Stock Analysis & Ideas

Share Volumes of Berkshire Hathaway Surged. Now We Know Why.

Story Highlights

Berkshire Hathaway, with a market cap of $631.3 billion, saw its share volumes surge in the past year. A research paper highlights the reasons behind the volume surge.

Earlier this week, the Wall Street Journal cited research from professors Robert Bartlett of the University of California, Berkeley; Justin McCrary of Columbia University; and Maureen O’Hara of Cornell University to explain the surge in volumes of Class A shares of Berkshire Hathaway (NYSE: BRK.A) that started last year.

The professors stated in their research paper that while the shares of this most expensive stock had an average volume of just 375 shares every day, over the past ten years, BRK.A volumes surged to 1,250 shares every day, or in excess of that from February 2021 onwards.

This research paper pointed out that this surge in volume has been due to a combination of “a well-intentioned but misguided FINRA [Financial Industry Regulatory Authority] reporting rule, Robinhood trading, and fractional shares.”

Let us look at these factors in a bit more detail.

What Are Fractional Shares?

Fractional shares allow small investors to buy into expensive shares when buying the whole share is not possible for such investors. Fractional shares are also created through mergers and acquisitions where companies combine their stocks in a particular ratio or through stock splits.

Reporting of Fractional Shares by Robinhood and the FINRA Rule

Robinhood Markets (HOOD) introduced fractional share trading to its customers in early 2020, where HOOD executes the fractional share trades against its own inventory. The research paper pointed out that this method of execution means that “each fractional trade must be reported separately to a FINRA trade reporting facility.”

This raises the question of how HOOD should report this trade in fractional shares to FINRA. However, the paper stated that FINRA’s rules state that in the case of this trade reporting, “any fractional transaction” should be rounded up to the “nearest whole share.”

The research stated that this rule means “a trade for one-half, one-third, one-hundredth—or even less!—of a share will be reported to FINRA, and thus reported on the consolidated tape, as a trade for one whole share.”

Consequently, Robinhood and another brokerage firm, Drivewealth, which executed a large number of fractional trades in the aforementioned way and also allowed customers to trade in the Berkshire Hathaway stock for as little as $1, did not initially comply “with this reporting obligation when they commenced their fractional trade programs.”

This resulted in a surge in volumes for the BRK.A share.

The Wall Street Journal report quoted a FINRA spokesperson who stated regarding this rule, “Finra is already actively working on the issue and is engaged in ongoing discussions with firms and regulators.”

Wall Street’s Take on BRK.A

Wall Street analysts are cautiously optimistic about Berkshire Hathaway with a Moderate Buy consensus rating based on one Buy and one Hold. The average BRK.A price target of $560,045 implies an upside potential of 30.5% at current levels.

Bottom Line

The research paper added that this “phantom volume now represents 80%
of BRK.A’s daily trading volume.” It remains to be seen whether FINRA brings in any changes to the reporting in fractional shares to avoid such ballooning in share volumes.

Meanwhile, Jim Cramer, host of Mad Money on CNBC and the head of the CNBC Investing Club, poked financial services platform Robinhood Markets for the bizarre trading volumes of Berkshire Hathaway.

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