Stock transfers of fewer than 100 shares, known as “odd lots” in stock market lingo, hit a record 48.9% of all transactions earlier this month, according to NYSE statistics on all U.S. equities trading, not just those performed on that exchange, and reported on by The Wall Street Journal. This figure is almost twice what it was in 2016. The fundamental reason for this trend is that firms are avoiding stock splits when their share prices skyrocket. Many CEOs want a share price in excess of $100, or even $1,000, in the assumption that it imparts distinction.
There were no equities in the S&P 500 Index that traded over $1,000 per share as recently as 2012, but now they include Amazon.com Inc. (AMZN), Alphabet Inc. (GOOGL, GOOG), Booking Holdings Inc. (BKNG), AutoZone Inc. (AZO), and NVR Inc. (NVR).Purchasing a single 100-share “round lot” of NVR would cost a whopping $380,000 or more, exclusive of fees and other transaction charges, and would be out out of reach for the great majority of investors.
- The frequency of odd lot transactions of fewer than 100 shares is increasing.
- They currently account for approximately half of all equity transactions in the United States.
- A key driver is rising average share prices.
- Companies are avoiding stock splits, making round lots more expensive.
- As a result, share prices of $1,000 or more are becoming increasingly prevalent.
- To test the market, high-speed trading algorithms employ odd lots.
Significance for Investors
According to scholarly data cited by the Journal, the average price of US equities throughout the twentieth century was roughly $35 per share. According to data by Ryan Grabinski, a portfolio strategist with Strategas Research Partners, as of Oct. 21, 2019, the average price per share of equities in the S&P 500 was $131.40, compared to $43.10 at the end of 2000, as reported by the Journal.
Previously, firms would often split their stocks if the price increased far over $35, in order to make round lot transactions more reasonable to the typical individual investor. Part of the corporate logic was that by keeping share prices low, it would stimulate investor demand and consequently liquidity in those shares, making them even more appealing to potential purchasers. Indeed, splits were formerly highly anticipated occurrences, with investors often buying up share prices ahead of time.
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, was another corporate motivation in the past for keeping round lots affordable to the vast majority of investors. This explicit surcharge has virtually vanished in recent decades.
While odd lot trading has historically been the domain of tiny individual investors, it is now now being used by automated trading algorithms. Some of these systems screen for the existence of significant buyers or sellers by using modest odd lot orders. Meanwhile, a big order that would normally be expected to influence the price in an undesirable way for the investor is routinely broken down into smaller transactions that are completed over time, and these are increasingly being placed in odd lot sizes.
Only Berkshire Hathaway Inc.’s class B shares (BRK.B), which are now trading about $210, are included in the S&P 500 Index. Its class A shares (BRK.A), which are now trading at $315,000 per and have been trading above $1,000 since 1983, are not included in the index.
The SEC has regulations requiring brokers to find the best possible price for a client’s order, but these requirements are based on round lot pricing, and the Journal adds that occasionally a better average price may be reached if portion of the order is separated into odd lots. In light of the fast surge in odd lot trading, the SEC has indicated that it is revisiting its policies.
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