The Reliability of Odd-Lot Liquidity
Published: June 5, 2025
Competition from off-exchange trading venues where trades are executed directly by traders and institutions appears to significantly influence on-exchange liquidity and prices around the time of a trade. Odd lots, or orders for less than 100 shares, decline in value before an off-exchange trade occurs, only to recover shortly after. Cancellations of on-exchange orders are shown to be correlated with off-exchange trading, indicating that off-exchange trading can impact on-exchange liquidity (Working Paper no. 25-01).
Abstract
Nearly half of all U.S. equity trading volume now occurs off-exchange. This study examines how off-exchange trading impacts on-exchange liquidity at high frequencies using proprietary exchange feeds. Results show that small exchange orders inside the spread, called odd lots, disappear for less than a millisecond around an off-exchange trade. This decline appears to negatively affect the prices received by many traders. On-exchange order cancellations correlate with off-exchange trades, a pattern which may propagate volatility from off-exchange venues to exchanges at extremely high speed. However, off-exchange trading seems to provide better prices than on-exchange liquidity at trade time even when compared to hidden odd-lot liquidity.