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Traditional odd lot trades (i.e., trades involving fewer than 100 shares) now comprise over half of all equity trades on U.S. exchanges. Under Regulation National Market System, however, these trades are excluded from a market center’s trade execution statistics. In addition, while brokers are required to consider odd lot quotes as part of their duty of best execution, odd lot quotes are formally excluded from the calculation of the national best bid and offer. This Article, written for a symposium on the Future of Securities Regulation at Columbia Law School, examines whether these regulatory exclusions for odd lot trades and quotes increase trade execution costs for retail trades filled in non-exchange venues. Across more than 3 billion trades during 2020, odd lot trades filled in nonexchange venues received ten percent less price improvement than non-odd lot trades. In addition, using order book data from Nasdaq, examination of a sample of retail, non-exchange trades in two popular retail stocks—Amazon and GameStop— on January 27, 2021 reveals that thirty-one to forty-six percent of odd lot trades would have received better pricing had the venue filled the order at the Nasdaq odd lot quote. These results suggest that the differential treatment of odd lots and round lots in the regulation of U.S. market structure may impair the execution quality of marketable odd lot orders from retail traders.
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