Odd Lots Considered for Official Count of U.S. Trading Volume

Hundreds of millions of shares traded each day in companies such as Apple Inc. and International Business Machines Corp. may be added for the first time to the official tally of U.S. equity volume.

Securities exchanges and the Financial Industry Regulatory Authority plan to consider adding trades of fewer than 100 shares, known as odd lots, to the record of transactions, Colin Clark, senior vice president at NYSE Euronext, said in a phone interview. There’s general support for modifying the so-called consolidated tape of transactions to include them, he said.

“There’s been a trending increase in odd-lot activity,” Clark said. “It’s a meaningful amount of activity not being reported. It’s time to get some more transparency.”

The policy of leaving odd lots out resulted in about 4 percent of volume being omitted from the official count in late 2009, up from 2.3 percent about two years earlier, a 2011 paper by Maureen O’Hara, a finance professor at Cornell University, and Chen Yao and Mao Ye of the University of Illinois found. The trades are now more likely to be from high-frequency firms, indicating a shift from their traditional source among individual investors, the study said.

Only executions of at least 100 shares, known as a round lot, are included in the record of transactions and compiled in the Trade and Quote Database, or TAQ, used by academics to study asset prices, trading and investor behavior. Compared with most of the 1990s when odd lots accounted for less than 1 percent of New York Stock Exchange volume, their omission now distorts analyses, according to the July 2011 paper.

Greater Role

“While this policy may have been sensible in the past, fragmentation, high-frequency trading, and the widespread use of algorithms have changed markets in fundamental ways,” the co-authors wrote. “Our results suggest that odd-lot trades have changed as well, and they now play a new, and far from irrelevant, role in the market.”

Odd lots are a “large and significant problem” for stocks with higher prices or less liquidity, the co-authors said. They called them the industry’s “missing trades” and said they should be introduced into the public transaction data.

The number of odd-lot trades has increased since 2008, when the data for their study began. The amount of traded shares going uncounted rose to 4.9 percent in the first 11 months of 2011, Ye said by phone. Computerized trading that breaks orders into smaller pieces to limit price moves is the main reason for the increase, he said.

Missing Trades

The study examined 120 stocks listed on NYSE and Nasdaq Stock Market that were traded on Nasdaq. If the figures are extended to the entire U.S. equities market, the missing trades in 2011 would have reached almost 390 million shares a day, according to data compiled by Bloomberg.

“The emergence of high-priced stocks such as Google, where trading a round-lot requires an investment of $50,000 or more, has resulted in odd-lots constituting a significant fraction of trades for a subset of important stocks in the market,” wrote O’Hara, Yao and Ye in their paper titled “What’s Not There: The Odd-Lot Bias in TAQ Data.”

Odd-lot executions represented 22 percent of trades in December 2009, compared with 14 percent in January 2008, the paper said. The official data for Google Inc. omitted 34 percent of trades. Apple was missing 19.3 percent and Amazon.com Inc. 22 percent, while the tally for some companies excluded two-thirds of transactions, the paper said.

Proprietary Feeds

“It is definitely time for odd lots to be on the tape,” O’Hara said in an e-mail. “These are invisible to those watching the consolidated tape, but not to those getting proprietary data feeds from exchanges. This gives the appearance of a two-tiered market and feeds concerns that the market is not fair.”

Exchanges are allowed to provide more information on their proprietary data feeds than is publicly available.

Trades in multiples of 10 shares were the most likely among odd lots, with 50 shares the most prevalent, the paper found. The next most common size was 1 or 99 shares. Dividing a round lot into multiple trades may be the result of firms seeking to avoid reporting requirements and may come from those with more knowledge about “future price movements,” the paper said.

“Traders (or algorithms) appear to be splitting trades into odd-lot pieces, motivated perhaps by such trades’ absence from the consolidated tape,” the researchers wrote in the paper. “We also find that odd-lots trades are more likely to be from high-frequency traders, evidence suggestive of the new patterns of trading in the market.”

