Insights

Recently, the paper “Fractional Trading”, co-authored by Prof. Lin Wenwei of the School of Management and Economics, The Chinese University of Hong Kong, Shenzhen, Prof. Da Zhi of the University of Notre Dame, and Prof. Fang Wei of Indiana University, has been published in the Review of Financial Studies, the top journal of international finance. The study provides an in-depth analysis of the impact of fractional trading on the U.S. stock market, particularly in terms of facilitating small trades in high-priced stocks, affecting asset prices, and contributing to trading frenzies and price bubbles. The findings suggest that fractional trading provides capital-constrained retail investors with the opportunity to trade high-priced stocks and may have a profound effect on their trading behavior and asset prices. This study is important for understanding the role of retail investors in the stock market and the impact of trading innovations on the market.

Author

Lin Wenwei

Assistant Professor, School of Management and Economics, CUHK-Shenzhen

Research Area

Capital Market Research, Corporate Disclosure, Social Media

Abstract

Fractional trading (FT)—the ability to trade less than a whole share—removes barriers to high-priced stocks and facilitates entry by capital-constrained retail investors. We observe a surge of tiny trades, measured using off-exchange one-share trades, among high-priced stocks compared to low-priced stocks after FT is introduced to the U.S. equity markets. These tiny trades, when coordinated during attention-grabbing events, are forceful enough to exert large price pressure on high-priced stocks. Further evidence suggests that FT can even fuel meme stock-like trading frenzies and bubbles in high-priced stocks, for which feedback effect likely plays a role.