Alarming Decrease in NYSE Average Trade Size

Fifteen years ago, the average order size on the NYSE was 1,600 shares. This year, the average order has shrunk to only 200 shares.

Things have deteriorated rapidly over the last five years. A recent study by Mondo Visione shows that the average value of an order submitted to the NYSE in 2005 was $19,400. This week, orders sent to the exchange average around $6,400.

I am an active closed-end fund investor. I hold about 50 securities in my CEF portfolio with an average position size of about $40,000. Since many closed-end funds trade near $10 a share, a typical position is around 4,000 shares.

I have noticed that the average trade size on the NYSE has been steadily decreasing over the last few years. This is largely due to the increase in high frequency trading programs that generally only trade in 100 or 200 share lots. This decrease in liquidity makes it harder to accumulate a full position with one purchase.

One possible workaround to get around this problem would be to split up your order into many smaller orders. But this is very expensive at most of the major retail brokerage firms who charge commissions on a per order basis, not a per share basis.

For example, suppose you want to acquire 4,000 shares of a closed-end fund using Fidelity, and submit 20 limit orders of 200 shares each in order to compete with the high frequency trading programs. The commission is $8 an order, or $160 total commission for the 20 orders which is quite costly. The same problem occurs if you use Ameritrade, Schwab, Scottrade or E-Trade.

Interactive Brokers charges commissions on a per share basis (0.5 cents a share), so the 20 orders of 200 shares each would have a total cost of only $20.

If the trend toward smaller trade size continues, I believe there will be competitive pressure on Fidelity, Schwab, Scottrade and E-Trade to offer a per-share commission structure as an option to larger accounts. If this is not done, larger accounts will be forced to use market orders (paying the full spread) to avoid being picked off by the high frequency trading algoritms.

As usual, the SEC has been asleep at the wheel on this issue. The size of the bid-asked spread is only one component of market liquidity. The thickness or size of the bid-asked spread and average trade size is even more important to most retail investors and much more important to mutual funds and other buy side investors. They have done nothing as average trade size continues to decrease.

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4 responses to “Alarming Decrease in NYSE Average Trade Size

  1. but don’t a lot of the larger sized trades execute off the market?

  2. Steve- A trade in a NYSE issue may execute off market, but is still reported to the consolidated tape and is included in the average trade statistics.Nearly all of the big buy-side investors (mutual funds, pension funds etc.) use computer algorithms to split up their orders into many smaller orders, or hire brokers that use software algorithms.

  3. Why not use an market-on-close order? There is usually quite a bit of liquidity at the close.

  4. mktmkr- Good suggestion. Actually I would want to use a limit on close order that would only be filled if the market closing price was better than my limit price. I’ll check my brokerage accounts to see which one offer this order type.

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