It’s no secret that Warren Buffett isn’t a fan of Robinhood.
The Oracle of Omaha has been sparring with the online brokerage platform since 2021. Until now, the fight has been over a difference in their philosophical views of the stock market.
A recent paper by three academics may have made it more personal, though.
At more than $440,000 per share, there typically isn’t a lot of trading activity around Buffett’s prized Berkshire Hathaway (BRKA) A stock: Between 2010 and 2020, an average of 375 shares were exchanged daily. Then, in February 2021, trading volume shot up to nearly 2,000 shares per day, where it’s remained ever since.
The increased activity captured the attention of market watchers but remained a mystery. Some speculated that there was a superbuyer scooping up the stock.
But research published last month by professors at University of California, Berkeley, Columbia Law School and Cornell University found that the turbo boost in trading hasn’t been the result of any superbuyer. Instead, volumes of the most expensive stock in the US have been artificially inflated by the way brokers like Robinhood report fractional trading.
The increases come from what researchers call “phantom, non-existent trading.” When a brokerage makes a private, off-exchange stock trade, like the fractional trades executed by Robinhood, they are required to report the trades to the Financial Industry Regulatory Authority as though they were for a full share. Under this “rounding up rule” an investment as small as 1/100th of a share in Berkshire Hathaway would count as a purchase of a full $440,000 share.
Researchers say that this “well-intentioned but misguided” FINRA rule has added an additional volume equivalent of more than a billion dollars a day to Berkshire Hathaway A shares. The reported phantom volume represents 80% of their daily trading volume.
DriveWealth, which processes stock trades for investing apps like Cash App, also reported fractional share trades in Berkshire to the FINRA database and drove up trade volume, the study found.
“The FINRA reporting rule for fractional trading has created significant distortions,” wrote the authors of the paper.
A FINRA representative told CNN Business that the agency “is already actively working on the issue, and is engaged in ongoing discussions with firms and regulators.”
Fractional trading brokerages like Robinhood, meanwhile, are “a fly in the ointment,” to Buffett, Robert Bartlett, a professor at the University of California, Berkeley School of Law and co-author of the study.
“Buffett wants to keep the price of his Class A shares high to attract long-term value investors,” he said. “Those aren’t the people buying these fractional shares, and so they are undermining his main vision for the stock.”
‘Adversaries’ of change vs. ‘casino’ groups
Buffett doesn’t mince words when speaking out against Robinhood. The brokerage is “a very significant part of the casino aspect, the casino group, that has joined into the stock market in the last year or year and a half,” he said at his Berkshire Hathaway shareholder meeting in 2021, referring to the recent meme-stock craze.
Charlie Munger, Buffett’s right-hand man, joined in at this year’s shareholder meeting, calling the brokerage’s business model “disgusting.”
Robinhood counters that it is “democratizing” Wall Street by creating an easily accessible trading platform that allows investors to engage in fractional trading, buying small percentages of stock shares.
“There is an old guard that doesn’t want average Americans to have a seat at the Wall Street table so they will resort to insults,” the company said in a statement last year.
“Adversaries of this future and of change are usually those who’ve enjoyed plentiful privileges in the past and who don’t want these privileges disrupted,” Robinhood added, saying that the “new generation of investors aren’t a ‘casino group.’”
Either way, Robinhood may have other troubles ahead.
Robinhood announced on Tuesday that it will lay off about 23% of its staff following a sharp decline in trading activity on the platform. This is the second round of layoffs this year and part of a broader reorganization effort led by CEO Vlad Tenev.