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Blacklight Research Spurs Change in Stock Exchange Rules

July 15, 2013

Findings on the effects of “odd lot” trades on the financial markets, using computations on PSC’s Blacklight, have led the New York Stock Exchange, the Nasdaq Stock Market and the Financial Industry Regulatory Authority Inc. to redefine how the industry tracks small stock trades. The new rules will be enacted in October.

Previously, odd lots — trades of 100 or fewer shares — did not have to be reported to regulators. The rationale was that these trades involved small investors who were unlikely to affect the larger market significantly. But recent volatility in the markets, driven by automated small trades that occur far faster than any human can think, called that assumption into question.

In an upcoming paper in The Journal of Finance, Mao Ye, University of Illinois, Urbana-Champaign, Chen Yao of UIUC and Maureen O’Hara, Cornell University, report that odd lots are playing an increasingly important role in the wider behavior of the markets. The researchers used Blacklight and the San Diego Supercomputer Center’s Gordon to analyze market data for the effects of odd-lot trading.

“For every 100 trades of Google, 52 to 53 of them” are in the form of odd lots, Ye observes. “There are more missing trades than trades you can see. In terms of volume, more than 20 percent of the trading volume [among all stocks] is missing” in the official count.

The widely held suspicion is that the largest and most sophisticated traders are using automated trading in odd lots to hide their activities from other traders. In any case, the researchers showed that including the odd lots significantly alters our understanding of the markets. Partly in response to this research, in June 2013 the market authorities agreed to a plan to require all trades, of as few as one share, to be reported.

“In the U.S., they care a lot about the transparency of the market,” Ye explains. The new rule change will remove “a kind of darkness we cannot see and that we never realized was there.”

PSC covered the group’s work in detail in a recent article that you can find here.