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You’ve likely heard chatter this week about GameStop, a store you vaguely remember passing when malls were still frequented, Reddit users battling Wall Street, and something about short selling stock. We spoke to Allegheny Economics Professor Michael Michaelides to answer questions you might have about what’s happening in the stock market right now.

What was the general chain of events, as far as you can summarize?

A group of people on Reddit, and possibly elsewhere, initiated a waging war against short sellers in the stock market, specifically those short selling GameStop stock. Short sellers lose money when prices increase (i.e., when rebuying the stocks to return it to the broker-dealers). So, a group of people, for whatever reason, initiated a message board on Reddit asking other users to invest against the short sellers. The idea here is that if many investors buy stocks that short sellers bet against, prices will increase, and short sellers will lose money, called a “short squeeze.”

Why have these events caused the stock market to be volatile?  

The stock market is volatile because of this short squeeze. When investors buy the stocks, in an attempt to hurt the short sellers, the prices increase. But now those investors have an incentive to sell and make money (i.e., normal trading). The latter leads to a decrease in prices. The stock market volatility is due to these rapid price fluctuations.

How is short selling different from the normal trading of stocks?  

Short selling is different from normal trading because short sellers do not follow a buy low, sell high strategy (i.e., buy stocks in the hope of them going up). Instead, short sellers follow a sell high, buy low strategy (i.e., sell stocks in the hope of them going down). Short sellers usually borrow stocks they do not own from broker-dealers, and immediately sell the stocks with the intention to buy it back later for less money. In contrast to the usual trading, short selling is profitable when prices decrease.

Could this feasibly happen at any time? Why is this a rare occurrence?  

Any sort of information may affect the behavior of investors (e.g., after reading a positive article an investor may rush to buy/sell a stock). Every now and then new information may have a significant impact. So, yes, it can happen at any time. It really depends on how investors perceive new information, whether they are informed or uninformed, etc. It is a rare occurrence because people have very heterogeneous beliefs; not everyone thinks in the same way. I am sure there are thousands and thousands of online posts asking the general public to act in one way or another. People will rarely think or act exactly the way you want them to. Thus, it is a rare occurrence.

What changes or actions would you expect we’ll see in the coming days?  

It is hard to tell. I am sure the regulators have already taken many actions. They probably know who the operators of those message boards were and/or which accounts traded excessively stocks like GameStop. All of those accounts must be closed by now. The FBI will also be involved in one way or another.