NEW YORK (Reuters) - Small trades of less than 100 shares began being reported to the “consolidated tape” on Monday, almost four years after regulators asked whether the increased use of “odd lots” was a sign of traders trying to circumvent certain regulations.
Odd lots now account for almost 5 percent of U.S. equity volume, an increase from less than 1 percent two decades ago when they were a neglected area of the market, according to academic research.
But “high-frequency” traders allegedly have latched onto odd lots to “ping” the market to gauge buying or selling interest, without the trade data being widely disseminated.
How much the odd lots will contribute to average daily trading volume at the New York Stock Exchange and Nasdaq won’t be known until Tuesday, spokesmen for the two exchanges said.
Increased trading in odd lots is also because of the high price of many stocks, such as Google Inc and Apple Inc. Google trades at more than $1,000 a share, and Apple at more than $500, making a common lot of 100 shares cost more than $100,000 and $50,000, respectively.
More than half the trades in Google shares are odd lots.
The inclusion of odd lots in the consolidated tape, the stream of stock quotes and sale prices that are disseminated to the public, was driven by revenue considerations, said Chris Nagy, president of consulting firm KOR Trading LLC.
“The move was helped along by the exchanges’ desire to increase there take on tape revenue, which is and was the main driver for getting the program out,” Nagy said. “The average person won’t see a difference.”
Increased trading in odd lots has raised questions about its impact on price discovery, a key attribute of the market where buying and selling determines a security’s price.
Research by Professor Maureen O‘Hara of Cornell University and two others shows that odd lots contribute, in some stocks, to 30 percent of price discovery, yet the information these trades contain was not reported to the consolidated tape until Monday.
Odd lots appear to have high information content, suggesting the data are extremely important for the price process, O‘Hara told Reuters in 2012 in comments about the study “What’s Not There: Odd-Lot Bias in TAQ Data.”
The inclusion of odd lot trades in proprietary data feeds questions whether the consolidated tape is obsolete, and raises the issue of fairness, with high-frequency traders gaining access to more information sooner than others, O‘Hara said.
The Securities and Exchange Commission, in its concept release on equity market structure in January 2010, asked a number of questions about the high level of odd-lot trades, which it said at the time was about 4 percent of transactions.
In particular, the SEC asked whether traders use odd lots to circumvent the disclosure of their trades and if they are important for price discovery.
Four well-known proprietary trading firms - Allston Trading LLC, RGM Advisors LLC, Hudson River Trading LLC and Quantlab Financial LLC - told the SEC in response to the concept release that there was no reason to exclude odd lots from the consolidated tape.
“This data would serve to increase transparency in the markets and further level the field between market participants, ultimately resulting in healthier and more efficient markets,” the firms said in their letter.
Reporting by Herbert Lash; Editing by Nick Zieminski