What was the cause of the phantom surge in Berkshire trading? When trading in Berkshire Hathaway's common stock unexpectedly soared last year, investors in the growing industrials-to-insurance conglomerate were left aghast.
On Wednesday, three academics offered a surprising answer: Trading volumes in the most expensive US stocks were and continue to be artificially inflated by the way brokers like Robinhood report on fractional share trading.
In a new research paper, professors from the University of California, Berkeley, Columbia University, and Cornell University said they had discovered what they described as "ghost and nonexistent trading."
The jump in publicly reported trading volumes for Berkshire and other companies has been fueled by the rise in fractional trading and rules from Finra, Wall Street's self-regulatory body, which directs brokers to round up those fractional share transactions, no matter how small they are. to a single action.
That rounding has meant that the boom in fractional share trading, where a client can buy or sell a portion of a single share, has inflated reported trading volumes across the US stock market.
And it has had a particularly big effect on Berkshire's Class A common stock, which is thinly traded and has fetched more than $500,000 a share this year. No publicly traded stock in the US is priced higher, according to Refinitiv data.
“Finra's reporting rule for fractional trading has created significant distortions. . .[that] likely shaped the trading behavior of at least some market participants,” Professors Robert Bartlett, Justin McCrary, and Maureen O'Hara wrote.
The jump in trading volumes at Berkshire first appeared in February 2021, when Robinhood began reporting transactions, according to the study. While the brokerage, which helped popularize fractional trading, had offered trading in sub-share increments since 2019, it did not initially report trades to Finra's database that records off-market transactions.
Finra later informed the company that it should report those trades and began doing so in early 2021.
In October, DriveWealth, which processes share transactions for digital banking startups Revolut and Cash-App, also began reporting fractional share transactions in Berkshire to Finra's database, the study found.
The professors said they were able to isolate the reported trades of Robinhood and DriveWealth based on the slight delays it takes for each to post buy and sell orders.
Daily volume for class A shares averaged around 357 shares per day in the two years before Robinhood began reporting fractional trading. Since then, activity appears to be more than five times that level, with nearly 1,900 shares changing hands a day, according to Bloomberg.
The surge in volumes created confusion in the market, as Berkshire Chief Executive Warren Buffett himself had previously lamented how difficult it was to find sellers willing to sell the company's Class A shares for its buyback program. of actions.
"If our shares were heavily held by short-term speculators, both price volatility and transaction volumes would increase substantially," Buffett said. he wrote to shareholders in his February annual letter. “That kind of remodeling would offer us much greater opportunities to create value by doing repurchases.”
Wednesday's findings defy speculation that the surge in trade over the past year was driven by a foreign buyer or trader who would not have to disclose the transactions.
Finra said that it “was already actively working on the issue and is participating in ongoing discussions with companies and regulators. Current business reporting systems (other than the consolidated audit trail) do not support the entry of a fractional share amount.”
While the public would not have known that the fractional transactions were wrongly inflating volume figures, regulators with access to the Consolidated Audit Trail, a system that tracks US stock trading, would have understood that the transactions were in their most tiny in size.
Berkshire, Robinhood, and DriveWealth did not respond to requests for comment.
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