The reason behind a mysterious trading surge in stocks like Berkshire Hathaway has been revealed

Warren Buffett and Charlie Munger press convention on the Berkshire Hathaway Annual Shareholders Meeting, April 30, 2022.


Berkshire Hathaway’s Class A shares is among the many inventory market’s most costly stocks priced above $400K a share and subsequently it was usually one of many least traded well-known firms. So a surge in quantity that started over a yr in the past left many scratching their heads.

Now new analysis launched Wednesday has make clear this trading frenzy and concluded that a change in how Robinhood and different on-line brokers report fractional trading information was a perpetrator.

“This volume is due to the interaction of a well-intentioned but misguided FINRA reporting rule, Robinhood trading, and fractional shares,” wrote the authors — Robert Bartlett at University of California at Berkeley, Justin McCrary at Columbia University and Maureen O’Hara at Cornell University.

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In 2017, the Financial Industry Regulatory Authority began requiring brokers to report fractional trades — typically simply 1/a hundredth of a share — as in the event that they had been for one complete share, which the authors coined because the “Rounding Up” rule.

The impact of this rule change went just about unnoticed till the spring of 2021 when a pandemic-driven trading mania by retail buyers boosted the usage of fractional trading.

As extra tiny trades are being reported as full shares, trading volumes for a lot of stocks turned massively inflated. In Berkshire’s case, the authors mentioned this reported “phantom” quantity now represents 80% of Class A shares each day trading quantity.

Shares of the Omaha-based conglomerate hit a document excessive above half a million {dollars} in March and have since retreated greater than 20% to about $430,000 apiece amid a sell-off in the broader market.

Trading volumes for this expensive title surged greater than tenfold in March 2021 from its common each day quantity of simply 375 shares over the previous decade, in keeping with the research. Volumes have stayed at these elevated ranges.

“FINRA is already actively working on the issue, and is engaged in ongoing discussions with firms and regulators,” a FINRA spokesperson informed CNBC. “The current trade reporting systems (other than the Consolidated Audit Trail) do not support the entry of a fractional share quantity. FINRA’s guidance on trade reporting needs to be understood in that context.”

The Wall Street Journal first reported on the brand new research earlier Wednesday.


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