March 22, 2021
By Thomas J. Jordan, President & CEO, Jordan & Jordan
To be clear, I believe the United States has the best markets for retail investors in the world. There are approximately 6 million non-professionals who receive free real-time market data, paid for by a broker, and can receive an execution (with no commission) and a confirmation within seconds. However, as was clearly communicated during the U.S. House of Representative Committee on Financial Services meetings, there are legitimate issues that should be debated to continually improve our Capital Markets.
Some key issues that were mentioned at the hearings will be on the agenda of the Financial Information Forum (FIF.com) where J&J has a relationship. Those issues are Rule 605 modernization, T+1/T+ ½ and Short Sale & Securities Lending. Other topics discussed that will require deliberations are Payment for Order Flow, accredited investors, private market access, sub-penny exchange quoting, social media tools, IPO vs. SPAC, systemic risk, conflicts of interest and investor education.
Implementation of any of these initiatives will take some time. We will soon have new leadership at the Securities & Exchange Commission (SEC), and they have many issues to prioritize. Can anything be done to improve the structure for retail investors in 2021?
Yes, put odd lots on the tape.
Odd lot trades make up 50% of all trades and some days are as high as 75%. The odd lot bids/offers are available on the more costly proprietary feeds, but they do not exist on the CTA/UTP NMS feeds, which have a far broader distribution. This inclusion of odd lot quotations is especially relevant for higher priced securities, since a large percentage of odd lot orders are present between the best round lot bid and offer. Odd lot last sale information has been disseminated on the CTA/UTP NMS feeds for many years, and the addition of odd lot quotations is long overdue.
The operating committees of the SIPs developed a proposal for disseminating odd lot quotations in 2019, but it was superseded by the SEC’s proposed Market Data Infrastructure rule of February 14th, 2020. Let me summarize the key components of the odd lot transparency proposal:
- Each of the 19 equity exchanges/participants would send individual top of book odd lot quotations to the consolidating Securities Information Processor (SIP) in the same format in which they send in top of book quotations for round lots.
- The SIP would then calculate the overall odd lot best bid and offer in the same manner done for round lots, except odd lot quotations would not be represented in odd lot top of book if worse than the round lot NBBO(National Best Bid/Offer).
- Each Odd Lot Bid or Offer will have size and the exchange character code
- With this addition, odd lots and their associated size would become transparent, along with the exchange where the odd lot order was placed
- This is for investor information and will not be a protected quote or in any way change Regulation NMS obligations
As for all initiatives, there will be concerns/objections:
- Odd lots are addressed in the market structure rule where round lot sizes are redefined.
- In that case, the earliest the odd lots will be on the competing consolidator tape is 2023, but more likely 2024 when the exclusive SIP is retired.
- If not regulated or protected some brokers may not display it to their customers.
- That is a commercial decision but sometimes competition changes behavior; look at zero commissions.
- The regulators and the exchanges want to improve the service to individual investors and even smaller institutions, and this is something that can be done now.
Odd lots have become a significant element of our markets in recent years and making this information available soon is the right thing to do. Although a more perfect solution could come in 2024, this proposal could be accomplished in 2021. Let us put odd lots on the tape now.
Game Stopped: Put Odd Lots on the Tape first published on Jordan & Jordan.