What happened
STRC, a preferred stock, has been facing challenges in maintaining its $100 stability level. The mechanism designed to keep its price steady appears to be failing, primarily due to the actions of short-term traders known as dividend arbitragers. These traders are buying, holding, and then selling STRC shares around ex-dividend dates, creating a surplus of shares in the market.
Why this matters
The presence of dividend arbitragers is significantly impacting STRC's market dynamics. As these traders buy shares before ex-dividend dates and then sell them, they are causing an increase in supply that longer-term holders cannot absorb. This excess supply leads to a decrease in price, making it harder for STRC to maintain its target price of $100. Additionally, if the dividend rate is increased to attract more buyers, it may inadvertently draw in more arbitragers instead of stabilizing the market for longer-term investors.
Context
Historically, preferred stocks like STRC have mechanisms to maintain price stability through dividends. However, the issuance of new shares at the fixed price of $100 allows arbitragers to exploit price differences without the usual market forces that would prevent such strategies in traditional stocks. Unlike regular stocks, where increased buying pushes prices upward, STRC's setup means that the price remains capped at $100, leading to an unmanageable supply situation.
What this means
The current design of STRC's stability mechanism appears to be unsustainable. To address these issues, adjustments to the issuance policy could be beneficial. For example, issuing new shares at a higher price point may deter arbitrage activities. Additionally, moving to a daily dividend payout, similar to SATA, could reduce the incentive for short-term trading. Without these changes, STRC may struggle to return to the $100 price level until market conditions improve significantly.
