Odd Lot Definition – What is Round Lot Trading Vs Odd Lots?

What Is an Odd Lot?

An odd lot is an order amount for a security that is less than the normal unit of trading for that particular asset – typically 100 shares. Therefore, they are considered to be anything less than the standard 100 shares for stocks. Trading commissions are generally higher on a percentage basis than those for standard lots.  This is because most brokerage firms have a fixed minimum commission level for undertaking such transactions.

Odd lots may inadvertently occur in an investor’s portfolio for a number of legitimate reasons.  This includes reverse splits or dividend reinvestment plans. For example, a one-for-eight reverse split, of which the investor holds 200 shares.  This will result in a post-split amount of 25 shares. Trading commissions for odd lots may still be higher than for standard lots on a percentage basis.  However, the popularity of online trading platforms continues to have an impact on trading costs.  The resulting drop in brokerage commissions makes it easier and less expensive for investors to dispose of odd lots.

An odd lot refers to an order amount for a security that is less than the normal unit of trading for an asset.  This amount is typically 100 shares for stocks.  Odd lots contrast with round lots, which are order amounts for a security that can be divided by 100.  Odd lots can occur in a portfolio as a result of a company announcing a reverse stock split, or due to dividend reinvestment plans.  An odd lot order generally costs more due to higher commission levels and takes longer to complete than other orders.  Large companies can sometimes view odd lots as insignificant.  They may choose to eliminate such holdings, buy out the shareholder at a premium, or offer the shareholder more stock to round it up.

(Source: investopedia)

Odd Lot vs. Round Lot vs. Mixed Lot

• The odd lot can include any number of shares between one and 99. For example, 75 shares would be an odd lot since it is below 100 shares. Odd lots are not posted as part of the bid/ask data. The execution of odd-lot trades does not display on various data reporting sources. Due to the uncommon number of shares involved in the trade, odd-lot transactions often take longer to complete than those associated with round lots.
• A round lot is any lot of shares that can be evenly divided by 100. For example, 300 shares would be counted as a round lot since it can be evenly divided by 100.  Round lots are posted on the associated exchange where they were listed.
• Mixed lots include lots with over 100 shares, but cannot be evenly divided by 100. For example, 147 or 2,999 would both be mixed lots. Reporting on mixed lots, including bid/ask data, generally only displays the portion that constitutes a round lot. For example, the 147 shares would report as 100 and the 2,999 shares would report as 2,900.

Summary

• An odd lot is a number of shares less than 100 (1-99)
• A “Round Lot” is 100 shares of stock
• Any number of shares that is a multiple of 100 is a round lot (i.e. 100, 600, 1,600, etc)
• An order for a number of shares greater than 100, but not a multiple of 100 (i.e. 142, 373, 1,948, etc) is a “Mixed Lot” (AKA PRL, or a partial round lot, order)
• Odd-Lot orders are not posted to the bid/ask data on exchanges
• Odd-Lot orders are taken into the order book at the exchange they are routed to.  When the exchange is able to match an order from the other side of the book with the odd-lot, it will be filled.  This could lead to a delay in the execution of an odd-lot.

Source: ibkr.info

Issuing Company Actions to Reduce the Odd Lot

Odd lots are considered fairly insignificant to larger institutions.  Therefore, a company may choose to eliminate any odd holdings from the marketplace. This can include buying out the associated shareholder at a premium.  Or, offering additional shares to the shareholder to create a round lot.  Or, engaging in a reverse split.  This is designed to result in the equivalent of less than one share or to pay the investor cash for a residual holding.  In short, anything other than round lots is an undesirable situation for a company.  They simply are not cost-effective. Consequently, there is usually an ongoing, low level of effort to eliminate these holdings. However, it is not an extensive effort, since the cost savings from the elimination of odd lots is not substantial.

Odd Lot Routing Guidelines

• There are numerous guidelines for the routing orders:  Only round lot orders to initiate positions will be routed to primary exchanges.  However, orders can be routed to primary exchanges, but only if the order in question is to close out a preexisting position.  IB will not direct-route odd-lot orders which initiate positions to primary exchanges.  Therefore, these types of orders should be Smart Routed so that IB’s routing system can send the order to an ECN for execution.  The exception is that odd lots can be routed to NYSE/ARCA/AMEX, but only as part of a basket order or as a market-on-close (MOC) order.
• A mixed lot or PRL (i.e. 257 shares) direct-routed to NYSE/AMEX will be submitted in whole to the exchange (applies to both market and limit orders).  If the order is direct-routed to NYSE/ARCA, only the round lot portion of the order will be submitted and, if it is executed, the IB system will cancel the remaining odd-lot portion of the order.  If the order is routed via IB Smart Routing, all market centers are eligible to receive the order according to the Smart Routing logic (including NYSE/ARCA, but only for the round lot portion of the order).
• IB will not route orders for HOLDRS.  The odd-lot portion of a PRL order for HOLDRS will be rejected by the IB system after the round lot portion of the order is executed.
• Individual exchanges may impose certain restrictions on odd lot orders, in addition to any of the restrictions mentioned above

Source: ibid

Why Does an Odd Lot Occur?

Investors generally do not like to acquire shares in odd lot sizes.  The related broker commission is disproportionately high on such small purchases. Brokers typically have a fixed minimum charge for these transactions, which is relatively high.   Still, a shareholder may inadvertently find himself with an odd lot holding for several reasons, including:

• A Reverse stock split can reduce the entity’s holdings to a level below 100 shares
• Employee stock option plan – The shareholder is an employee who was issued a small number of shares as part of a stock option plan
• Supplier compensation – The shareholder is a third party who was issued a small number of warrants as part of a supplier compensation plan
• Gifted shares – The shareholder gifted a small number of shares to one or more third parties.  Or, the shareholder received the shares as a gift from an existing shareholder
• Residual balance – The shareholder sold off a small number of shares, leaving a residual balance of an odd or mixed lot.

SEC Actions

The SEC has a number of significant rule change proposals under consideration.  One of those proposals involves splitting the old National Best Bid and Offer (NBBO) into two new kinds of BBO. But, it is not a simple fix, and it doesn’t completely fix the problem.  Currently, when you are trading, the NBBO shows the best of the best buyer and seller regardless of which exchange they’re waiting in.  However, it needs to be for at least a “round lot” (usually 100 shares).

The U.S. market has an “odd lot problem.” That’s because 100 shares of AMZN (for example), at over $200,000 not only qualify for block size but is multiples larger than the average trade or best bid value. So what tends to happen is that institutional algorithms and individual investors bid for smaller values of AMZN, creating an “insiders” market at better prices than the NBBO shows.  One problem with this is that investors and brokers using the SIP won’t know that there are small buyers and sellers at slightly better prices in the market.  But there is a good reason to have round lots in a stock like GE, where 100 shares represent around $700. Considering the average trade is around $7,000, the public, the protected best-ex quote should represent enough shares to fill the average trade. 

If you’re trying to capture spread, that round lot also ensures you have a “protected” quote, meaning you won’t miss fills if a large trade causes worse prices to trade at other venues (be “traded through”). It’s also the same prices that Rule 605 uses to monitor investors’ execution quality and protect them from bad fills. (Source: https://www.nasdaq.com/)