Warren Buffett and Charlie Munger press conference at the Berkshire Hathaway Annual Meeting of Shareholders, April 30, 2022.
CNBC
Berkshire Hathaway’s Class A shares are among the most expensive stocks on the market at over $400,000 each, and therefore it was often one of the least traded popular companies. So a surge in volume that began over a year ago left many scratching their heads.
Now a new study published Wednesday has shed light on this trading frenzy and concluded that a change in the way Robinhood and other online brokers report partial trading data was to blame.
“This volume is due to the interplay of a well-intentioned but misguided FINRA reporting rule, Robinhood trading, and fractional shares,” write the authors — Robert Bartlett at the University of California, Berkeley, Justin McCrary at Columbia University and Maureen O’Hara. at Cornell University.
In 2017, the Financial Industry Regulatory Authority began requiring brokers to report fractional trades — sometimes just 1/100 of a share — as if they were for a whole share, which the authors coined the “Round Up” rule.
The effect of this rule change went largely unnoticed until the spring of 2021, when a trading frenzy driven by the Covid pandemic by retail investors increased the use of fractional trading.
With smaller markets reported as full shares, trading volumes for many stocks rose massively. In the case of Berkshire, the authors said this reported “phantom” volume now represents 80% of the daily trading volume of Class A shares.
Shares of Warren Buffett’s Omaha, Nebraska-based conglomerate hit a record high of more than half a million dollars in March and have since retreated more than 20% to about $430,000 each amid a selloff in the broader market.
Trading volumes for the pricey name rose more than tenfold in March 2021 from its average daily volume of just 375 shares over the past decade, according to the study. Volumes have remained at these elevated levels.
“FINRA is already actively working on this matter and is engaged in ongoing discussions with firms and regulators,” a FINRA spokesperson told CNBC on Wednesday. “Current trade reporting systems (other than the consolidated audit trail) do not support the entry of a fractional amount of shares. FINRA’s trade reporting guidance should be understood in this context.”
The Wall Street Journal first reported on the new study earlier Wednesday.
