Millions of hidden shares revealed

Millions of hidden shares in the US are revealed today for the first time thanks to researchers from the Warwick School of Business, the University of Illinois and Cornell University.

Trades of fewer than 100 shares, referred to as ‘odd lots’, had not been registered on the publicly available ‘consolidated tape’.

Only large investment banks and high-frequency traders with sophisticated technology paid to see them from individual exchanges.

Until now, these small trades were thought to only be purchased by small retail investors and were not seen as significant.

Hidden shares, a two-tier market

However, Chen Yao, Maureen O’Hara and Mao Ye found that a growing number of larger trades were being ‘sliced and diced’ to under 100 shares and consequently remained as hidden shares, leading to a ‘two-tier market’.

They found that in 2009, about 4% of traded share volume consisted of odd lots, rising to 4.9% in 2013. “In some cases they found that 60 per cent of a stock’s shares were traded as odd lots and so were hidden from the public transaction feed.”

All ‘odd lots’ publicly available today

The researchers’ study – ”What’s Not There: The Odd-Lot Bias in TAQ Data” – has resulted in US regulators deciding to include all odd lots in the publicly available ‘consolidated data’, meaning they are not hidden shares any more as from December 9th, 2013.

Dr Yao, Assistant Professor of Finance at Warwick Business School, said:

“This is a welcome move by the US exchanges. From Monday the markets will be more transparent and fairer for all. While leaving odd lots out of the public feed may have been sensible in the past, fragmentation, high-frequency trading, and the widespread use of algorithms have changed markets in fundamental ways.”

“The results of our research suggest that odd-lot trades have changed as well, and they now play a new, and far from irrelevant, role in the market. We found a large fraction of trades are odd lots, which leads to significant inaccuracies in measures of volume. It will be interesting to see how the markets react when these odd lots are included; it is something we will be studying intently.”

Dr. Yao and colleagues gathered and examined data on 120 stocks on the Nasdaq from 2008 to 2011. They found that “the median fraction of missing odd lots was 24 per cent, but some stocks were missing more than 60 per cent of their trades.”

Dr. Yao explained that algorithmic trading typically slices and dices orders into small units, creating a new client list of odd-lot traders.

Dr. Yao said:

“The emergence of high-priced stocks such as Google or Apple, which have reached nearly $1,000 a share, results in odd lots constituting a significant fraction of trade for them. And the fact that odd lots are not reported to the ‘tape’ provides incentives for informed traders to transact via odd lots rather than use more visible trade sizes. Google, for example, had almost 31 per cent odd lot trades in 2008 and this had grown to 52.9 per cent by 2011. Amazon’s odd lot trades went from approximately 22 per cent to 46 per cent of trades, while Apple’s increased from 17 per cent to 38 per cent over this interval.”

“We found odd lot trades represented 22 per cent of trades in December 2009, compared with 14 per cent in January 2008.”

“In 2009 the volume of odd lot trades was four per cent; it was 2.3 per cent two years earlier. In June we estimated that had risen to 4.9 per cent.”

The growing problem of these missing trades is more significant for stocks with less liquidity or higher prices, the authors wrote.

Dr. Yao said “Dividing a round lot into multiple trades may be the result of firms seeking to avoid reporting requirements and may come from those with more knowledge about future price movements,” said Dr Yao. “Traders (or algorithms) appear to be splitting trades into odd-lot pieces, motivated perhaps by such trades’ absence from the public ‘consolidated tape’. We also find that odd-lot trades are more likely to be from high-frequency traders, evidence suggestive of the new patterns of trading in the market.”