Consolidated Tape

Creating the consolidated tape, an official record of price and volume data for all transactions, was among the first steps the Securities and Exchange Commission took in the 1970s to build a national market by linking trading on NYSE and regional U.S. exchanges. Once prices from these venue were published on a single data feed, they could be seen by everyone, enabling investors to compare the transactions they received to other trades that had just occurred, regulators said.

The Consolidated Tape Association Plan that disseminates trading data for stocks listed on U.S. exchanges went into effect in 1974. Four years later the SEC approved the Consolidated Quotation Plan, which collects the best bid and offer prices and the number of available shares at those levels from each exchange, for the same securities in the CTA Plan.

A similar program for quotes and trades in securities listed on Nasdaq, called the Nasdaq UTP Plan, was approved as a pilot in 1990 and became operational in 1993. The U.S. options industry has its own data plan to distribute quote and execution information to investors.

Halts, Restrictions

The exchanges and Finra, which oversee the market-data programs, plan to vote in November about whether to include trades of fewer than 100 shares in the transaction reports, said Clark, a member of the operating committee for the CTA who is also on a subcommittee examining odd lots for that group and the Nasdaq UTP Plan.

One issue they’re considering is whether executions should be deemed “last-sale eligible,” which could allow odd lots to trigger trading halts or short-sale restrictions, he said. The group may also delay the inclusion of bids and offers of fewer than 100 shares in the quotation data, he said.

“We’re still trying to work on the implications of including odd lots,” Clark said. “It’s about the nuts and bolts of what that could mean.”

The prospect of odd-lot trades being reported comes as NYSE Euronext plans to merge the CTA and CQ plans to streamline their administration. The data feeds for trading and quotations will remain separate, Clark said.

Information Content

U.S. equity trading across exchanges and other venues fell to 6.81 billion shares a day in the first half of this year from

10.83 billion in the first six months of 2008, data compiled by Bloomberg show. Adding odd lots won’t increase revenue for brokers suffering from lower average daily equities volume or affect the price of stocks -- it will only affect the official count.

Brokers, investment managers and trading firms may glean more information about buy and sell demand from new data added to the transaction stream. In addition to activity from high-frequency firms identified in the 2011 paper, more transactions from individual investors, especially in higher-priced stocks, will be reported for the first time.

Odd-lot trades accounted for 77 percent of TD Ameritrade Holding Corp.’s executions in Apple in April, the company told the SEC in a letter that month. They were 69 percent of the total number of transactions in the SPDR S&P 500 ETF Trust, 84 percent in Google, 84 percent in Priceline.com Inc., 69 percent in Amazon and 72 percent in IBM, it said.

Equity Volume

“The firm finds that as security prices increase, retail investors continue to dedicate the same dollar amount to invest in the security,” the Omaha, Nebraska-based retail broker told the SEC. “As security prices increase beyond $50, TD Ameritrade has observed that there is a commensurate increase in the amount of odd-lot trades the firm handles.”

The SEC said in a January 2010 paper that odd lots may account for about 4 percent of U.S. equities volume. The agency asked market participants if the transactions should be reported publicly and whether traders may be buying or selling in smaller sizes to “circumvent the trade disclosure or other regulatory requirements,” according to the paper.

Credit Suisse Group AG, NYSE Euronext, exchange operator Bats Global Markets Inc. and automated trading firms including Allston Trading LLC and Hudson River Trading LLC said odd lots should be included in the public transaction data. The importance of smaller trades has increased as the average execution size has decreased, Bats told the SEC.

“Historically, when average trade sizes were 800 shares or more, the informational value associated with an odd-lot transaction was minimal,” Bats wrote in a 2010 letter. “As average trade sizes have fallen below 200 shares, the informational value associated with odd-lot transactions has risen and begins to approximate the informational value found in round and mixed-lot transactions.”

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