FINANCE


Tiny trades, big questions: Fractional shares


MAUREEN O’HARA PROFESSOR


ROBERT W. PURCELL PROFESSOR OF MANAGEMENT


Samuel Curtis Johnson Graduate School of Management


Cornell SC Johnson College of Business Cornell University


Te Journal of Financial Economics, 157, July 2024 LINK TO PAPER LINK TO MAUREEN O’HARA VIDEO


Co-authors • Maureen O’Hara


Professor, Robert W. Purcell Professor of Management, Samuel


Curtis Johnson Graduate School of Management, Cornell SC Johnson College of Business, Cornell University


• Robert P. Bartlett, Stanford Law School, Stanford University, California • Justin McCrary, Columbia University Law School, NBER, New York


Summary Retail trading in equities markets is enjoying a renaissance. No longer the


“quirky side show” of years past, estimates of retail trading rose from 20% of the market in 2010 to as high as 40% in 2021. U.S. retail brokerage accounts increased from 59 million in 2019 to 95 million in 2021. Fidelity alone had 32.5 million accounts in 2021, with Charles Schwab reaching 29.6 million accounts and relatively new entrant Robinhood Markets hitting 23 million accounts and hosting 13 million monthly users. Causes of this retail resurgence are varied, but the entrance of fintech trading apps such as Robinhood and Cash-App, the introduction of commission-free trading in 2018, and even the distribu- tion of stimulus checks are noted as prime factors. So, too, is the introduction of fractional share trading in 2019 which allowed investors to purchase as little as $1 of high-priced stocks like Berkshire-Hathaway A and Tesla.


Tis paper investigates fractional share trading with a particular focus on understanding both the scale and impact of this new innovation. Te authors develop a latency-based method for identifying a large sample of fractional share trades and they find that high-priced stocks, meme stocks, IPOs, SPACs, and popular retail stocks exhibit considerable numbers of these tiny trades. Tey surmise that this reflects dollar-based order entry, with many tiny trades being fractional components of larger orders. Tey offer a fractional trade measure predictive of future liquidity and volatility, suggesting a new metric to capture the information in retail trades.


CONTENTS TO MAIN


| RESEARCH WITH IMPACT: CORNELL SC JOHNSON COLLEGE OF BUSINESS • 2024 EDITION


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