High-priced stocks are being traded in the dark

October 16, 2013 8:42 am

High-priced stocks are being traded in the dark

By Michael Mackenzie and Arash Massoudi in New York

A number of well-known US companies boast very expensive equity prices, but trading in these companies is increasingly taking place in the dark – a trend seen hurting individual investors. One-fifth of overall trading in US equities now consists of so-called odd lots, whereby a transaction consists of buying or selling less than 100 shares in a company. These trades are not publicly reported and their size in terms of overall US equity trading volumes has risen sharply since 2007, when electronic trading transformed the industry.The failure to disclose information about odd lots trading in shares of high-priced company shares is seen rewarding high-frequency traders at the expense of investors who rely on market information from publicly shown changes in share prices.

“Supposedly the individual investor has benefited from electronic trading, but I don’t think that is the case,” said Jeffrey Rubin, director of equities at Birinyi Associates. “Investors are not seeing the true size of demand and supply of shares when trading takes place as an odd lot.”

The issue has now captured the attention of regulators with a proposal to include odd lot trades in the consolidated tape, the public record of trades made in real time.

A decade ago, odd lots trading was the preserve of small retail orders, but since the rise of ultra-fast computerised trading, the fact that these transactions are not publicly reported has attracted greater participation from sophisticated traders.

In recent years, the average trading size of a stock traded on the New York Stock Exchange and other public venues has declined to around 200 from over 1,000.

The rapid computerisation of trading has had the largest impact on odd lots. Credit Suisse estimated that more than 40 per cent of all shares traded in companies priced above $200 a share is now in odd lots, rising from about 5 per cent in the past six years. This has ensnared the likes of Amazon, Netflix and BlackRock.

Meanwhile, Credit Suisse added that more than 80 per cent of trading in stock priced above $400 a share occurs as odd lots, capturing companies such as Apple, Google,Chipotle, MasterCard, Washington Post and Priceline.

“This combination of non-reporting and smaller trade size means informed traders, including HFT, would gain an informational and risk advantage if they split orders into odd lots and smaller trade sizes,” said Phil Mackintosh, managing director at Credit Suisse.

The rise in odd lots trading has also accelerated with the rebound in equity prices since 2009 and a general trend by company management away from splitting their stocks whenever the price becomes so expensive it is seen being beyond the reach of small investors.

“High-frequency traders are active in odd lots trading and they have an information advantage over other investors,” said Mr Rubin.