January 31, 2021 By Evan Shapiro
The current intersection of social media and the stock market has caused ramifications that have reached the level of upcoming government hearings, immense short seller losses, as well as a slew of retail investors generating lucrative gains, and dramatic losses. There is also a major theme of populism. There have been calls for restrictions and some brokerages have responded by placing limits on retail trades. I would argue that the stock market is going through a transformational change that has major parallels to the populism that began in the music industry with the launch of Napster in 2001 and continues to this day. In addition the financial services industry, law makers, institutional and retail investors could all learn from the evolution in the music industry, in regards to the path forward in the investment world that will promote positive change, rather than hamper innovation and undermine growth. In addition the recent major events regarding the influence of social media and the stock market, may be a sign that a new level of populism is taking place as well in the music industry which is manifesting itself through the intersection of music and Tik Tok, Twitch, and the growth in online concerts.
It took years of legal action by the music industry in relationship to file sharing, before the music industry realized that the train had already left the station and the best way to deal with file sharing was to monetize it. To those that believe that increased regulation, restricting trading in certain stocks and scrutinizing social media investment groups, will alleviate the current volatility in certain stocks related to the populist trends in Wall St Bets as well high levels of short interest, I suggest that the lessons learned by the music industry post Napster are a good indication, where that would lead. It is likely to exacerbate volatility and lead to an increase in losses for both retail and institutional investors. The train had already left the station in 2001 with the birth of Napster and the train has already left the station with the populism of Wall Street Bets and it’s over 6 million members.
I would argue that complaints regarding the the outcome of the interaction between the stock market and social media, as well as complaints regarding royalty payouts of streaming services are similar, in that they tend to take account for only a portion of the impact of technology on both the investing world as well as the music industry, as well as demonstrate that there can be a failure to adapt to those changes. There are both winners and losers, when it comes to change and innovation. Those that fail to adapt tend to lose and also close themselves out from the new opportunities that innovation creates.
Those that complain about the impact of the internet on the payout of music consumption, often fail to mention that the internet has also led to dramatically reduced costs in the creation of music, and worldwide collaborations that were very difficult to obtain prior to the internet. In addition, it is also often overlooked that social media and the internet have led to musicians having much more control over their destiny with the ability to build a substantial fanbase without the backing of a major label.
In the January 30, 2021 CNBC article “Robinhood says restrictions on GameStop due to tenfold increase in clearinghouse deposit requirements,” reporter Emma Newburger states, “Online broker Robinhood said that it put temporary buying restrictions on a small number of securities because central Wall Street clearinghouse-mandated deposit requirements for equities increased tenfold,” yet how about a broker such as Fidelity Investments that has no such restrictions? This indicates a failure to adapt to change on the part of Robinhood in comparison to Fidelity Investments which has no issues with the current investment environment.
Opposite outcomes are evident in the following examples regarding the stocks of GameStop and AMC, both current favorites among members of Wall St Bets, as well as a stocks that are currently restricted on Robinhood. In the January 27, 2021 Forbes article, “Another Wild Reddit Rally As AMC Surges 300%, Online Brokers Crash, Shares Are Halted And Short-Sellers Cede Losses,” staff writer Jonathan Ponciano states, “ The stunning gains are already sparking big losses for Wall Street shops that bet against GameStop, the largest firm to capitalize on the impending short squeeze; firms Citron Research and Melvin Capital closed out on their short positions Wednesday and Thursday, with Citron's head citing a 100% loss (though neither have disclosed specific amounts lost),” yet in the January 28, 2021 Business Insider article, “'The trade of a lifetime': Silver Lake and Mudrick have reaped huge gains from their AMC investments as Reddit traders send the stock soaring,” reporter Will Daniel states, “The trade involved Silver Lake swapping risky debt in the downtrodden theater chain for stock. Now, with AMC shares up as much as 370% this week, the wager has paid off handsomely,” and “Mudrick Capital is another firm that made a similar trade earlier this month. It exchanged $100 million in debt for nearly 13 million shares, which are currently worth $273 million, according to the FT report.” The movement in Gamestop shares has been detrimental to Citron Research and Melvin Capital, yet a similar short squeeze of AMC stock has been beneficial for Silver Lake and Mudrick Capital. Ultimately there are institutions and retail investors that are booking profits and losses in both GameStop and AMC, which demonstrates that the rise of social media in relationship to the stock market is innovative, but ultimately investors make their own decisions, and those decisions lead to profits and losses, not social media itself.
The financial services industry can adapt to the current environment, by shoring up their balance sheets and adding liquidity. That is the difference between Robinhood and Fidelity Investments. Fidelity Investments was prepared for recent events because they had the liquidity to deal with it. Clearly, Robinhood was not prepared. Speculation is nothing new in the stock market, both on the short and long side. Firms that look to restrict trading or seek additional regulation, will only undermine themselves, similar to the way the music industry undermined itself through litigation related to Napster and illegal file sharing. Robinhood would be better off focusing on the revenue they are making with payment for order flow, rather than trying to control a train that is already far ahead of where they anticipated it would be.
It may be more than just coincidence that at the same time that the populism of Wall Street Bets is having a major impact on the stock market, the music industry is experiencing major innovation in the area of monetizing online live concert streaming. Any band or artist can monetize their online concerts through a platform such as bandcamp or zoom. Even though COVID-19 has played a major part in the move to monetizing live concert streaming, I would argue that the seeds were already planted in the same populism that fuels Wall St Bets and that for the music industry, what is taking place with Wall St Bets, is a signal that the monetization of online concerts is where the future is going and bands can greatly benefit by investing their time and money in that area. Cultural trends will always shape multiple industries, and populism is having a major impact in the music industry as well as the stock market, and is very likely to become even more significant over the next 20 years or more.