Why Warren Buffett Got Confused About FINRA and Split Trading: New Rule Causes Increase in Trading Volume Reported by BRK.A
Berkshire Hathaway, Inc. Class A (NYSE: BRK-A) is the most expensive common stock currently trading, making the stock's trading volume one some of the lowest numbers in the market, as the average investor can't afford the stock over $420,000.
Yet in February 2021, the stock's trading volume surged, confusing both investors and Berkshire Hathaway CEO Warren Buffett.
Why Trading Volume Has Grown: A Newly Concluded Survey by Robert Bartlett of the University of California, Berkeley; Justin McCrary of Columbia University; and Maureen O'Hara of Cornell University revealed the long-awaited answers.
Many investment firms introduced a concept known as "split trading" in late 2019 and it has been a big hit with many investors. The idea was that if a stock was too expensive to trade, an investor could buy a fraction or 1/100 of a stock. Now investors could make a profit by earning a stock, but instead of receiving the full profit, they would make a profit based on the percentage they own of a stock.
Robinhood Markets Inc HOOD is one of the investment companies that has embraced the concept. The idea was a quick hit and investors immediately started using it.
Questions began to emerge about how trading volume would be reported for split trading. During the COVID-19 pandemic, the Financial Industry Regulatory Authority (FINRA) decided that split trades would be reported as if they were a whole split. This immediately began to distort volume numbers and introduced a concept known as the "rounding" rule.
As a result, average daily volume fell from 359 to 1,900, according to the Wall Street Journal. When translating the traded volume into dollars, the volume increased from $109 million per day to over $800 million per day.
Also read: Former Berkshire leader and possible Warren Buffett successor walks away from it all: The Tracy Britt Cool story< /em>
The increase in trading volume confused everyone and even caused Buffett to claim that regulators had the wrong numbers. Asked about the issue, a FINRA spokesperson said the original system was not designed for split trading and "FINRA's guidelines on trading reports should be understood in this context." /p>
The three authors also found that Drive Wealth, LLC. was using the same reporting tactics that boosted Berkshire Hathaway's trading volume. Drive Wealth started working with split trading in 2015 and is considered a pioneer of the idea.
And Next: Bartlett, McCrary, and O'Hara call on FINRA to revise the current reporting system. Until that happens, BRK.A will continue to see abnormal trading volume every day.
"Given its unusually high stock price, BRK.A is in many ways simply an exaggerated example of how the FINRA rule along with the rise of split trading create phantom, non-existent trading volume across all stocks,” the authors wrote.
Photo: Kent Sievers via Shutterstock
Berkshire Hathaway, Inc. Class A (NYSE: BRK-A) is the most expensive common stock currently trading, making the stock's trading volume one some of the lowest numbers in the market, as the average investor can't afford the stock over $420,000.
Yet in February 2021, the stock's trading volume surged, confusing both investors and Berkshire Hathaway CEO Warren Buffett.
Why Trading Volume Has Grown: A Newly Concluded Survey by Robert Bartlett of the University of California, Berkeley; Justin McCrary of Columbia University; and Maureen O'Hara of Cornell University revealed the long-awaited answers.
Many investment firms introduced a concept known as "split trading" in late 2019 and it has been a big hit with many investors. The idea was that if a stock was too expensive to trade, an investor could buy a fraction or 1/100 of a stock. Now investors could make a profit by earning a stock, but instead of receiving the full profit, they would make a profit based on the percentage they own of a stock.
Robinhood Markets Inc HOOD is one of the investment companies that has embraced the concept. The idea was a quick hit and investors immediately started using it.
Questions began to emerge about how trading volume would be reported for split trading. During the COVID-19 pandemic, the Financial Industry Regulatory Authority (FINRA) decided that split trades would be reported as if they were a whole split. This immediately began to distort volume numbers and introduced a concept known as the "rounding" rule.
As a result, average daily volume fell from 359 to 1,900, according to the Wall Street Journal. When translating the traded volume into dollars, the volume increased from $109 million per day to over $800 million per day.
Also read: Former Berkshire leader and possible Warren Buffett successor walks away from it all: The Tracy Britt Cool story< /em>
The increase in trading volume confused everyone and even caused Buffett to claim that regulators had the wrong numbers. Asked about the issue, a FINRA spokesperson said the original system was not designed for split trading and "FINRA's guidelines on trading reports should be understood in this context." /p>
The three authors also found that Drive Wealth, LLC. was using the same reporting tactics that boosted Berkshire Hathaway's trading volume. Drive Wealth started working with split trading in 2015 and is considered a pioneer of the idea.
And Next: Bartlett, McCrary, and O'Hara call on FINRA to revise the current reporting system. Until that happens, BRK.A will continue to see abnormal trading volume every day.
"Given its unusually high stock price, BRK.A is in many ways simply an exaggerated example of how the FINRA rule along with the rise of split trading create phantom, non-existent trading volume across all stocks,” the authors wrote.
Photo: Kent Sievers via Shutterstock
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