Odd Lotter Trading of High and Low Quality Stocks

Abstract

THANKS LARGELY to the New York Stock Exchange Public Transactions Studies' and the pioneering efforts of Charles 0. Hardy2 and Garfield Drew,3 there is certain amount of information available about how odd lot investors behave as group. Generally speaking we know they favor high quality stocks, prefer buying to selling, prefer to hold stocks for the long run, avoid margin, and could be lot better in their timing. While considerable information has been generated concerning the aggregate buying and selling proclivities of the odd lotter, there is comparatively little known of his behavior concerning individual stocks. Since October, 1964, data on purchase and sales of 75, and more recently, 100 common stock sample have been made available by the Securities Exchange Commission,4 thereby permitting examination of odd lotter trading in individual securities. Garfield Drew's odd lot studies suggest that, in the aggregate odd lotters buy more than they sell when prices are low and sell more than they buy when prices are high. To the extent that this is true, they demonstrate what we can call a search for -a buying of what seems to them to be undervalued and selling of what seems to them to be overvalued stocks. At the very extremes of price variation, the odd lotter apparently yields increasingly to the temptation to switch from value and seek performance by increasing his relative buying at the tops and selling at the bottoms. Drew emphasizes, however, that this is relative phenomenon. While the ratios of selling to buying decline just before market tops, they nevertheless do remain on the sell side. Similarly, at the bottoms, while the ratios rise somewhat, they nevertheless remain on the buy side. At the turns, the odd lotter is on the correct side of the market, although to lesser degree than he might have been.5 But these are aggregate data that are compared to indexes of aggregate prices. Do they describe how the odd lotter behaves with regard to all sorts of individual securities, or are they characteristic only of the over all averages? With regard to lesser quality securities we might anticipate that odd lotter behavior would be different. Investors buying and selling these stocks at all would tend to be more risk oriented than those trading in the blue chips. Given the assumption of different people, or at least different motivations for trading in these securities it is logical extension to hypothesize different behavior. One might anticipate more emphasis on performance and less on value. A speculative vehicle that is bought for shorter term capital gains might well be bought when prices are high in anticipation of them going higher with money derived from the sale of stocks that are low and expected to go lower.