This is exchanges at Goldman Sachs, where we discuss developments currently shaping markets, industries, and the global economy.

I'm Allison Nathan from Goldman Sachs research, creator and editor of the firm's top of mine report,

which focuses on macroeconomic issues on the minds of our clients.

In this episode, we focus on the volatile start to markets in 2021,

with a number of heavily shorted stocks unexpectedly skyrocketing in late January,

amidst a boom in retail trading. This volatility seems to have subsided somewhat, but many questions remain.

What factors led to this volatility?

Is it likely to repeat, especially given the increased activity of retail investors? what could and or should be done to prevent similar episodes in the future?

And what, if anything, does this episode signal about the broader market or mean for it.

Exploring these questions is top of mind.

We first turn to Kevin Kelly, Goldman Sachs co-head of Global Prime Services,

to break down the factors that led to the equity market volatility in late January.

What factors led to the recent period of volatility that we saw in select equities in January.

So we have to rewind the clock a bit to back in October,

where we started to see our prime brokerage clients adding

to their long exposure at a much faster rate than to

shorts driven by a multitude of factors but definitely the positive outlook on earnings

and fiscal stimulus. This was more pronounced within the long short community where we observed the long short ratio, which we measure as clients long market value divided by the short market value hitting an all time high at the end of 2020. In early January, we also observed our clients

covering nearly 5% of our US short book. Now this was interesting to us as when we see that type of short covering in our portfolio, it's usually accompanied by long selling or long be risky, which didn't happen in January.

By clients covering their shorts and not selling their longs, this led to an increased long exposure after being stretched into year end.

With this backdrop, over the first several weeks of January, we did observe when we looked at the prime brokerage performance that longs were underperforming as well as shorts.

To put that in context, as a Friday, January 22nd, our internal estimate that we calculate within prime brokerage on client

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