Specialty components manufacturer Meta Materials (NASDAQ:MMAT) — which focuses on various functional materials and nanocomposites — saw its shares rise dramatically on Tuesday. Management announced that it has launched a legal investigation regarding allegations of naked short selling. Helping to fuel the rise in MMAT stock is a possible short squeeze.
According to Investopedia, “[n]aked shorting is the illegal practice of selling short shares that have not yet been determined to exist or that the trader hasn’t secured in some way.” Following the 2008 financial crisis, U.S. and European authorities have largely banned the notorious practice. Nevertheless, loopholes and discrepancies between trading systems enable naked shorting to occur.
As for MMAT stock, the underlying company stated in a press release that in late June 2023, management “outlined its preliminary analysis of potential naked short selling, and retained well-known analytics firm, Shareholder Intelligence Services, LLC, to review trading patterns of the Company’s common stock.”
Subsequently, the analysis revealed that the allegations carried substance. Management believes that it has “the necessary information to act and will be further sharing these findings with regulatory agencies.” Meta will also file legal proceedings against the financial firms engaging in the naked short selling.
MMAT Stock Gets an Assist from a Possible Short Squeeze
Immediately after the opening bell, MMAT stock shot higher, reaching a peak of $4.11. Since then, the price has come down yet MMAT is still up about 40% for the day. Helping to fuel the rise is a potential short squeeze.
According to Fintel, Meta’s short interest stands at 11.71% of the float. Further, the short interest ratio comes in at 4.12 days to cover. This metric indicates the number of days required for bears to unwind their short positions based on average trading volume.
Interestingly, Fintel also states that at a leading brokerage, the number of shares available to be shorted is zero. To be clear, that’s not an all-inclusive figure. However, it may add some context regarding the naked short selling allegations behind MMAT stock.
Short squeezes risk sparking a positive feedback loop because in order for bearish traders to exit their positions, they must buy to close. Whoever exits quickly in an upsurge suffers the least amount of damage. This dynamic creates a panic as traders desperately offload their shares.
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On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
