- Short-squeezes are hitting SPAC stocks as investors redeem their shares ahead of mergers.
- Locust Walk Acquisition nearly tripled on Wednesday after 17 million shares were redeemed by investors not interested in holding the merged company.
- As investors redeem shares, the float shrinks and short-sellers scramble to cover their bets.
- Sign up here for our daily newsletter, 10 Things Before the Opening Bell.
Certain SPAC stocks are seeing massive short-squeezes as investors redeem their shares ahead of mergers, leaving short-sellers scrambling to buy back shares to cover their bets.
SPACs often have redemption rights, which give shareholders the right to sell their shares back to the acquisition company for $10 per share if they don't want to own the proposed merged company. When investors sell back their shares to the acquisition company, the number of shares outstanding decreases.
Shares of Locust Walk Acquisition nearly tripled on Wednesday after the firm said that while shareholders approved its proposed merger with Effector Therapeutics, the company received elections to redeem approximately 17 million of its outstanding shares.
That means investors decided to get their $10 per share back rather than own the newly combined company. The redemption of SPAC shares ultimately leads to a decline in shares available to short, sending borrowing costs through the roof.
CNBC's David Faber said of the short-squeeze in Locust on Wednesday: "Anybody short it today suddenly finds themselves saying 'wait a second' I can't borrow this stock anymore, it doesn't exist, I got a huge short squeeze on my hands."
But short-sellers aren't the only ones that lost money following the massive redemption in shares. Effector Therapeutics was likely expecting to raise as much as $170 million from investors in the Locust Walk Acquisition SPAC, but instead they raised only $5.2 million due to the surge in redemptions.
The move in Locust Walk Acquisition could also be playing out in shares of Blue Water Acquisition on Thursday, which soared as much as 199% ahead of its planned merger with Clarus Therapeutics. A shareholder vote on Friday is expected to approve the merger, but investors are likely speculating that there will be a large amount of share redemptions.
Other SPACs that have seen volatile trading ahead of their proposed SPAC mergers, potentially caused by investors redeeming their shares or speculation that they will, include Good Works Acquisition and Tortoise Acquisition.