The introduction in 2019 of fractional share trading, from brokerage firms such as Robinhood and Drivewealth, allows investors to purchase as little as $1 worth of high-priced stocks like Berkshire-Hathaway A and Tesla, opening the door to a new type of stock purchasing.
This trading innovation has democratized stock ownership, reducing the financial barriers that once confined participation to the privileged few. It has also proven to be a barometer of future market activity.
Using a metric they developed, a research team led by Maureen O’Hara, professor at the Samuel Curtis Graduate School of Management, at the Cornell SC Johnson College of Business, found that fractional trading is predictive of future market liquidity and volatility, suggesting an information content to tiny trades.
“It turns out that tiny trades are more common than one might think, especially for stocks that are popular among retail investors, like high-priced stocks, meme stocks, IPOs and popular retail stocks,” said O’Hara, co-author of “,” forthcoming in the Journal of Financial Economics.
“It’s clear that fractional share trading is here to stay,” she said, “and it’s reshaping the way we think about investing.”
Other co-authors are Robert P. Bartlett, professor at Stanford Law School, and Justin McCrary, professor at Columbia Law School.
O’Hara and the team developed a method to identify fractional share trades by Robinhood and Drivewealth based on latency – the time it takes for trades to be executed and processed electronically. They found that an increase in fractional share trading is predictive of changes in a stock’s liquidity and volatility, which can impact its value.
The authors also show that for some stocks, fractional share trades comprise a surprising portion of total trading: Nearly 10% of all trades in Tesla are fractional; for Berkshire Hathaway A, that number exceeds 80%.
Amid the allure of accessibility and market insights that come with fractional trading, the researchers believe challenges loom ahead. With disparate reporting rules, exclusion from exchange trading and the practice of “rounding up” tiny trades, the opacity of fractional share trading poses a conundrum for regulators. These transactions often evade traditional tracking mechanisms, complicating efforts to accurately gauge the prevalence and implications of fractional trading.
Regulatory frameworks also find themselves at a crossroads, grappling with integrating fractional share trading into existing market structures, the researchers wrote. Striking a balance between innovation and oversight becomes imperative to safeguard market integrity and investor interests.
“Ongoing dialogues between regulatory bodies, market participants and technology innovators are essential to navigate this evolving landscape effectively,” O’Hara said. “As stakeholders traverse this uncharted terrain, a collaborative approach that fosters transparency, innovation and regulatory clarity will be pivotal in shaping the future trajectory of fractional share trading.”
Despite these challenges, the researchers believe that by shedding light on this growing trend, the result will be better reporting protocols and more informed decision-making among investors and regulators alike.
“Whether you’re a seasoned trader or just dipping your toes into the stock market,” O’Hara said, “it’s worth keeping a close eye on this dynamic and ever-changing landscape.”
Sarah Magnus-Sharpe is director of PR and media relations for the Cornell SC Johnson College of Business.
