Spike in VW Share Price Pounds Short-Sellers

(MoneyWatch)  Shares of Germany's Volkswagen AG hit an almost unbelievable high of more than 1,000 euros per share (about $1,275) on Oct. 28, versus a 52-week low of around 144 euros (about $183).

The shares immediately started falling back to earth on Oct. 29, for instance a share price of 518.82 euros at 1:12 p.m. local time.

Sports car maker Porsche SE, which is in the process of taking over VW, blamed the share price spike on "short sellers" who made what turns out to be a spectacularly wrong bet earlier that the VW share price would fall.

"Porsche SE denies all responsibility for these market distortions and for the resulting risks to which the short sellers have exposed themselves," Porsche said in a written statement.

Short selling is when an investor borrows shares that the investor thinks will drop in value (Automotive News subscription required for current "shareholder value" article). The investor later buys shares at the lower price to replace the shares that were borrowed earlier. The investor pockets the difference, minus a cut for the broker who loaned the shares.

That's how it's supposed to work. But if the share price goes up, the investor may have to buy the shares at a higher price to replace the borrowed shares, and suffer the loss. If a lot of short sellers are forced to buy at the same time, that increased demand drives up the price, which makes a bad situation for the shorts even worse. That seems to be what happened with the VW shares.

On Sept. 16, Porsche disclosed it had acquired a bloc of shares representing 4.89 percent of Volkswagen. That put Porsche over the top of the 35 percent share needed to make up a controlling share.

At the time, Porsche CEO Wendelin Wiedeking said his company intended to increase its stake to more than 50 percent. Porsche now says it wants to acquire up to 75 percent of Volkswagen. But the company says it is out of the market for now, and it will only buy shares at an "economically justifiable" price.