A 1:10 reverse split of Citigroup stock on Friday 6 May, which reduced the number of outstanding shares by a factor of 10 while increasing the stock price by the same multiple, could lead to a near 5% reduction in liquidity on the US market.
The calculation is made in a paper by US-based boutique agency broker Rosenblatt Securities, which mapped the trading activity of the bank's shares against stocks with similar characteristics.
Citigroup, which is listed on the New York Stock Exchange, had 5.508 billion shares outstanding in June 2009 but subsequent issuances to raise capital during the financial crisis boosted the number of shares to 29.206 billion by March 2011. It is America's most traded stock, making up 6.13% of 2011 volume up to 6 May.
Valued at around US$4.50, compared to US$45 for shares of rival investment bank J.P. Morgan, Rosenblatt says Citi shares were previously attractive to high-frequency trading (HFT) firms, which expected a US$1.50 return for a trade based upon 100 shares of a large-cap firm and could generate a higher comparative return based on capital at risk.
Rosenblatt identifies the number of outstanding shares and a firm's share price as the two most influential factors in attracting HFT volume, and creates a measure of a stock's HFT attractiveness, by dividing the number of shares by the price.
On this basis, Citigroup had the largest float/price multiple at 6.475 billion according to data put together on 3 May, with Sirius XM Radio, Bank of America Corporation, and Sprint Nextel Corporation, all of whom are anecdotally noted as HFT favourites, in the next three positions.
Citi's exchange of one share for every 10 has reduced the number of shares outstanding to 2.921 billion, valued at around the US$45 mark.
As the shares take on similar characteristics to those of J.P. Morgan, it is hypothesised that their trading volumes could also assume parallels; an average of 39.1 million J.P.Morgan's shares have been traded per day since January 2010 compared to 550 million per day for Citi.
Following the split, Citi's float/price multiple will fall to 64.76 million, compared to 88.44 million for J.P. Morgan.
If Citi's average daily value traded dropped to the level of J.P. Morgan, it would be reduced by 92.46%.
Rosenblatt says that a 90% volume loss in Citi shares, based on data for the year to date, would lead to a 4.6% decline on overall US equity volume.
This will affect three main groups: stock exchanges, dark pools and HFT firms. Exchanges will be hit be reduced transaction revenue, although their market share of Citi trading is expected to increase; this will come from dark venues that are used for trading low value stocks, which Citi will no longer be, at sub-penny increments; and finally HFT firms will be hit by the loss of a valuable tool.