Odd-Lot Trading in the Stock Market and Its Market Impact

Abstract

Hsiu-Kwang Wu-* The purpose of this study is to investigate the trading activities of oddlotters and their market impact. Odd-lotters are usually small investors who do not have the resources to trade on a round-lot basis. For instance, on the New York Stock Exchange the unit of trading, the round-lot, is usually 100 shares with the exception of a few inactive stocks. Therefore, the odd-lotters are more likely to be in the relatively lower income group and are generally less speculative and sophisticated than large investors, such as institutional investors. In view of the important role of small investors, the general interest in the stock market, and the availability of data, it is rather surprising that there has been so little rigorous and systematic study of odd-lot activities. In fact, there has been no major study since World War II.1 If odd-lot trading contributes to price stability and market activity, then this trading is beneficial in an economic sense because both characteristics are conductive to a liquid market. Indeed, according to classical economists, all speculative trading with profits increases market efficiency and is beneficial because it creates liquidity and stability by providing an active and broad market while reducing intertemporal differences in price.2 A popular belief