Stock trades consisting of less than 100 shares, called "odd lots" in stock market jargon, reached a record 48.9% of all transactions earlier this month, according to data compiled by the NYSE on all U.S. equity trades, not just those executed on that exchange, and reported on by The Wall Street Journal. That percentage is about double what it was in 2016. The main driver behind this trend is the fact that companies are shunning stock splits when their share prices soar. Many CEOs are eager to have a share price in excess of $100 or, better yet, $1,000, in the belief that it confers prestige.
As recently as 2012, there were no stocks in the S&P 500 Index that traded above $1,000 a share, but today their ranks include Amazon.com Inc. (AMZN), Alphabet Inc, (GOOGL, GOOG), Booking Holdings Inc. (BKNG), AutoZone Inc. (AZO), and NVR Inc. (NVR). Buying a single 100-share "round lot" of NVR would cost a staggering $380,000 or thereabouts, exclusive of commissions and other transaction costs, far beyond the means of the vast majority of investors.
- Odd lot trades of less than 100 shares are growing in frequency.
- They are now nearly half of all U.S. equity transactions.
- Rising average share prices are a major reason.
- Companies are shunning stock splits, making round lots less affordable.
- Share prices of $1,000 or more are thus becoming more common.
- High speed trading algorithms use odd lots to test the market.
Significance for Investors
According to academic research cited by the Journal, the average price of U.S. stocks was around $35 per share throughout most of the 20th century. More recently, the average price per share of stocks in the S&P 500 was $131.40 as of Oct. 21, 2019, versus $43.10 at the end of 2000, per research by Ryan Grabinski, a portfolio strategist with Strategas Research Partners, also as reported by the Journal.
In the past, companies regularly would split their stocks if the price rose much higher than $35, to make round lot transactions more affordable to the average individual investor. Part of corporate thinking was that, by keeping share prices at an affordable level, that would increase demand by investors and thus bolster liquidity in those shares, making them yet more attractive to prospective buyers. Indeed, splits used to be widely-anticipated events, with investors often bidding up share prices in advance.
Another corporate motivation in the past for keeping round lots affordable to the vast majority of investors was the existence of the odd lot differential, an extra charge of 1/8 point (12.5 cents) or, on less liquid stocks, 1/4 point (25 cents) per share assessed by most exchanges and securities dealers on trades of less than 100 shares. This explicit extra charge largely has disappeared in recent decades.
While odd lot trading traditionally has been the preserve of small individual investors, today it also is being utilized by computerized trading algorithms. Some of these programs use small odd lot orders to test for the presence of large buyers or sellers. Meanwhile, a large order that otherwise would be likely to move the price in a direction unfavorable to the investor often is broken into smaller trades that are executed over a period of time, and these increasingly are being entered in odd lot sizes.
Regarding Berkshire Hathaway Inc., only its class B shares (BRK.B), currently priced around $210, are in the S&P 500 Index. Its class A shares (BRK.A), currently trading around $315,000 each, and above $1,000 since 1983, are not in the index.
The SEC has rules that obligate brokers to find the best available price for a client's order, but these rules are based on round lot pricing, and sometimes a better average price can be obtained if part of the order is broken into odd lots, the Journal notes. The SEC indicates that it is reviewing its regulations in light of the rapid rise in odd lot trading.