Per Share Fees Vs Payment for Order Flow
By David Weed
Recently a number of Market Makers have announced their intention to move away from payment for order flow to per share fees trading. This article is intended to explore some of the ramifications of that shift.
How will this affect the individual trader?
That depends on what you want to trade. If your investments can generally be found on the NYSE and trade in Dollars or more you most likely won't even notice the difference. But if you love to work the "pennies"… OUCH!
Plain and simple this will add .01 per share to every round trip in a stock… regardless of what that stock is trading for. So now you'll need to double up on a .01 stock before you even cover commission costs!
As the general public starts to figure this out look for trading volume in these low priced issues to dry up. Severely. Only the truly naïve will continue to buy and sell these issues when they can't make any money on them. For example let's say you've got a company with a price of .03 but a rumor of good news round the corner is floating around and you buy in hoping for a quick run. Lucky you, the news is true and the stock jumps to .05. (OK we aren't talking megabucks here but a 66% gain is nothing to sneeze at and is a lot more likely than a 1000% gain!). Under last weeks trading rules you could make that trade for $39.90 round trip on 5000 shares for a nice profit of 31% after accounting for commissions. Now however, you will have to pay an extra $50 for the "per share fee" in addition to the commission you paid before (right, your broker is such a nice guy he'll pass this cost on to you of course). Now your "profit" on this trade is a measly 4%. On a 66% move in the stock price! Only the truly gifted will be making these kinds of trades.
So what will happen to these low priced stocks?
Good question. Many of these issues have huge outstanding share counts and need large trading volumes to get any movement in the stock price. So if this change results in lower trading volumes these stocks will go stagnant. And that is not going to make the current shareholders happy. And we all know what unhappy shareholder's leads to. For those that remember trading in `96 and `97 when per share trading was de riguer, very few traded in the low pennies and even fewer in the sub pennies. There weren't near as many daily newsletters and message board posts screaming XXXX at .02 is a steal! Guaranteed ten bagger! A return to that atmosphere as far as the low priced pennies is virtually assured.
The most likely decision then for the CEO's of these companies is; how do they get back in the limelight. Some will choose to do nothing and will languish for a very long time until they either close their doors or make it really, really big. Others will take a decidedly different approach and will reverse split the stock. A reverse split works exactly backwards from the kind of split we read about most often in the financial papers. Instead of getting more shares of the same stock and the price drops by the stated ratio, we get fewer shares and the price increases by the stated ratio. With their stock back above a dollar they stand a chance of getting the volume and exposure needed. They also won't need as much volume to get price movement since the outstanding share counts will have been lowered significantly. For an Idea of what size RS to expect take $1 and divide it by the current price per share (price of .04 requires a 25 to 1 RS), divide the OS count by that figure to get an idea of the new OS count.
My expectation is that a great many companies whose stock trades at less than 50 cents will be RS'ing late this year (thousands) as they see the money moving to issues priced higher than 50 cents. The ones that aren't merely printing presses will have a chance at holding the post RS figure and may be able to go on as viable operations. Hopefully the public will catch on quickly to the ones that have been using the company as a license to print worthless certificates and exchange them for cash. Because in order for that to work you must have volume in the stock and the only way to do that is not to dilute it or RS frequently to keep the volume up.
So what is the good news?
First, a lot of people who should never have been trading pennies in the first place will stop.
Second, a lot of companies that should never have seen the light of day will finally die.
Third, a lot of financial predators will have a more difficult time fleecing their prey.
Fourth, Rampant shorting will not be such easy money in the low pennies.
Fifth, Some really good companies, currently trading between $2 and $10 will start to get some attention as "investors" that were trading these low penny stocks seek new places to speculate.
Last (and maybe best), Market Makers will no longer be so focused on trying to profit from the spread. Like everyone else they don't want to work any harder than they have to.
What should the individual investor do?
Each should do as his/her heart and talents dictate. I can see great wisdom in closing large positions in low penny stocks. I can see more wisdom in researching and studying the stocks in the $2-$10 range seeking good candidates for the money taken out of the low penny range.
Mr. Weed is currently a researcher and staff member of studiedstocks.com; a website focused on low priced yet profitable companies currently underexposed to investors.
David Weed
aka the Bird of Prey
www.warp-drive.com
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