Porsche already owned a stake of 42.6 percent of Volkswagen shares but announced a few days ago that it plans to raise the total holding to 75 percent. “That prompted some short-sellers to buy from a shrinking pool of stock to end their bets,” Bloomberg tried to explain the market reaction following Porsche's announcement.
“One of the biggest risks with the herd mentality approach to shorting is that a lot of money can be made on the outset. But you can end up losing the whole of it when you try to close the position. There's no limit,” Ed Oliver, a senior business consultant at Spitalfields Advisors, told Bloomberg.
However, market analysts admitted that Volkswagen's shares were overvalued after Porsche's announcement and even if things came to an end, price may not be reverted to its initial value. “The problem is, from a fundamental point of view, shares are really overvalued. But when the short squeeze comes to an end, there are not enough shares available to bring the share price back down,” a Frankfurt-based told msnbc.
Obviously, a 1,000 euros market share shocked the whole automotive market, with the German regulators analyzing the move “for possible insider trading or market manipulation,” msnbc wrote. “We were joking before about the share price hitting 1,000 euros, and all of a sudden, it was there. This is perverse,” the same analyst concluded.