What is an Odd Lotter?

An odd lottery is an individual or retail investor who buys securities (usually stocks) in odd lots or amounts that are not multiples of 100. An odd lottery differs from larger investors, who usually buy in round lots or in multiples of 100.

Key points to remember

  • Odds are individual investors who buy securities in lots that are not multiples of 100.
  • Odd lotteries usually pay higher commissions because small amounts of shares are difficult to buy.
  • The rise of high-frequency trading practices has facilitated an increase in the overall share of odd lot buying in the stock market in recent times.

Understanding Odd Lotteries

Typically, shares are purchased in round lots of 100 shares. Bundling orders into lots of 100 shares is relatively easy for large buys, but can be quite inefficient for smaller investors. In the past, small investors and odd lotters typically paid higher commissions, although this is less of an issue today with the advent of commission-free trading and fractional share property offered through online brokers.

Odd lotteries were once considered a mystery in the stock markets. A Chicago Grandstand A 1987 article reported that odd lotters at the time accounted for less than one percent of market turnover the previous year and that their trading behavior did not indicate a definitive pattern that could be exploited for profit. profitability.

Lately, however, the share of odd lot trading has surged. Odd-lot trades accounted for 49% of all trades on October 23, 2019, and this figure has only increased until 2020.Note that the odd trefoil behind many of these trades were probably not human. The rise in high frequency trading (HFT) and algorithmic trading have created a proliferation of transactions of all sizes.

Odd Lotters and the Markets

The presence of odd trefoil gave rise to a theory used in technical analysis – the odd lot theory – which has since fallen out of favor. Odd trefoil was once thought to be misinformed, so their trading behavior could serve as a counter-indicator. Simply put, trading in a way that was the opposite of odd lotteries was considered a profitable strategy. If a stock was strongly bought by odd lotrs, selling that stock should produce gains, the theory goes. This theory, which was never very well supported, fell out of favor as retail investors increasingly opted for mutual funds over individual stocks.

The belief that the behavior of individual investors is a counter-indicator has not completely fallen out of favour, however. Some point to the investor sentiment survey conducted by the American Association of Individual Investors (AAII) as evidence.

An increase in odd lot trades

One of the reasons given for the increased market share of odd lot trading is high frequency trading. According to this theory, high frequency trading firms use algorithmically generated odd lot trades to verify the trading strategies of large buyers. They send small amounts of odd lot trades, which are bundled with larger orders from large trading companies, to determine whether to buy or sell a given stock. Large buyers, in turn, slice their orders to evade detection by algorithms. Previous research confirms this theory.

A 2014 paper claims that odd lot trades contributed up to 35% to trade price discovery. That said, it is difficult to know with certainty the extent to which odd lots influence trading prices, as these transactions are not included in the consolidated band which gathers the exchange data.

In response to increased odd lot trading activity, the Security and Exchange Commission (SEC) is considering a regulatory change.One of these new rules is related to price data reporting, which previously required a minimum of 100 shares in order to report an updated price or tick. These rules update existing regulations requiring brokers to purchase stocks on behalf of clients at the best possible price, including trades involving odd lots.

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