When trading in Berkshire Hathaway’s common stock unexpectedly skyrocketed last year, investors in the sprawling industrial-insurance conglomerate scratched their heads.
Three scientists gave a chilling answer on Wednesday: The trading volume of the most expensive stock in the US has been and continues to be artificially inflated by brokers like Robinhood reporting trading in fractional shares.
In new research, professors from the University of California, Berkeley, Columbia University and Cornell University said they had uncovered what they called “phantom, nonexistent trade.”
The rise in publicly reported trading volume for Berkshire and other companies has been fueled by the increase in fractional trading and rules from Finra, Wall Street’s self-regulatory body, which direct brokers to round these fractional stock trades — no matter how small — into a single one Share.
This rounding up has caused the boom in fractional stock trading — where a client can buy or sell a portion of a single share — to boost reported trading volume across the US stock market as a whole.
And it’s had an especially big impact on Berkshire’s Class A common stock, which trades little and has fetched over $500,000 a share this year. According to data from Refinitiv, no publicly traded stock in the US commands a higher price.
“The Finra reporting rule for partial trading has led to considerable distortions. . .[that]likely shaped the trading behavior of at least some market participants,” wrote Professors Robert Bartlett, Justin McCrary and Maureen O’Hara.
The surge in trading volume in Berkshire first appeared in February 2021, when Robinhood began reporting the transactions, the study found. While the broker, who helped popularize fractional trading, had offered trading in increments of less than one share since 2019, it initially didn’t report the trades to the Finra database, which records over-the-counter transactions.
The company was later informed by Finra that it should report these deals and began doing so in early 2021.
In October, DriveWealth, which handles stock trades for digital banking startups Revolut and Cash App, also began reporting fractional stock trades in Berkshire to the Finra database, according to the study. The professors said they were able to isolate reported trades from Robinhood and DriveWealth based on the slight time lags it takes each to post buy and sell orders.
Daily volume for Class A shares averaged about 357 shares per day for the two years before Robinhood began reporting fractional trades. Since then, activity appears to have increased more than five times, with nearly 1,900 shares changing hands every day, according to Bloomberg.
The surge in volumes caused confusion in the market after Berkshire CEO Warren Buffett previously lamented the difficulty of finding willing sellers of the company’s Class A shares for its share buyback program.
“If our shares were heavily held by short-term speculators, both price volatility and transaction volume would increase significantly,” Buffett wrote in his annual letter to shareholders this February. “Such a transformation would give us much greater opportunities to create value through buybacks.”
Wednesday’s results cast doubt on speculation that the uptick in trade over the past year was fueled by a foreign buyer or dealer who was not required to disclose transactions.
Recommended
Finra said it is “already actively working on the issue and is in ongoing discussions with companies and regulators. Current trade reporting systems (with the exception of the Consolidated Audit Trail) do not support entering a fractional share amount.”
While the public wouldn’t have known that the fractional trades erroneously inflated the volume numbers, regulators with access to the Consolidated Audit Trail — a system that tracks US stock trading — would have understood that the trades were mostly tiny.
Berkshire, Robinhood and DriveWealth did not respond to requests for comment.