Odd Lotter

What Is an Odd Lotter?

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

Understanding Odd Lotters

Typically, stocks are purchased in round lots of 100 shares. Bundling orders in lots of100 shares is relatively easy for large purchases, but can be quite inefficient for small investors. In the past, small investors and odd lotters typically paid higher commissions, though this is less of an issue today with the advent of commission-free trading and fractional share ownership offered through online brokers.

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

In recent times, however, the share of odd lot trades has jumped. Odd lot-sized trades accounted for 49% of all trades on October 23, 2019, and this figure has only grown through 2020. Note that the odd lotters behind many of these trades were likely not human. The rise of high-frequency trading (HFT) and algorithmic trading has created a proliferation of trades of all sizes.

Odd Lotters and the Markets

The presence of odd lotters gave rise to a theory used in technical analysis — odd lot theory — that has since fallen out of favor. It was once held that odd lotters are ill-informed, so their trading behavior could serve as a contra-indicator. That is, trading in a manner that was the opposite of odd lotters was believed to be a profitable strategy. If a stock was being heavily bought by odd lotters, selling this stock should produce gains, according to the theory. This theory, which was never very well supported, fell out of favor as small investors increasingly opted for mutual funds over individual stocks.

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

An Increase in Odd Lot Trades

One of the reasons being put forward to explain the increase in market share of odd lot trades is high-frequency trading. According to this theory, high-frequency trading firms use algorithmically-generated odd-lot trades to check for trading strategies for large buyers. They send small amounts of odd lot trades, which are lumped with larger orders from big trading firms, to determine whether they should buy or sell a given stock. The big buyers, in turn, slice their orders to escape detection from algorithms. Previous research backs up this theory.

A 2014 paper claims that odd-lots trades contributed as much as 35% to the price discovery of trades. That said, it is difficult to know for sure the extent to which odd-lots influence trading prices because such trades are not included in the consolidated tape that collates exchange data.

In response to the surge in odd-lot trading activity, the Securities and Exchange Commission (SEC) is considering a change in regulations. One of these new rules is related to the dissemination of pricing data, which used to take a minimum of 100 shares in order to report an updated price or tick. These rules update current regulations mandating that brokers be obligated to purchase shares on behalf of customers at the best possible price, including trades involving odd lots.