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SPAC stocks are being hit by short-squeezes as investors redeem shares prior to mergers.
After 17 million shares were redeemed, investors who weren't interested in the merger company bought Locust Walk Acquisition and it nearly tripled.
Investors redeem shares and the float shrinks, and short-sellers scramble for cover.
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SPAC stocks are experiencing massive short-squeezes due to investors redeeming their shares before mergers. Short-sellers scrambling for shares to cover their bets.
SPACs are often granted redemption rights that allow shareholders to sell their shares to the acquisition company at $10 per share. If they do not want to be part of the proposed merger, the company can then buy the shares back from them. The number of shares remaining decreases when investors sell their shares back to the acquisition company.
Locust Walk Acquisition shares nearly tripled after it announced that shareholders had approved the merger with Effector Therapeutics. However, the company also received elections to redeem 17 million shares.
Investors decided to return their $10 per share rather than purchase the new company. SPAC shares are ultimately redeemed, which results in a decrease in short-term shares and a rise in borrowing costs.
CNBC's David Faber stated that the Locust short-squeeze on Wednesday was a sign of a large short squeeze.
The massive redemption of shares has not only affected short-sellers, but also other investors. The surge in redemptions meant that Effector Therapeutics raised just $5.2 million instead of the $170 million they had hoped to raise from investors in the Locust Walker Acquisition SPAC.
Blue Water Acquisition shares rose as high as 199% on Thursday ahead of the planned merger with Clarus Therapeutics. Investors are likely to speculate that there will be large share redemptions, although a shareholder vote is expected on Friday.
Good Works Acquisition, Tortoise Acquisition, and Tortoise Acquisition are two other examples of SPACs that experienced volatile trading in the lead up to their proposed SPAC mergers. This could be due to investors redeeming shares or speculation that this will happen.
