The Marketability of High-Priced Stocks After Fractional Trading

28th Denman Research Award in Business (2nd place, 2023)Denman Research Scholarship AwardFintech brokers engaging in a high-frequency trading payment for order flow (HFT-PFOF) model are compensated proportional to the amount of trading activity happening in their accounts. Intense competition for order flow incentivizes them to increase the marketability of stocks by introducing fractional trading (FT) which allows investors to trade stocks without the constraint of prices. This paper studies whether virtually reducing stocks' nominal prices via FT will cause an increase in its demand due to its newfound affordability-- given the ability to trade high-priced stocks, are investors willing to? If we observe an increase in its demand, this study will provide additional evidence that wealth levels pose a significant determinant for trading decisions. We find that retail trading activity in high-priced stocks significantly increased over the 10 days after FT was introduced. In aggregate, we find significant increases in trading volume (by over 1 million trades), volatility, and ownership breadth. We show that Robinhood investors are largely contrarian buyers in the advent of FT. However, their trades may be too small to move the volume weighted average price (VWAP) to showcase their increasing demand as we saw significant increases in volatility and ownership breadth-- this could explain why 10-day CAR was -0.3%. We further provide anecdotal evidence of significant overpricing in retail-favored high-priced stocks where 10-day CAR was +3.4%. This paper shows that the affordability of stocks play a significant role in trading decisions, thus providing evidence towards the marketability hypothesis.No embargoAcademic Major: Financ