Report: The Short and Long of Recent Volatility

The volatile start to 2021—with some heavily-shorted stocks unexpectedly skyrocketing in late January—seemed to have subsided. But with some of these stocks again on the rise, we ask what factors caused this volatility, how likely it is to repeat, what could prevent this, and what it signals about or for markets. We turn to former SEC Chair Arthur Levitt, Wellington’s Owen Lamont, Goldman Sachs’ co-head of Global Prime Services, Kevin Kelly, and Goldman Sachs Research strategists for answers. We conclude that many factors led to the volatility, with a sharp and unusual underperformance of short positions—in part driven by retail investors—a key catalyst. While Kelly believes that shifts in positioning have reduced risks around a repeat episode, Lamont worries that prices look less and less rational, and sees more volatile episodes ahead. Levitt agrees that future bouts of volatility are likely, but struggles to define regulations that would protect investors against them. And he concurs with Lamont that despite a perception that short-sellers create volatility, they actually play a vital role in price discovery.