In a previous column, I wrote about the dichotomy between freedom and control as it relates to the role of government. The past week the same dynamic played out on Wall Street as individual investors, using a Reddit chat room, banded together to take on established Hedge Fund managers. The facts are straightforward. Some Hedge Funds decided to short the Gamestop stock. Shorting a stock simply means the fund ‘borrows’ the stock at the current value and, after the value of the stock drops, returns the stock at the lower price keeping the difference as a gain. A benefit of the pandemic, if there is such a thing, is that teleworking has also led to an increase in day trading. In this case, a group of Reddit day traders, numbering in the millions, decided that they collectively prop up the Gamestop stock, which would put the Hedge Fund managers in a ‘short squeeze.’ Since the price of the stock went up, not down, the funds had to cover their positions, which meant an infusion of capital and stock buying that resulted in a further increase in the price. Ironically, several of these individual traders conducted their trades using an application “RobinHood,” no doubt named after the legendary character whose apocryphal motto was “to take from the rich, to give to the poor.” The current “RobinHood” states that their corporate mission is to “democratize finance for all.” However, as individuals were taking on the establishment, RobinHood, going against their mission statement, severely restricted trading on the Gamestop this week, which was met with ire of users. Many felt the CEO had succumbed to Citadel Securities, which handles a majority of RobinHood’s trades. RobinHood claimed it needed the trading respite to shore up its regulatory obligations.
There is little doubt that the ‘fundamentals’ do not support Gamestop’s current market evaluation. The pandemic has hurt all big box stores as customers saw reduced income and sought out e-commerce. Furthermore, current game systems rely more on downloaded games instead of traditional boxed discs. What happened to Blockbuster is happening to Gamestop. Does it matter? In a free market system, the individual investor is ‘free’ to participate in the market. As John Locke would say, the individual has the ‘liberty’ to invest his/her ‘property’ he/she sees fit in order to secure his/her livelihood. After all, this is why ‘RobinHood’ exists—to democratize investing. The events of this week saw Marc Cuban, Elon Musk, Chris Sacca, AOC, and Ted Cruz rally to the support the individual investor. An interesting group seeing eye-to-eye on this issue to say the least.
Hobbes would argue that the system needs a level of ‘control’ to protect individuals from one another. That is true. With Gamestop showing extreme volatility in price, up 1700% in just a month, risk and the stock go hand-in-hand. There are reports of individuals putting their retirement into Gamestop, taking out second mortgages to buy the stock, or even buying on margin, where the investor borrows a majority of the money to purchase the stock. A sudden drop in Gamestop could result in millions losing their equity, or even a series of margin calls. Margin calls, when a bank grows concerned the value of the stock cannot cover the loan and asks for cash to cover the loan, were responsible in part for the Great Depression. SEC regulations exist to try make sure the game is played fair. What is troubling is the call for more ‘control’ by the those in ‘power.’ The events of the past week, once again, put a collection of individuals up against the ‘establishment.’ It is a recent trend in American where starfish are taking on spiders.
Ori Brafman and Rod Beckstrom published The Starfish and the Spider in 2008. Their argument is that starfish organizations are replicating faster than traditional spider organizations. Spider organizations are hierarchical, have rigid command structures, and, if the head is cut off, the organization ceases to function. Contrary to spiders, starfish organizations are loosely organized (sometimes called complex adaptive systems), and, more importantly, if an appendage is cut off the organization multiplies. The original starfish grows back a new arm while the removed appendage becomes a starfish itself. It is why decapitating nation state leaders like Saddam Hussein or Muammar Gaddafi causes the current system to die but targeting terrorism leaders does not produce the same result. Terrorism cells are starfish. When the two organizations go at each other, starfish tend to prevail. In 2000, the ‘spider’ recording industry went after the peer-to-peer sharing service Napster. While the lawsuit succeeded in shutting down the service, multiple peer-to-peer services arouse in Napster’s place.
The internet’s open architecture coupled with the growth in ‘open systems’ means that starfish have the freedom of maneuver to rapidly disband and reorganize on a different platform. As spiders try to reach down their tentacles of control, starfish will simply morph. Individual investors self-organized to show the spiders on Wall Street that they can undermine the fund managers power to determine winners and losers. Power, once centered at the top, has been diffused. If the SEC tries to regulate a Reddit chatroom, the users will leave and reorganize on another app. It is the nature of starfish.
The same holds true for RobinHood. As of this writing, users upset with RobinHood’s suspension of trading have fled the application for a competitor “Webull.” Now the Webull CEO has called for the SEC to intervene into the trading of Gamestop and other stocks the ‘chat room’ has targeted for inflation to include AMC theaters. Tech giant Google deleted thousand of negative reviews of RobinHood from its search engine. Webull and Robinhood wanted to empower the individual investor and then seem shocked when that happened. More control will not extinguish the starfish’s power. According the Brafman and Beckstrom, the only way to extinguish a starfish company is to round them all up and exterminate them at once. Executing this course of action is highly improbable.
2020 gave us a pandemic. That pandemic led to debates over governmental control of people’s lives versus their freedom to purse a living. The first month of 2021 saw a continuation of the debate of freedom and control. Individual freedom of the investor to influence the market versus the control of hedge fund managers and tech companies. This is a battle between hierarchical spider organizations and self-organized starfish organizations. The internet with its multiple pathways and plethora of applications has provided starfish the opportunity to disband and reorganize in the blink of an eye. The more the spiders try to control the situation the more they will lose. Instead, spiders should find a way to make starfish part of the system. When centralized power is checked by decentralized power, all should rejoice.
Dr Mel Deaile is the author of ‘Always At War,’ a book on organizational culture in SAC under Gen LeMay. He received his doctorate from the University of North Carolina-Chapel Hill.
The opinions, conclusions, and recommendations expressed or implied within are those of the author and do not necessarily reflect the views of the Air University, U.S. Air Force, or Department of Defense.