Citigroup stock split may ruin it for traders
Citigroup Inc. shares fell Monday after the banking giant announced a 1-for-10 reverse stock split -- a strategy to get the shares out of penny-stock range.
That also seems likely to change the stock’s status as a favorite issue to trade, both for individual investors and for high-frequency trading firms.
A reverse split reduces the number of shares outstanding, but it doesn’t change the fundamentals of the stock, such as the price-to-earnings ratio. If Citi stock is at $4.43 when the split occurs (expected May 6), the new shares should immediately trade for about $44 each. The total value of the stock outstanding doesn't change.
The main idea behind a reverse split usually is to lift a stock above $5. Many big investors have rules against buying shares below that price threshold because they’re typically considered too speculative.
But since Citi crashed during the financial meltdown of 2008 and issued a massive amount of stock to the government in return for a bailout (since repaid in full), its low price has drawn in many individual investors hoping to score a big gain, either short term or long term.
The stock also has been a huge moneymaker for high-frequency trading firms, as Lori Spechler notes on the NetNet blog. Those trading outfits earn rebates from stock exchanges for funneling orders to the exchanges.
That has added up to big money, given the gigantic trading volume in Citi shares. On Monday alone nearly 800 million shares changed hands.
On most days, Citi accounts for a full 10% of the volume of all NYSE-listed stocks, CNBC’s Bob Pisani calculates.
It was fun while it lasted.
-- Tom Petruno