Academic detectives solve Berkshire's 'Mystery of the Voluminous Volumes'

The mysterious surge in trading volume for Berkshire Hathaway's Class A shares that began early last year is an illusion.

That's the conclusion of three academic researchers who were puzzled, along with everyone else (including Warren Buffett) by the sudden increase in volume from a daily average in 2019 and 2020 of 359 shares to 1900 shares a day starting in February of last year.

In a new study that made headlines this week, Robert Bartlett at UC Berkeley, Justin McCrary at Columbia University, and Maureen O’Hara at Cornell University write, "This volume is due to the interaction of a well-intentioned but misguided FINRA reporting rule, Robinhood trading, and fractional shares."

Specifically, they found that the surge came just as Robinhood started to comply with an obscure Financial Industry Regulatory Authority 2017 rule that requires a fractional share trade to be reported as if a full share had been bought or sold.

Fractional share trading has become increasingly popular in recent years, especially for Robinhood customers who don't pay any commissions, especially when buying even one share of a high-priced stock would involve paying thousands of dollars.

And no stock has a larger per-share price tag than Berkshire's Class A, which closed today at almost $430,000 for just one share.

So if a buyer only wanted $5000 worth of BRK.A, he or she could buy 1.16% of a share, but it is counted as one full share in the trading volume.

This is true for any fractional sale, but it becomes especially apparent when a stock is priced as high as Berkshire's.

Amid speculation the volume surge might have been caused by someone accumulating a lot of shares, even Buffett wasn't sure what was happening.

The Wall Street Journal writes he "was puzzled by the reported volume numbers and believed they were wrong, but didn't know the reason why, a person close to the company said." 

Financial Industry Regulatory Authority (FINRA) office in NYC, Sept. 2020 (REUTERS File Photo/Andrew Kelly) 

The trio of researchers note that the rule "has created significant distortions."

FINRA says it is working on what amounts to a technical problem, telling CNBC it "is already actively working on the issue, and is engaged in ongoing discussions with firms and regulators. The current trade reporting systems (other than the Consolidated Audit Trail) do not support the entry of a fractional share quantity. FINRA’s guidance on trade reporting needs to be understood in that context."

Berkshire's OXY stakes inches even closer to 20%

Since last week's newsletter, Berkshire has disclosed it bought another 1.9 million shares of Occidental Petroleum for $112 million on Thursday and Friday of last week and Monday of this week. That's an average price of $57.70.

That brings Berkshire total reported stake to almost 181.7 million shares, roughly 19.4% of the oil giant's outstanding shares.

If Berkshire owns 20% or more of Occidental it can include some of the company's earnings in its own financial results, boosting its bottom line.

Berkshire reports paying $9.6 billion (an average purchase price of $52.96) since it started accumulating the stock in early March.

The stake is currently valued at nearly $11.1 billion, based on OXY's $61.06 closing price tonight, a paper profit of 15.3%.

BUFFETT AROUND THE INTERNET

Some links may require a subscription

• CNN Business: How to invest like Warren Buffett during a recession

• Yahoo Finance Video: Yahoo Finance Editor-in-Chief Andy Serwer discusses Berkshire's stake in Occidental Petroleum and what that indicates to investors

• CNBC Pro (subscription): Berkshire Hathaway’s stock has gotten a lot cheaper since Warren Buffett’s buyback binge

• CNBC Pro (subscription): Charlie Munger believes Berkshire’s investments in fossil fuels and renewables can both work

• Forbes: Elon Musk Trumps Warren Buffett In Today’s Japan

• New York Times: A Warren Buffett Protégée (Tracy Britt Cool) Strikes Out on Her Own

• Reuters: China's (Berkshire-backed) BYD to start selling electric vehicles in Japan next year

• Bloomberg (subscription): Buffett’s Silence on BYD Fuels Trader Theories on Next Move

• Bloomberg Opinion (subscription): Did Buffett and Munger See BYD’s One Problem: Lithium Supplies?

• Bloomberg (subscription): NFL’s Suh Runs With Buffett, Sees Real Estate as an Equalizer 

BERKSHIRE STOCK WATCH

BERKSHIRE'S TOP U.S. STOCK HOLDINGS - Jul 22, 2022

Berkshire's top holdings of disclosed publicly-traded U.S. stocks by market value, based on today's closing prices.

Holdings are as of March 31, 2022 as reported in Berkshire Hathaway’s 13F filing on May 16, 2022, except for Apple, Bank of America, and U.S. Bancorp, which also include shares held as of Mar 31, 2022 as disclosed in New England Asset Management’s 13F filing on May 14, 2022, and except for Occidental Petroleum, which is as of July 18, 2022.

In addition to U.S. stocks, shares held as of December 31, 2021 of China's BYD, as listed in Buffett's 2021 letter to shareholders, are included. The price of those shares in U.S. trading is used to approximate the current market value of the position. The value of the stake as a percentage of the company's market value is fixed at what was listed as of December 31, 2021 in the letter.

The full list of holdings and current market values is available from CNBC.com's Berkshire Hathaway Portfolio Tracker.

QUESTIONS OR COMMENTS

Please send any questions or comments about the newsletter to me at alex.crippen@nbcuni.com. (Sorry, but we don't forward questions or comments to Buffett himself.)

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-- Alex Crippen, Editor, Warren Buffett Watch