On Conway's Law and Social Financial Media
Every now and then a stock market story comes around that captures the attention of the nation. Yesterday, we were blessed with such a story as short squeeze on all but left for dead video game retailer, Gamestop ($GME), led the stock to astronomical levels. The stock is up 350% this year. It was up 50% on Friday, another 50% intraday yesterday, before coming back to earth a bit.
The interest in the story however, was because this squeeze was not led by a bunch of hedge funds going after another fund who was short, but by a subreddit, r/wallstreetbets, which features a bunch of retail traders, "tendies", and lots of YOLO trades. Epsilon Theory has a great writeup of r/wallstreetbets and Matt Levine has a great summary of the mechanisms that would lead to such a squeeze that left a hot, popular hedge fund needing a $2.75B capital infusion.
Much has been debated about whether this is "good" or "bad" or "manipulation" or not. As someone who spent 11 years building Stocktwits, the largest independent platform for retail investors to talk stocks, it was amazing to watch. While it was a distinct event that originated on a different platform, it was many years in the making.
When we set out to build Stocktwits we wanted to change the communication structure around markets. At the time, in 2009, Wall Street had a bunch of egg on its face and we wanted to build a platform where regular investors could communicate like traders on a desk at Goldman or a large hedge fund. We felt the financial media did a disservice to DIY investors and traders and like many Web 2.0 companies that launched at that time, we wanted to change the hierarchy. Yesterday, we saw an event that is the result of that change.
I'm currently reading an unrelated book on structuring engineering teams called Team Topologies. The book's theme revolves around Conway's law which states that organizations design systems or software that match their communication structure. This has been summarized more popularly by a16z's Steve Sinofsky with the often repeated "Don't ship your org chart". When applied to a complex system like a financial market it could be interpreted that markets will be designed based on informational flows - which traditionally made retail investors communication-takers. In the book, they lay out a tactic for breaking out of problems caused by Conways law called a Reverse Conway Maneuver - where you change the org chart and communication structure to reach the desired system. The trend in Social financial media represented an attempted Reverse Conway Maneuver on the markets at large, and yesterday represented a tangible outcome of it all.
Regardless of how you feel about it, and the positive and negative implications of it all, the communication structure of markets is and has changed due to platforms like Stocktwits and r/wallstreetbets. I'm not overly concerned as markets are dynamic and always evolving - much more so than politics or other areas touched by social media. What worked with Gamestop, won't likely work again, or at least in the same way. What is nice to see is that the communication structure of markets has changed and the megaphone we set out to build for average individuals is getting a bit louder, more important, and being shouted into on many different platforms.