Odd Lotter

What Is an Odd Lotter?

An odd lotter is an individual or retail investor who buys securities (normally stocks) in odd parts or sums that are not multiples of 100. An odd lotter varies from larger investors, who commonly buy in round parcels or multiples of 100.

Figuring out Odd Lotters

Ordinarily, stocks are purchased in round loads of 100 shares. Bundling orders in parts of100 shares is moderately simple for large purchases, yet can be very inefficient for small investors. In the past, small investors and odd lotters regularly paid higher commissions, however this is less of an issue today with the appearance of without commission trading and fractional share ownership offered through online brokers.

Odd lotters were once viewed as a secret in stock markets. A Chicago Tribune article from 1987 reported that odd lotters at the time represented short of what one percent of market turnover the year before and their trading behavior didn't demonstrate a definitive pattern that could be saddled for profitability.

In recent times, notwithstanding, the share of odd parcel trades has hopped. Odd parcel estimated trades represented 49% of all trades on October 23, 2019, and this figure has just become through 2020. Note that the odd lotters behind a significant number of these trades were reasonable not human. The rise of high-frequency trading (HFT) and algorithmic trading has made a multiplication of trades, everything being equal.

Odd Lotters and the Markets

The presence of odd lotters led to a theory utilized in technical examination — odd part theory — that has since fallen undesirable. It was once held that odd lotters are not well educated, so their trading behavior could act as a contra-marker. That is, trading in a way that was something contrary to odd lotters was accepted to be a productive strategy. On the off chance that a stock was by and large vigorously bought by odd lotters, selling this stock ought to create gains, as indicated by the theory. This theory, which was never very much upheld, become undesirable as small investors progressively picked mutual funds over individual stocks.

The conviction that the behavior of individual investors is a contra-pointer has not fallen undesirable totally, in any case. A point to the survey of investor sentiment directed by the American Association of Individual Investors (AAII) as evidence.

An Increase in Odd Lot Trades

One reason being put forward to make sense of the increase in market share of odd part trades is high-frequency trading. As indicated by this theory, high-frequency trading firms use algorithmically-created odd-parcel trades to check for trading strategies for large buyers. They send small measures of odd parcel trades, which are lumped with larger orders from big trading firms, to decide if they ought to buy or sell a given stock. The big buyers, thusly, cut their orders to escape detection from calculations. Previous research backs up this theory.

A 2014 paper claims that odd-parts trades contributed as much as 35% to the price discovery of trades. All things considered, it is challenging to be aware without a doubt the degree to which odd-parcels influence trading prices in light of the fact that such trades are excluded from the consolidated tape that examines exchange data.

In response to the flood in odd-parcel trading activity, the Securities and Exchange Commission (SEC) is thinking about a change in regulations. One of these new rules is connected with the scattering of pricing data, which used to take at least 100 shares to report a refreshed price or tick. These rules update current regulations ordering that brokers be committed to purchase shares in the interest of customers at the best conceivable price, including trades including odd parcels.

Highlights

• Odd lotters are individual investors who buy securities in parcels that are not multiples of 100.
• Odd lotters generally pay higher commissions since small measures of stocks are hard to purchase.
• The rise of high-frequency trading rehearses has worked with a leap in the overall share of odd parcel purchases in the stock market in recent times.