Citi Reverse Stock Split: Bad for Trading

Citigroup's reverse stock split: perhaps good for stock, but bad for trading. Citi's 1-for-10 reverse stock split doesn't change any fundamentals, but it is good news for institutional investors, as a price in the $40s will definitely make the stock more attractive for them and certain other longer-term holders of the stock. Those who like to buy lower-priced stock may not be so happy.

But it is definitely a negative for the trading community. On most days, Citi is 10 percent of the volume of all the trading in NYSE stocks.

Let me say that again: Citi is 10 percent of the consolidated tape of the NYSE (all trading in all NYSE listed stocks).

That's about 500 million shares, on a day when the consolidated tape is about 5 billion shares.

Why? Because of the nature of our current market structure, traders are paid a rebate per share for directing order flow to exchanges and other trading centers. Citi is the ultimate rebate stock: low-price, high volume.

The result: an entire sub-community of trading exists to trade Citi and the rebate around it. But to make it work, you need to trade a lot of shares (north of 1 million a day) and you need to keep the price low.

The reverse split blows this trade apart.

What does it mean? Traders estimate that Citi's volume, post-split, is likely to go from about 500 million to, perhaps, 100 million, a drop of 80 percent. That's 400 million fewer shares. So the consolidated tape will go from 4.5-5 billion to 4.1-4.5 billion average daily volume.

A similar event occurred with the other monster stock favored by rebate traders: AIG. AIG was trading below $2 when the company announced a 1-for-20 stock split on May 21, 2009, which went into effect on July 1, 2009. The result: volume dropped dramatically.

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