Small Trades Now Half of Market as Investors Avoid Expensive Stocks

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Small Trades Now Half of Market as Investors Avoid Expensive Stocks

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, stock trades consisting of less than 100 shares, known as “odd lots” in stock market jargon, reached a record 48.9% of all transactions earlier this month. That proportion is about double what it was in 2016. The primary reason for this tendency is that businesses avoid stock splits when their share prices increase. In the idea that it adds prestige, many CEOs strive for a share price over $100 or, even better, $1,000.

No S&P 500 Index companies were trading over $1,000 per share until 2012, but now they include Alphabet Inc. (GOOGL, GOOG), Booking Holdings Inc. (BKNG), AutoZone Inc. (AZO), NVR Inc., Amazon.com Inc. (AMZN), and Booking Holdings Inc. (NVR).Exclusive of commissions and other transaction charges, the cost of purchasing a single 100-share “round lot” of NVR would be staggeringly high at $380,000 or thereabouts, well beyond the reach of the overwhelming majority of investors.

Key Takeaways

  • The number of odd lot deals involving less than 100 shares is increasing.
  • Almost all stock transactions in the United States currently include them.
  • A significant factor is rising average share prices.
  • Round lots are becoming less accessible because businesses are avoiding stock splits.
  • Thus, share prices of $1,000 or above are becoming increasingly typical.
  • Odd lots are used by high-speed trading algorithms to test the market.

Significance for Investors

The Journal cited scholarly studies that indicated that the average cost of U.S. equities over the majority of the 20th century was around $35 per share. More recently, analysis by Ryan Grabinski, a portfolio manager at Strategas Research Partners, as well as published by the Journal, found that the average price per share of equities in the S&P 500 was $131.40 as of Oct. 21, 2019, compared to $43.10 at the end of 2000.

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In the past, businesses would often divide their shares if the price increased much beyond $35 in order to make round lot transactions more accessible to the typical individual investor. A component of corporate thinking was that by maintaining share prices at an affordable level, investors’ demand would rise, boosting the shares’ liquidity and adding to their appeal to potential purchasers. Splits were formerly a highly anticipated occurrence, with investors often driving up share values beforehand.

The existence of the odd lot differential, an additional fee 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, was another corporate motivation in the past for keeping round lots affordable to the vast majority of investors. This overt additional fee has virtually vanished in recent decades.

While odd lot trading has historically been the domain of tiny, individual investors, automated trading algorithms are now now using it. Some of these systems check for the existence of significant buyers or sellers using modest odd lot orders. While this is happening, huge orders that would normally be expected to move the market in an investor-unfavorable direction are being split up into smaller transactions that are completed over time, and these trades are increasingly being placed in unusual lot sizes.

Only Berkshire Hathaway Inc.’s class B shares (BRK.B), which are presently trading for around $210, are included in the S&P 500 Index. Its class A shares (BRK.A), which have been trading over $1,000 since 1983 and are presently trading above $315,000 per, are not included in the index.

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Looking Ahead

According to SEC regulations, brokers are required to find the best price for a client’s order. However, these regulations are based on round lot pricing, and the Journal points out that occasionally a better average price may be reached if portion of the order is divided into odd lots. In light of the sudden increase in odd lot trading, the SEC says it is examining its policies.

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