Warren Buffett Has Another Reason to Go Against Broker Robinhood

It’s no secret that Warren Buffett is not a fan of Robinhood. The Oracle of Omaha has been fighting the online brokerage platform since 2021. Until now, the fight has been over a difference in their philosophical views of the stock market.

However, a recent article by three scholars may have made the matter more personal.

At over $440,000 a share, there’s typically not a lot of trading activity around Buffett’s award-winning Berkshire Hathaway A stock: between 2010 and 2020, an average of 375 shares were traded daily.

Then, in February 2021, trading volume rose to nearly 2,000 shares a day, where it has remained ever since.

The increase in activity caught the attention of market watchers but remained a mystery. Some speculated that there was a superbuyer recalling the shares.

But research published last month by professors at the University of California, Berkeley, Columbia Law School and Cornell University found that the boost in trading was not the result of any superbuyers.

Instead, the volumes of the most expensive US stocks have been artificially inflated by the way brokerages like Robinhood report fractional trading.

The increases come from what researchers call “phantom and non-existent trading.” When a brokerage makes an off-exchange private equity trade, such as the fractional trades executed by Robinhood, it is required to report the trades to the Financial Industry Regulatory Authority (FINRA) as if they were for a full share.

Under this “rounding rule”, an investment as small as 1/100th of a share in Berkshire Hathaway would count as a purchase of a total share of $440,000.

The researchers say this “well-meaning but misguided” FINRA rule added an additional volume equivalent to more than $1 billion a day to Berkshire Hathaway A shares. The reported phantom volume represents 80% of your daily trading volume.

DriveWealth, which processes equity transactions for investment apps such as the Cash App, also reported fractional equity transactions in Berkshire to the FINRA database and increased transaction volume, the study found.

“FINRA’s reporting rule for fractional trading has created significant distortions,” the paper’s authors wrote.

A FINRA representative told the CNN Business that the agency “is already actively working on the issue and is engaged in ongoing discussions with companies and regulators”.

Meanwhile, fractional trading brokers like Robinhood are “a fly in the ointment” for Buffett, says 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 its Class A shares high to attract long-term value investors,” he said. “These are not the people who buy these fractional stocks, and therefore they are undermining your primary vision for the stocks.”

‘Opponents’ 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 group that has entered the stock market in the last year or year and a half,” he said at his 2021 Berkshire Hathaway shareholder meeting.

Charlie Munger, Buffett’s right-hand man, attended this year’s shareholders meeting, calling the brokerage’s business model “disgusting.”

Robinhood responds 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 shares.

“There is an old guard that doesn’t want ordinary Americans to sit at the Wall Street table and resort to insults,” the company said in a statement last year.

“The opponents of this future and change are generally those who have enjoyed many privileges in the past and who do not want those privileges to be interrupted,” added Robinhood, saying that “the new generation of investors is not a ‘casino group’.

Either way, Robinhood may have other problems ahead.

Robinhood announced on Tuesday that it will lay off around 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.