A trading volume surge in Berkshire Hathaway’s Class A shares over the past year is not what it seems.
Fractional trading at brokerage firms like Robinhood distort the reported trading volume in stocks, according to a new research paper.
Buffett himself was bewildered at the sudden trading volume surge in Berkshire’s Class A shares, which trades for more than $400,000.
The stock, which has never been split and currently trades for more than $429,000 per share, saw its average daily trading volume more than quadruple from less than 400 shares prior to February 2021 to about 2,000 shares today.
Buffett himself reportedly thought the data was wrong.
The trading volume surge led some to speculate that a mystery buyer was vying for control of the storied conglomerate, but instead, the trading frenzy was being driven by everyday retail investors that were executing fractional share trades in the stock, enabled by brokerage firms like Robinhood, according to a new research study.
Specifically, the study found that FINRA’s “round up” rule requires firms to report off-exchange trading volume, and when a fractional trade is executed, it is rounded up to 1 whole share being traded.
“The FINRA reporting rule for fractional trading has created significant distortions,” the research authors wrote. The study was conducted by professors Robert Bartlett of the University of California, Berkeley, Justin McCrary of Columbia University, and Maureen O’Hara of Cornell University.
While Robinhood launched fractional share trading in 2019, it didn’t begin reporting those trades to FINRA until January 2021, right around when the distortion in Berkshire Hathaway’s Class A volumes started to appear.
The author’s called FINRA’s reporting rule well intentioned, but also “misguided,” as it is the sole reason for the 80% phantom volume seen in Berkshire’s stock. And the reporting rule is impacting other stock trading volumes as well, especially high-priced stocks that are popular with fractional trading.
But the phantom trading volume impact is biggest for Warren Buffett’s company, given the allure for a retail investor to own a slice of Berkshire Hathaway via its original share class.
Berkshire Hathaway introduced lower-priced Class B shares in 1996, which have been split in the past and currently trade for $286 per share.
“Given its unusually high stock price, BRK.A is in many ways simply an exaggerated example of how FINRA’s rule along with the rise in fractional trading creates phantom, non-existent trading volume across all stocks,” the study said.
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