Citigroup's reverse stock split will severely curb trading activity in one of Wall Street's favourite stocks, forcing traders who seek to profit from frequently trading the shares to find a new source of income.
The third-largest US bank by assets is set for a 1-for-10 reverse stock split on Monday, likely boosting its share price back above $40 from its current level of $4.55.
While that won't change the nature of Citigroup as an investment it will reduce interest in trading the stock, mainly because of a controversial system of volume rebates offered by the exchanges to brokers, traders said.
Traders who have been primarily dealing in Citigroup Inc, who have been making much of their living off the volume rebates, will need to focus on other stocks. Citi accounts for about 6.0 percent of daily composite trading in the US stock market.
"You would be hard-pressed not to think that it is not going to force some people to back away and find some other names to trade, and it may not be that easy to replace that kind of volume and that kind of activity," said Joseph Benanti, managing director of Rosenblatt Securities in New York.
The 50-day moving average in daily composite volume for Citi is nearly 425 million shares out of total daily volume of 7.54 billion shares on the New York Stock Exchange, NYSE Amex and Nasdaq during the same time frame.
No other stock comes close in terms of volumes traded.
Citi's stock price fell from over $40 in 2007 to a low of 97 cents as a result of losses suffered during the 2008 financial crisis and has been trading below $5.00 for much of the past two years.
The liquidity rebates and automated and high frequency trading created a unique trading situation in which daily trading volume in Citigroup stock surged to over 400 million shares on many days in the past two years.
The volume rebates effectively meant traders got paid to provide orders to the exchange rather than getting charged for them.
The rebate system was originally devised by Bernard Madoff at the Cincinnati Stock Exchange. The NYSE and Nasdaq charge traders who remove standing orders - an order which remains in effect until cancelled or modified - and rebate those who supply the orders. Rebates vary but the typical rate is approximately a quarter of a penny per share.
By floating both bids and offers in a tight price spread, traders can capture the rebate on either side of the trade. That means a broker trading for example, a million shares a day, could get $2,500 just for facilitating those trades.
Citi is a major holding for many investors. Retail investors who enjoy trading stocks often buy and sell Citigroup because it's cheap and a big holding for institutions, leaving little possibility of getting stuck with unwanted holdings.
"Guys just make their living in Citi so yeah, you'll see that change pretty quickly," said Alan Valdes, director of floor trading at DME Securities in New York.
The split's effect on volume has not gone unnoticed by the exchanges.
"Remember that just around the corner is the Citigroup reverse split. And for those of you that pay attention to the US markets that will be another volume dampener in that business, but you can see we are holding steady there," said Duncan Niederauer, CEO of Big Board parent NYSE Euronext, as he addressed investors at the annual general meeting April 28.
The float of shares available to the public in Citi shares is more than 29 billion shares, the largest of any company in the S&P 500 stock index. Citi's public float is more than the combined float of the second- and third-ranked companies, General Electric Co and Bank of America Corp, which totals 20.7 billion shares.
The looming split and volume vacuum may lead some to look at stocks with similar characteristics to Citi. To qualify they have to be a core holding for many investors, have a low price, trade in a tight bid-ask spread, and attract heavy volume.
Ford Motor Co and Bank of America Corp fit the bill in some ways, but their prices may be too high, and volume is smaller.
Frequently-traded low-priced stocks such as Alcatel-Lucent SA and Sirius XM Radio Inc are also candidates because of their price, but they have just 2.23 billion and 3.92 billion shares outstanding, respectively.
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