Here’s a little puzzler for everyone. As people dig through the implications of Apple’s stock split we’ve had a number of pieces trying to work out just why it’s beneficial. At one level of theory it should make any damn difference, more shares in existence doesn’t change the value of the overall company. Yet the markets note that it does change that value, so what gives?
Theories have ranged from wanting to get into the Dow (it’s boring why it couldn’t, pre-split) but that doesn’t really work as no one cares about being in the Dow, There’s no major indexing done against it, that’s all over in the S&P 100 and 500, where Apple already is. There’s been some thought that it reduces the odd lot problem (if you’ve fewer than 100 shares you don’t get guaranteed best execution price and this could make a small difference) but the one that serious people are pointing to is that it reduces the bid ask spread:
Every one of the stocks that has effected a split in the past year has enjoyed tighter spreads thanks to the split. The most dramatic example is MasterCard’s recent 10-for1 split (the largest action taken among those on the list) where spreads collapsed by 75%. The average spread improvement among all the stocks is a still-impressive 35%.
That spread is best thought of as the slice of our money that the markets themselves take for our privilege in using those markets. The fee that we pay for there being a liquid and functioning market. So, if this reduces that, it means we’re all paying a little less in our IRAs in such fees and our pensions become that joyfully fatter. Hurrah! etc. Which is great, but where does that leave high frequency trading, something that also reduces the bid ask spread?
In an interview with the Financial Times, Mr McNabb said that HFT firms had helped investors cut their trading costs, and urged the US Securities and Exchange Commission not to reverse the market reforms that gave birth to the phenomenon.
HFT firms knit together the dozens of trading venues that compete for investors’ business, he said. “Our perspective is: be careful in pulling the thread, because the whole suit may fall apart.”….
The firm has had to spend heavily on technology to deal with the proliferating number of stock exchanges and trading venues, but says the reduction in spreads – the difference between the price of buying and selling stocks – far outweighs those costs……
“From a data perspective, we can see what’s happened to our fund shareholders over the last 20 years and they’ve benefited by that reduction in transaction costs.”
That is a bit of a problem for the Michael Lewis thesis that HFT is the work of the very devil. For if a reduced spread is a good idea, which the markets certainly think it is in the context of companies like Apple having a stock split, then shouldn’t the reduction in the bid ask spread brought about by HFT be thought to be equally useful to have?
And if not, why not?
[Image via Thinkstock]