Most public company mergers these days tend to be announced after market hours or on weekends. The market reaction is reflected in pre-market trading the next business day when volumes are light, with all market participants having had a chance to digest the news at their leisure.
Every now and then, however, an enterprising reporter breaks an exclusive “in advanced merger talks” story in the middle of a trading day. Such was the case at 1:58 p.m. on Wednesday this week when Dow Jones broke the news that Broadcom was in advanced talks to be acquired by Avago.
Here’s what happened next (you can follow along at home on the free version of Surveyor available here; select May 27, BRCM, compare to AVGO, and zoom in to 13:58):
BRCM leapt from a pre-news spread of $48.19 x $48.20 to its Limit Up band of $50.90 in about 3.4 seconds. It traded at that band for 14 seconds as bids at that price accumulated to around 350,000 shares (the typical best bid in BRCM earlier in the day was around 3,000 shares, so a 100x increase), and was then halted by NASDAQ for 5 minutes.
BRCM opened out of halt with a matching auction print for 158,543 shares at $53.60. It stayed out of halt for the rest of the day, trading with a wider nickel spread and a much thinner order book than is typical, ultimately closing at $57.155.
Note the red sell volume spike in BRCM around 14:15. This is a pair of sell orders totaling 850,000 shares at $55.00 that had actually been entered hours before the news broke (at the same millisecond, implying a single seller), that were sitting open deep in the book all day. (They show up graphically in Surveyor when the NBBO reaches a price point where $55.00 is a top ten tier; you can adjust this in the settings tab in the top left corner). As the merger rally continues, this seller manages to unload his entire 850,000 share block–a $46.75 million trade–at his offering price! It wasn’t quite the day’s high, but not bad for moving that size of stock with two visible orders on a major exchange.
Down on the AVGO chart, we see no halt but a much thinner book with wider spreads throughout the day. A thinner order book makes AVGO more susceptible to the wild swings we see between $135 and $139 during the time BRCM is halted.
AVGO and BRCM are in the same industry, have similar market caps, and were up by similar percent gains on the day. Why is BRCM’s trading smoother and more orderly?
Because of AVGO’s high absolute price. Stocks with higher prices attract fewer market makers, because of the higher buying power required to hold positions, even if for a short time. Fewer market makers means a thinner order book, which means wider spreads, more transactional uncertainty, and a generally more unpleasant trading experience for long-term investors. Corporate CFOs may wish to consider this in evaluating stock splits that could bring their absolute price down to more market maker friendly levels.