What is a Round Lot
A round lot is a standard number of units (known as a "lot") of an asset - for example, 100 shares of a stock, or any group of shares that can be evenly divided by 100, such as 500, 2,600 or 14,300. A round lot of 100 shares of stock has historically been the smallest order that can be placed through an exchange. However, today, odd lots and fractional shares allow for the execution of orders as small as one share on some exchanges or even a fraction of a share down to two or three decimal places. A round lot may also be referred to as a normal trading unit.
In options markets, 100 contracts has typically been the round lot in listed calls and puts, although investors can buy as few as one options contract - each of which typically represents an odd lot of stock; that is, 100 shares. In bond markets, a round lot has typically represented $100,000 (of face value) worth of bonds. Other markets, such as commodities markets, often have their own convention for what is defined as a round lot.
BREAKING DOWN Round Lot
Investors typically purchase stocks in large batches, resulting in the need for round lot measurements. Round lots often have lower trading costs; discounts are applied for various round lot amounts.
A lot consisting of fewer than 100 shares or a lot that cannot be evenly divided by 100 is called an odd lot. Sometimes odd lots are combined, or bunched, into round lots to facilitate trading. A mixed lot consists of both a round lot and an odd lot. An order of 198 shares would be considered a mixed lot. Odd lots or mixed lot trades typically incur higher trading costs, but improved electronic trading technologies have helped reduce the added fees for odd lot trades.
In some cases, odd lot trades may not be allowed or may not be given priority. Some exchanges may require only round lots for pre-specified market orders, including reserve orders. In these trading situations, orders are placed for trades at a specified transaction price, and preference is given for round lots.
A recent trend has been the ability to trade in fractional shares, which amounts to less than 1.00 shares of a stock or ETF. Originally implemented to aid with dividend reinvestment, many brokerages now offer fractional shares as a way to promote dollar cost investing, or stating to the broker that you wish to buy $200 of some stock, even if that amounts to, say, 23.87 shares.
In bond trades, a round lot is usually $100,000 worth of bonds. Trades less than $100,000 or not divisible by $100,000 are considered to be odd lots and would incur higher trading costs. Trading innovation is ongoing in the bond market, and trading mechanisms are constantly evolving for odd lot trades and smaller blocks of bond trades.
Exchanges typically have rules and regulations regarding trades in round lots versus odd lots. Prices for these trades are mainly set by the exchanges that dictate pricing for the broker dealers. Additionally, broker dealers can be constrained to trading in round lots or odd lots on market exchanges. As market exchanges evolve, the availability for trading in odd lots is increasing.
Round lot and odd lot trades are often followed to determine the type of demand and volatility for a security. Securities with high odd lot trading are typically followed by small investors, while high levels of round lot trading usually indicate a security is highly traded by institutional investors.