Unrecognized Odd Lot Liquidity Supply: A Hidden Trading Cost for High Priced Stocks

Current National Market System rules do not recognize odd lots in the protected intermarket quote. Thus, liquidity demanders can receive worse prices than they would receive if odd lots were protected. The effect of ignoring odd lots is magnified because off-exchange trades (over one-third of total volume) benchmark executions against the protected quote. The authors identify time intervals with an unprotected odd lot limit order at a price better than the protected quote and examine trades during those intervals for 10 high-priced stocks during one week in 2015. They find over 406,000 intervals, representing 37% of sample stock trading time, in which an odd lot order betters the protected quote. Examining trades within these intervals, they find nearly 55,000 cases in which the trade price is worse than the odd lot price. In total, the price disimprovement in their 10 stocks is $554,675 for the week examined. This previously undocumented trading cost is associated with the corporate decision not to split a stock’s price in a market in which odd lot orders are excluded from the protected quote.