The Market Inside the Market: Odd-lot Quotes 

Robert P. Bartlett, Justin McCrary & Maureen O’Hara 

Discussion by Katya Malinova

DeGroote School of Business

McMaster University

CFMR 2022 (virtual)

Oddlots: not a small market! 

https://www.nasdaq.com/articles/odd-facts-about-odd-lots-2021-04-22

Substantial volume share for mid&high-priced stocks!

https://www.nasdaq.com/articles/odd-facts-about-odd-lots-2021-04-22

Substantial volume share across different trading volumes!

https://www.cboe.com/insights/posts/an-in-depth-view-into-odd-lots/

Significant amount of odd lot orders at better than the NBBO prices!

https://www.cboe.com/insights/posts/an-in-depth-view-into-odd-lots/

Key Questions in the Paper:

  • How prevalent are the "superior" (relative to the NBBO) odd-lot quotes?
  • Is the info in the (invisible on the SIPs) odd-lot quotes valuable?
  • Will the Reg NMS II & the new definition of the round lots resolve the odd-lot issues?
  • A true market-inside-the-market, esp. for higher-priced stocks!
  • Yes, t+ one minute predictability & profitable trading strategy!
  • Not really ... 

Several issues/questions after reading the paper ... 

2. Is there a need for a regulatory intervention?

  • ​Who is disadvantaged by the "market-inside-the-market"?

3. If "yes" to #2, then what type of changes? What else do we need to know?

4. More broadly:

  • What is the origin of the round lot sizes, minimum pricing increments, etc.?
  • Do we still need to regulate these?

1. Now that we have read the paper, what's next?

  • ​What can/should you do as an investor? As a broker?

Regulatory Response: Round Lot Sizes

  • Why 100, 40, 10?
    • Convenience for the humans?
  • The authors suggest to think of a machine learning approach based on eliminating the info advantage from observing the odd lot data. 
  • An alternate take:
    • Is there any "natural"/equilibrium/stable $-volume trade size?
      • What is the distribution of $-trade sizes?
    • Do rigid lot sizes create frictions?

Regulatory Response: Round Lots, the SIPs, and Order Protection

  • Should the SIPs contain all quotes (incl. odd-lots)?
    • Is it feasible?
    • Would this eliminate the profitable opportunities? 
      • Many subscribe to prop data feed & see the odd lots ...
         
  • The role of the Order Protection Rule?
    • Post 100 shares, get hit by a 1-share taker, left with 99 unprotected?
      • Why such different treatment of 100 vs 99?
      • Room for manipulation?
    • Should the odd-lot quotes be protected?
    • (And can/should we revisit the protection of the round lot ones? ....)

Regulatory Response: things to consider

  • Are there "too few" odd-lot trades?  
    • Does the mkt "reset" quotes to round? Why & how? Impact on exec quality? 
  • The dynamics & the origin of the odd-lot quotes?
    • Posted as "odd"? Or "leftover" after odd taker orders? 
    • Kept or cancelled if "leftover"?

https://www.nasdaq.com/articles/odd-facts-about-odd-lots-2021-04-22

Regulatory Response: things to consider

  • Wholesaler pricing for retail:
    • Improve over the best quote overall (and not just the NBBO based on the round lots)?
       
  • Other NBBO reference pricing? (Dark pools?)

 

  • Prop Feeds Data Costs?

 

  • Other frictions while trading against the odd lot quotes? Settlement costs?​

Bigger/bolder picture: can we learn from crypto markets?

  • Do fixed lot sizes + min pricing increments create unnecessary frictions?
  • Why were they introduced and do we still need them?
  • High divisibility on crypto-exchanges and those seem to work fairly well ...

 

 

  • Same speed limit for all cars ... but
    • can we build better, safer, faster roads? 
    • does regulating the speed limit ever become obsolete?

 

Interesting paper! 

Impressive data!!!!

Fun to read!

Lots of food for thought! 

 

 

Bottom line

@katyamalinova

malinovk@mcmaster.ca

slides.com/kmalinova

https://sites.google.com/site/katyamalinova/