What’s Not There: The Odd-Lot Bias in TAQ Data
Cornell University - Samuel Curtis Johnson Graduate School of Management
University of Illinois at Urbana-Champaign; University of Warwick
University of Illinois at Urbana-Champaign
July 22, 2011
Johnson School Research Paper Series No. 31-2011
Midwest Finance Association 2012 Annual Meetings Paper
We investigate the systematic bias that arises from the exclusion of trades for less than 100 shares from TAQ data. In our sample, we find that the median number of missing trades per stock is 19%, but for some stocks missing trades are as high as 66% of total transactions. Missing trades are more pervasive for stocks with higher prices, lower liquidity, higher levels of information asymmetry and when volatility is low. We show that odd lot trades contribute 30 % of price discovery and trades of 100 shares contribute another 50%, consistent with informed traders splitting orders into odd-lots and smaller trade sizes. The truncation of odd-lot trades leads to a significant bias for empirical measures such as order imbalance, challenges the literature using trade size to proxy individual trades, and biases measures of individual sentiment. Because odd-lot trades are more likely to arise from high frequency traders, we argue their exclusion from TAQ and the consolidated tape raises important regulatory issues.
Number of Pages in PDF File: 47
Keywords: TAQ data, Odd-lots, Price Discovery, Transparency, Order Imbalance, Retail Trading
JEL Classification: G10, G14working papers series
Date posted: July 23, 2011 ; Last revised: September 16, 2011
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