3 ms·

i've been pondering this notion of fractional shares that has become popular amongst retail brokers recently. i read some news about a stock split and it got me

by a-dub 5y ago

i've been pondering this notion of fractional shares that has become popular amongst retail brokers recently. i read some news about a stock split and it got me wondering how relevant that is now that shares are essentially divisible down to the penny. the fact that splits exist at all says that it's a knob that is intentionally turned at some point... but what did it do? does it reduce volatility by requiring a larger outlay to participate? (a sort of requirement to put more skin in the game). if so, does its elimination increase systemic risk? does it mean that every stock becomes a penny stock- subject to unpredictable price moves as a result of cheap speculation?

vineyardmike 5y ago
> does it reduce volatility by requiring a larger outlay to participate? Yes. Absolutely. It also makes it less appealing to retail investors. Eg. Berkshire Hathaway A stock is 431,536.38 at time of writing. Amazon is 3,608.66, Apple is 163.27. Apple is supposedly the most popular consumer-held stock. It also makes it harder to use derivative products. eg. Options require buying/selling 100x shares, so Berkshire Hathaway would literally require millions of dollars for one option contract. That surely impacts trade volume. > Does [fractional shares] mean that every stock becomes a penny stock- subject to unpredictable price moves as a result of cheap speculation? Yes and no. Not all companies are available as fractions. Also, the Robinhood investor who is day trading from his phone at work is probably using fractional and driving price movements (eg. GME), but the day trading full time investor class is not using fractional shares nearly as much. A lot of more professional-focused platforms either don't allow fractions (or don't for pro users), or don't make full features available. Eg. IBKR is a common platform for Algo trading and their api doesn't allow fractional shares (but their manual GUI with app allows it). This is likely due to technical and liquidity reasons as much as pragmatic ones. When a fractional share is available, that basically means the broker owns the shares, and gives you partial ownership. They need to basically own n+1 across their platform for all users (round up). If you're doing large trading volumes, that's impractical to keep up with on their end - especially if you quickly buy a lot and sell back. > does it mean that every stock becomes a penny stock Just to repeat, usually brokers only support the most popular stocks as fractional, which already have high volume. This means it may not have a huge impact on the system - but that's just speculation, i don't know if it has had an impact on the stocks like you suggest.
- deleted 5y ago
  [deleted]
- Kranar 5y ago
  >Yes. Absolutely. There is no causal relationship between nominal price and volatility. There are correlations between price and volatility, but it's that cheap stocks (such as those below 5 dollars) are usually much more volatile than expensive ones. The same goes for liquidity, there is also no causal relationship between nominal price and liquidity. You can verify yourself that Berkshire Hathaway's price has no effect whatsoever on either volatility or liquidity, just compare BRK-A which trades at ~300,000 dollars with BRK-B which trades at ~200 dollars: https://finance.yahoo.com/chart/BRK-B#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- https://finance.yahoo.com/chart/BRK-B#eyJpbnRlcnZhbCI6IndlZW... As a quant it would be nice of this property didn't hold, would be an easy arbitrage... but alas no such arbitrage opportunity is readily available.

by a-dub 5y ago

vineyardmike 5y ago

> does it reduce volatility by requiring a larger outlay to participate? Yes. Absolutely. It also makes it less appealing to retail investors. Eg. Berkshire Hathaway A stock is 431,536.38 at time of writing. Amazon is 3,608.66, Apple is 163.27. Apple is supposedly the most popular consumer-held stock. It also makes it harder to use derivative products. eg. Options require buying/selling 100x shares, so Berkshire Hathaway would literally require millions of dollars for one option contract. That surely impacts trade volume. > Does [fractional shares] mean that every stock becomes a penny stock- subject to unpredictable price moves as a result of cheap speculation? Yes and no. Not all companies are available as fractions. Also, the Robinhood investor who is day trading from his phone at work is probably using fractional and driving price movements (eg. GME), but the day trading full time investor class is not using fractional shares nearly as much. A lot of more professional-focused platforms either don't allow fractions (or don't for pro users), or don't make full features available. Eg. IBKR is a common platform for Algo trading and their api doesn't allow fractional shares (but their manual GUI with app allows it). This is likely due to technical and liquidity reasons as much as pragmatic ones. When a fractional share is available, that basically means the broker owns the shares, and gives you partial ownership. They need to basically own n+1 across their platform for all users (round up). If you're doing large trading volumes, that's impractical to keep up with on their end - especially if you quickly buy a lot and sell back. > does it mean that every stock becomes a penny stock Just to repeat, usually brokers only support the most popular stocks as fractional, which already have high volume. This means it may not have a huge impact on the system - but that's just speculation, i don't know if it has had an impact on the stocks like you suggest.

deleted 5y ago
[deleted]
Kranar 5y ago
>Yes. Absolutely. There is no causal relationship between nominal price and volatility. There are correlations between price and volatility, but it's that cheap stocks (such as those below 5 dollars) are usually much more volatile than expensive ones. The same goes for liquidity, there is also no causal relationship between nominal price and liquidity. You can verify yourself that Berkshire Hathaway's price has no effect whatsoever on either volatility or liquidity, just compare BRK-A which trades at ~300,000 dollars with BRK-B which trades at ~200 dollars: https://finance.yahoo.com/chart/BRK-B#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- https://finance.yahoo.com/chart/BRK-B#eyJpbnRlcnZhbCI6IndlZW... As a quant it would be nice of this property didn't hold, would be an easy arbitrage... but alas no such arbitrage opportunity is readily available.