March 15, 2011

Berkshire Hathaway and the Myth of Trading Liquidity

The Ides of March today carries an air of foreboding that dates to Julius Caesar’s demise in 44 BC. Before Brutus colored the day red, Romans did on the Ides what any other urbane culture might: They feted Mars, god of war. It feels lately like Mars has been trudging along the tectonic plates.

We still have $200 here for the first person to correctly answer last week’s two critical IR questions: Where do your shares trade? Which brokers trade them?

Speaking of the Issuer Data Initiative: Thank you, NIRI CEO Jeff Morgan, for sliding it across your desk today and out via the weekly NIRI email (note: Register for NIRI National by Friday for the early bird discount). Public companies, please commit your support so every IRO will have answers to the questions above.

Reading Dick Johnson’s noteworthy blog about Warren Buffett’s view of IR prompted a way to show why good issuer data matters. Berkshire Hathaway Class A shares (BRK.A) trade about 500 shares daily, over about the same number of trades per day. On rare occasions, a trade occurs off the NYSE, but most times if Mr. Buffett wants to know which brokers executed trades, that information is available because the trades occurred at his listing exchange.

Now contrast that with a biotech client of ours trading 3.1 million shares daily, 17,000 trades per day. On March 11, over 80% of the volume occurred somewhere other than the listing exchange. So unlike Mr. Buffett’s Class A shares, there is no way for the biotech IRO to see the brokers behind most of those trades.

Why is one company entitled to information and another not, simply because of price, volume and where trades match? Good question. It doesn’t seem right, does it? It’s nobody’s fault. Trading has fragmented. Rules for issuer data did not keep pace.

The best news for public companies is that there’s a solution. Sign the Issuer Data Initiative, and there is a good chance that all public companies will receive equal information. Imagine what you’ll know. Rather than guessing what happened, you can look at who traded your stock on the day price moved, and make some inquiries.

Back to Berkshire Hathaway. The SEC-CFTC Flash Crash Panel recently lamented a lack of liquidity in trading markets, especially at “peak load” periods, and suggested that price discovery depends on interaction among all types of participants (see our comment letter here).

It would appear that BRK.A refutes that notion. Price discovery requires only a willing buyer and a willing seller. It’s worked on a dab of liquidity. Just 1.65 million shares outstanding, trading 500 shares a day. Market cap north of $200 billion.

Value of example: priceless.

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