Gain Capital shares up 14% Friday in apparent Short Squeeze

Short interest in Gain Capital (NYSE:GCAP) shares hits 22% of float.

LeapRate Exclusive…. Retail forex broker Gain Capital, parent of and Gain GTX, saw its stock rise by 14% on Friday in what looks to be an upward short squeeze in the company’s shares.

As we predicted back when a Gain Capital convertible note offering was announced back in November, many institutional buyers of convertible offerings will buy the convert and then short the underlying company’s stock, to effectively ‘lock in’ a preferred interest rate on the notes without having (much, if any) exposure to the company’s share price.

Gain Capital share price

Gain Capital share price last three trading sessions. Source: Google Finance.

It looks like this has happened to Gain Capital. The company has about 2.5 million of its shares sold short, or about 22% of its publicly trade float. Only 46 NYSE traded companies have short interests more than 23% of float. (Data courtesy of the Wall Street Journal).

So what exactly is a Short Squeeze?

Well, let’s preface our explanation by stating that it can be one of the unexpected benefits of having a large short interest. When a company with a large short interest starts to see its share price rise a little, for whatever reason, things can snowball upwards when those who shorted the company’s shares start to panic (or hit stop loss points) and quickly try to buy shares to cover their shorts.

Gain Capital’s shares, with no underlying news driving things, started to creep up the past 3 trading sessions both before and after New Year’s Day. With GCAP shares having traded down more than 50% since hitting an all time high in late September, apparently many investors began to believe that there was little downside risk left in the company’s stock. And a short squeeze ensued on Friday, pushing Gain shares up 14%, nearly back to their $9 IPO price.

It will be interesting to see what happens in Monday trading. Stay tuned to LeapRate…

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