Subject: Trading - Round Lots of Shares

Last-Revised: 21 Mar 1998
Contributed-By: Art Kamlet (artkamlet at aol.com), buddyryba at pipeline.com, Uncle Arnie (blash404 at aol.com)

There are some advantages to buying round lots, i.e., multiples of 100 shares, but if they don't apply to you, then don't worry about it. Possible limitations on odd lots (i.e., lots that are not multiples of 100) are the following:

• The broker might add 1/8 of a point to the price -- but usually the broker will either not do this, or will not do it when you place your order before the market opens or after it closes.
• Some limit orders might not be accepted for odd lots.
• If these shares cover short calls, you usually need a round lot.
• If you want to write covered calls, you'll need a round lot.

Don't be concerned that your order to buy or sell 59 shares won't be considered until all 100-share orders are run. Your order doesn't just sit there waiting for an exact match on stocks that trade actively. Your order will likely just be swept into the specialist/market makers/brokers trading account along with other items.

If you're buying very small numbers of stocks priced under $100 or so, your biggest problem is to find a broker who will bother with the order and give reasonable commission. The discounters may not touch the small order or charge more - and a lot of bigger firms have minimum commissions of $35 - 75 or so. Many firms want a minimum size account to open one, too.

If you're trading penny stocks (commonly defined as having a price under $5 per share), there may be additional restrictions. For example, one reader reports that on the Toronto exchange, a round lot for an issue priced under CDN$1 is 500 shares.

This seems like a good place to mention the terminology for very big orders. Block trades are large trading orders (very round lots?), where large is defined by the stock exchange. On the NYSE, a block trade is any transaction in which 10,000 shares or more of a single stock are traded, or a transaction with a value of $200,000 and up.

So why does an investor still hear so much about odd lots? Well, once upon a time, there was a difference. At that time, if you wanted to sell 100 shares, your order would be forwarded to an NYSE or AMEX floor broker, who would then trek over to the trading area for that particular stock and try to find a buyer. If you wanted to sell only 50 shares, the floor broker would instead hoof it over to an odd lot broker. If you were in a hurry and specified "no print," the odd lot broker would buy the 50 shares at one eighth of a point below the posted bid price for the stock. Otherwise, the trade would go through at one eighth off the next trade (one quarter point if over $40/share). But all this is ancient history.

The "odd lot differential" of one eighth or one quarter of a point was one of the ways that the odd lot broker made money. But these days, there are no odd lot brokers--and hence no odd lot differentials. Small stock trades, whether for 50 shares or 100 shares, are handled by computer rather than by people.

The only thing that's left of the odd lot broker system is a reluctance by many people to place orders for less than 100 shares. At one time, these orders were subject to the odd lot differential, so people learned to avoid them whenever possible. The notion that orders of less than 100 shares were bad entered the investment world's folk lore, and like many other sorts of folk wisdom, it has a remarkable ability to persist even though it is no longer justified by the facts.

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