What Is Bunching?
Bunching is the combining of multiple odd-lot or round-lot orders for the same security so that they can all be executed at the same time. All affected clients must agree to the bunching, also known as block trades, before the order is submitted.
Bunching also refers to a pattern that appears on a ticker tape when a series of same-security trades print consecutively, one after the other.
- Bunching is the combining of small or unusually-sized trade orders for the same security into one large order for simultaneous execution.
- All affected clients must agree to the bunching before the order is submitted.
- Bunching can be financially advantageous for investors with orders for less than 100 shares of a particular security as odd-lot orders are difficult to match, meaning additional charges for them are common.
- Regulators heavily scrutinize bunching and trade allocation practices in order to ensure that traders aren’t using cherry-picking to defraud customers.
Most securities trade in a standard number of units. A round lot is usually 100 units (shares, contracts, etc.) of the asset or a number that's evenly divided by 100. An odd lot contains less than 100 units. Often, bunching occurs on the floor of a securities exchange when traders and brokers roll up small or unusually sized trade orders into one larger order and then trade it in one single transaction.
The number of units in a round lot.
Bunching can be financially advantageous for investors with orders for less than 100 shares of a particular security. Odd-lot orders are difficult to match, and so additional charges for them are common.
Bunching trades provides a means for traders to treat all clients equally, by aggregating odd-lot orders together for purchase or sale, and then breaking them down afterward into the various client accounts through a process known as the allocation process. Usually, the allocation is done electronically through order management systems (OMS), which helps streamline the process and avoid errors on the part of the trader.
There are no procedures for trade allocation established by regulatory bodies; these procedures are decided on a firm-by-firm basis. However, all traders and advisors must be careful to follow their firm’s procedures carefully. Current best practices treat all clients equally, without showing preference to any single client. Generally, allocations should be decided before an order is placed, and any partial fills should use a pro-rata allocation formula. Accurate and detailed documentation of bunched trades is also essential.
Some unscrupulous day traders participate in a bunching practice known as cherry-picking, which seeks to take advantage of normal fluctuations in trading prices throughout the day to pick out winning or losing trades and allocate them in a manner that favors the traders or their client’s accounts.
This practice violates the Securities and Exchange Commission's (SEC) regulations. For example, a 2018 case involving a Minneapolis commodities trading advisor found that the advisor, Christian Robert Mayer, was fraudulently cherry-picking winning trades from customer accounts and transferring them into his own account, by claiming that he had allocated them to the wrong accounts. The defrauded customers were ultimately reimbursed $105,090.
In order to avoid cherry-picking, traders and advisors must carefully follow rules designed to avoid abuse. Regulators heavily scrutinize bunching and trade allocation practices in order to ensure that traders aren’t using cherry-picking to defraud customers. Firms must, therefore, review all allocations made each day, as well as any exceptions to the procedure. Irregularities must be documented to serve as evidence in the face of regulatory scrutiny.