Concannon on Stock Splits (Part 1)

Chris Concannon is CEO of Bats Global Markets. He wrote an interesting article recently in Modern Trader magazine called “Stock Splits for the Middle Class.”

Concannon begins by presenting some data to suggest current stock trading is weak and depressed:

• Average share volume for the 12-month period ending April
  30, 2016, is down ~9% from the same period four years ago
• Notional volume during this period is up 15%
• Share volume in January 2016 is up 1.92% while
  notional volume is up 42% compared to January 2010

Weak/depressed trading is seen by a lack of significant share-volume growth. More notional value traded on equal or lower share volume suggests stock appreciation is outpacing stock splitting. I would have liked to see how these numbers compare to other historical periods for a stronger case, though.

Concannon believes the refusal of corporations to split stocks is one limiting factor on share volume:

     > In an ill-conceived effort to attract “long-term
     > investors” and detract “speculators” from trading
     > their stocks, a number of popular U.S. companies
     > have kept their nominal stock prices above $200,
     > $500 or even $1,000 per share.

This is an interesting claim but no evidence is given to support it. If he is referencing a conversation(s) or quote by directors or C-level execs then he should most assuredly cite them! The use of quotation marks implies credibility but a critical reader cannot assume these to be actual words spoken by others.

Concannon goes on to explain the psychological impact of higher stock prices. He begins:

     > An average individual investor may avoid a $500
     > stock as being too richly priced but change his or
     > her view when that security is split 10-for-1 and
     > then trades at $50 [emphasis mine].

This makes sense but the actual impact is unspecified and I’m not sure it could really be measured. Concannon qualifies the statement well.

He then goes on to suggest the wider bid/ask spread is a significant drawback when trading more expensive stocks. He argues stock splits, while leading to higher per-share commissions, would more than make up for this by improved liquidity. In theory this makes sense but it is just that: theory. Why not interview some big institutional traders to see if they agree? This would be compelling evidence. Without any evidence it remains an empty claim.

I will conclude with my next post.