Over the past few years, retail traders have had the ability to trade fractional shares on all stocks through various retail brokerage platforms.
Although this was useful for clients with small investments, it was difficult for consolidated tapes, which are used to report trades in entire stocks.
Today, we’ll look at the changes in reporting fractional shares and see how much they mean for the trading market.
Changing the way fractional shares are reported
Initially, fractional shares were excluded from the tape, which makes some sense when you consider that matching less than a whole share results in no change in “voting” ownership.
But as fractional share trades became more popular, FINRA required them to be reported in a 2017 FAQ as if they were full-share trades. However, fractional share reporting didn’t really take off until FINRA clarified its rules in 2021.
Recently (as of February 23), FINRA required that actual fractional share volume be reported to the Trade Reporting Facility (TRF) in a new area, which is also reported to the Securities Information Processor (SIP).
How much does this change the average daily dose (ADV)?
Before February 23, fractional share trades were being rounded up or down:
- Shares less than 1 were rounded up (to 1).
- Shares greater than 1 are rounded up (to the nearest whole share).
This means that ADV may be lower or higher than actually reported.
Now, fractional shares are reported on TRF up to six decimal places.
Table 1: Fractional share reporting guidelines before and after February 23
Now, we can see how many “one-share” trades are actually frictional trades and which stocks have the highest or lowest ADV. As we show in Chart 1, the majority of shares in many popular retail stocks trade in fractions. The data also shows that:
- Trades are more likely to be rounded up (blue) than rounded down (red).
- Not surprisingly, even very highly priced stocks like Berkshire Hathaway appear to have very high fractional value (blue bars), but actually very low fractional volume (light blue dots).
Chart 1: Retail names had the biggest discrepancy in volume
Overall, the market is ADV More than 4.4 million shares were reported. This includes 4.3 million shares rounded up to one share (black), and $100,000 worth of shares rounded down to the nearest whole number (red). This results in $1.3 billion worth more being traded per day on tape than in actual liquidity.
How much do fractional trades affect liquidity?
Fractional trades need to be facilitated by the investor’s broker on a core basis as fractional amounts cannot be sent to exchanges or dark pools or settled by the DTCC. Given this, it is interesting to see how prevalent they are, and how much they distort available liquidity.
Looking at the ratio of trades in different share quantities (Chart 2A), we see that:
- Higher priced stocks see more partial or complete one-share trading.
- Look for low priced stocks about 15% Of all trades representing one share or less in the TRF.
- View Stocks in the $1000+ Group about 45% Of all trades representing one share or less in the TRF.
- There is almost no trading for fractions larger than one share.
- Overall single-share trades are more consistent across all price groups.
Chart 2A: Fractional volume appears higher in higher priced stocks
Looking at the ratio of trading volumes across different share volumes (Chart 2B), we see that:
- Overall one-share trading still dominates smaller trades in the TRF (green).
- Shares with higher prices have higher fractional volumes.
- It is more likely that a fraction is greater than a share for lower priced stocks (red).
- It is more likely that a fraction is less than a share for higher priced shares (red).
- Although there are few trades for larger fractional shares, they actually account for more liquidity (especially in lower priced stocks).
Overall, frictional trades increase liquidity less than 0.2% of TRF quantity. TRF represents approximately half of all shares traded, which means fractional ADVs are less than 0.1%.
Chart 2B: Fractional volume appears higher in higher priced stocks
Why do fractional trades exist?
It is interesting that fractionals exist even for low priced stocks.
Looking at the distribution of fractional trades by hypothetical (value) shows why this happens.
The bounce we see in Chart 3 shows that a large portion of trading occurs in whole-dollar values. The largest jumps occur for $1 trades, with relatively small amounts of trades for 99-cents or $1.01. We then see further upside at exactly $2, $5 and $10.
In short, retail not only trade short, but they also often prefer to trade hypotheticals rather than stocks.
Chart 3: Fractional trades are hypothetically reported for a round dollar amount
More Fractional Data Teaches Us How Retail Trades
It’s interesting that more partial data shows that retail prefers to trade in dollars – not shares. We also see that more than 1 in 5 trades in higher priced stocks occur on fractional volume.
However, the impact on liquidity is less problematic. Total ADV is reported to be (just) over 4.4 million shares, which is less than 0.05% of ADV.
In short, fractional reporting probably turns out to be a smaller problem than some expected.
