Is trading round lots tradition or good practice?

January 28, 2009 4:31 PM

I have started dabbling in the stock market again, and I've been trying to figure out why conventional wisdom suggests that trading in round lots (usually of 100) is better than trading odd lots (<100). Can you help?

I bought a couple of equities today in lots of 50 and 65, and didn't seem to take any penalty on either the trading fee or stock price. Nor did I encounter what seemed to be delayed trades (maybe I did, but it didn't look like it). I've also read that the practice of trading in round lots, essentially predates Internet trading and no longer needs to apply, as long as the trading fees don't become an issue. These were just brief blurbs and I am looking for solid information here. All my equities are from the New York or Toronto exchanges.

posted by Deep Dish to work & money (9 comments total)

I have never seen a penalty in trading in odd sizes with my broker in the US.

The only reason I know of to trade in larger amounts is to minimize the affect of the commission on the overall transaction.
posted by zippy at 4:35 PM on January 28

I don't know the answer, but just a data point to suggest that things might be as you suspect:

I've been buying and selling stocks for over a decade, with several different brokers, and always over the internet. At some points in time, I traded fairly actively - rolling over my entire portfolio into a new set of stocks on a monthly basis, that sort of thing. So I've done a pretty good number of trades. In all that time, and all those trades, I consistently bought as many shares as I possibly could with the amount of money that I intended to invest, and later sold them all to switch to another stock.

This means that I've rarely if ever bought or sold a multiple of 100 shares. I've never been charged extra, nor (as far as I know) had my purchase or sale delayed.
posted by Flunkie at 4:43 PM on January 28

The reason it is better to trade in round blocks has to do with execution and liquidity, the effects of which become more apparent if you are trading very low volume stocks with wider bid/ask spreads. If you are trading high volume stocks that rarely have more than a $0.01 bid/ask spread, you won't notice any difference, as electronic trading will match you up within seconds at the current market price no matter what size your order is. I think in the days before electronic trading odd lots were probably more detrimental than in today's market.
posted by jameslavelle3 at 4:50 PM on January 28

I have boa and I know they don't allow some types of trades of less than 100 shares (i.e. all or none and the like).

But I can't imagine a financial penalty for less than 100.
posted by jourman2 at 4:57 PM on January 28

You buy and sell. It seems more likely to me that someone buys 100 stocks than 103. If you sell 103 then transaction might be split in 100 + 3 and may cause additional fees with some brokers. I once ordered 5000 stocks and saw at thinkorswim how the order was broken up (2000 here, 500 there.....).

Just a guess.
posted by yoyo_nyc at 5:24 PM on January 28

Conventional wisdom seems to hang around. If everyone is buying/selling in blocks of 100 it makes life easier. By selling large blocks you minimise the one-time transaction cost of the order.
posted by xanderbeedle at 5:48 PM on January 28

Money managers typically try to buy in even blocks, and adjust levels in even increments, because if you say buy 1005 units and then sell 1000 units by mistake, you're left with having to take another transaction cost hit on the 5 remaining units once you catch yourself later. So if you buy/sell in units of 100, you are more likely to find a seller/buyer more rapidly. For the individual investor it's probably not worth worrying about.
posted by felix at 7:11 AM on January 29

Some exchanges (Toronto Venture for example) trade almost exclusively in board lots. Odd lots may get filled, but even with a limit, the market would have to move below (or above) it to buy (or sell).

XY co. is trading at 50 cents, you want to buy 165 shares at 45. The market comes to 45, you are filled on 100 shares. The market may have to go to 40 or even lower before you get confirmed on your last 65 shares. (In fact some other trader has bought shares at 35, then sells them to you at your 45 price). If it stays around 45, then you may have to place a new order the next day (at another commission) to get filled, or go to the market, and expect to pay up for the odd lot.

(Of course, the Venture has some strange rules on market orders too, but I won't beat my leechblock timer if I elaborate.)
posted by Chuckles McLaughy du Haha, the depressed clown at 7:25 AM on January 29

It may be a hang over from the past. It seems to me, that back in the eighties when I was a finance major we were taught that the per share transaction fees were higher for odd lots. I believe this is less often true today.
posted by Carbolic at 7:53 AM on January 29