Why would a Stock Price Spike after a Reverse Split?

Yesterday, August 31, 2022, ShiftPixy Inc. (Nasdaq: PIXY) announced a 1:100 reverse split scheduled for the end of the day, rounding up fractional shares. I bought a single share for $0.15 with the hope of making an easy $15 once my shares were rounded up. I posted it to our paid group, RSPro, at 12:30pm and to Twitter at 3:00pm.

Things looked normal the next day (today) with shares trading around $15 pre-market. Then the market opened and prices jumped to $17. Unusual, but not crazy. Then $25. Then Nasdaq halted trading for a few minutes as they routinely do after big moves. A few minutes later it was at $30. Several trading halts later, and the market has been open now for 3 hours, price is holding at $33, with a high just under $40. Shares normally drop or hold in the day following a split, so this was quite unusual.

How did PIXY go up 135% on no news and no activity on Twitter/Reddit? We don’t know yet, but I have a few guesses.

  1. Fat finger error. You may imagine that professional investors never make dumb mistakes, but they do. Once in awhile, a trader with a lot of capital will type in an order incorrectly, adding an extra zero in the price or order size. Sometimes they execute a large market order when they meant to do a limit order, or they’re using a complicated algorithmic order and they enter the wrong parameters. Then they go to lunch and don’t see the chaos until they get back. Banks and markets have systems to catch these (the trading halt is one), but they’re not perfect. Sounds insane, but it happens. Some recent examples from Investopedia:
    • A fat finger error was blamed for causing a 6% plunge in the British pound in 2016.
    • A junior Deutsche Bank employee mistakenly sent $6 billion to a hedge fund in 2015 after incorrectly entering the “gross figure” instead of net value. Deutsche Bank retrieved the funds the following day.
    • In 2014, a trader at Mizuho Securities accidentally placed orders for more than $600 billion in leading Japanese stocks; the price and data volume were entered in the same column. Fortunately, the majority of orders were canceled before they were executed.
  2. Algorithm error. Many sophisticated traders using computer programs to execute trading strategies. When those programs don’t have safety protocols built in, and when they get wrong or unexpected data, they can go haywire. Say someone was using a momentum strategy but forgot to put in a check for a sudden price change due to a reverse split, their program might see the 100x spike from the split and think PIXY just cured cancer. A bot, or even a few bots with the same error, could be behind a lot of the buying. And it wouldn’t take much money to move the price: PIXY has a market cap of only $8 million, and typical daily volume is about $200,000. That’s miniscule. Plus, Yahoo Finance hasn’t seemed to register the split yet, and I’m guessing a few 3rd party data providers haven’t either.
  3. Organic buying. Someone may have a legitimate bull thesis. PIXY briefly traded at an $0.28 just three weeks ago, which would be $28 considering the reverse split. Today’s prices aren’t truly insane, and so perhaps someone was able to get more liquidity once PIXY’s share price got about $0.20 after the split.
  4. Short squeeze. To short a stock, one borrows someone else’s shares and sells them. If the price goes down, you buy those shares back, return them to the original owner, and profit. Everything’s fine unless the stock price jumps. The original owner will want their shares back so they can sell, and brokers start forcing short sellers to close their positions to avoid getting cleaned out. Short sellers buy stock to close out their positions, driving price higher, forcing more margin calls, etc. etc. Normally something triggers the short squeeze, either some meme activity or actual good news. I’m not seeing that here, although there could be some Discord chatter I’m not tracking.

PIXY is a nanocap with no analyst coverage and a barebones options market. This jump is under the radar, and with no one interested, we may never find out what happened. Still, a nice little bonus for those of us who trade reverse split arbitrage.

Leave a Comment

Your email address will not be published. Required fields are marked *