Millions of hidden U.S. trades to be revealed

By Staff | December 9, 2013 | Last updated on December 9, 2013
3 min read

Millions of hidden U.S. stock trades will be widely disclosed for the first time today.

That’s because of an SEC rule change that will result in odd lots (trades of less than 100 shares) “[being] revealed on trading screens across the world,” reports The Wall Street Journal. It adds, “Trades of all sizes…will [now] be included in the consolidated tape on which price and volume data on U.S. stocks are published.”

This previously hidden trade data has been available to proprietary traders such as large investment banks and sophisticated high-speed players, but not to most retail traders. Vlad Khandros, head of market structure and liquidity strategy at UBS Investment Bank, told WSJ that the rule change could cause “an approximate 4% increase in perceived total market volumes.”

Read: Are high-speed traders a threat?

Read more on why odd lots are being used more often and on how that affects the market.

In a 2011 paper, a team of international academics claimed many market players have considered odd lots as insignificant over the past few years. But they say the practice of “slicing and dicing” large trades to less than 100 shares is leading to a “two-tier market.”

Read: SEC launches market structure data and analysis website

Their research paper is called What’s Not There: The Odd-Lot Bias in TAQ Data. The researchers examined 120 stocks on the Nasdaq from 2008 to 2011, and found the median percentage of missing odd lots was 24%. However, some stocks were missing more than 60% of their trades over that period.

Read: Faster trade confirmation disclosure on the way

As a result of the SEC rule change, “the markets will be more transparent and fairer for all,” says one of the researchers, Warwick Business School’s Chen Yao. “While leaving odd lots out of the public feed may have been sensible in the past, fragmentation, high-frequency trading, and the widespread use of algorithms have changed markets in fundamental ways.”

Further, she finds, “Odd-lot trades have changed as well, and they now play a new, and far from irrelevant, role in the market. We found a large fraction of trades are odd lots, which leads to significant inaccuracies in measures of volume. It will be interesting to see how the markets react when these odd lots are included.”

Read: SEC sanctions two firms for best execution failures

The increase in odd lots has been driven by “the emergence of high-priced stocks such as Google or Apple, which have surged to nearly $1,000 a share,” says Yao. “Odd lots constitute[d] a significant fraction of trade[s] for the [shares], and the fact that odd lots aren’t reported…provides incentive for informed traders to transact via odd lots rather than use more visible trade sizes.”

Google, for example, had almost 31% odd lot trades in 2008, she adds, and then had 52.9% of them by 2011. Amazon’s odd lot trades went from 22% to 46% over that same period, while Apple’s increased from 17% to 38%.

Yao concludes, “Dividing a round lot into multiple trades may be the result of firms seeking to avoid reporting requirements, and may come from those with more knowledge about future price movements.”

The research team consists of Yao, as well as Cornell University’s Maureen O’Hara, and University of Illinois’s Mao Ye.

Read: Nasdaq ramps up market oversight staff


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