This is an important post for individuals who place odd lot market orders. According to a representative from NYSE Arca, the fill of my 50 share market order on 3/26/2010 to buy STDPRB was a legal fill at $18.85 even though round lots were trading at $18.45 to $18.49. This is the explanation.
Knight Trading sent the order to NYSE ARCA. NYSE ARCA would treat a odd lot trade in the same manner as a round lot. However, NYSE ARCA did not have the national best offer. The NYSE had the national best offer at 18.49, so ARCA kicked my order to the NYSE. For reasons unknown, possibly a system glitch, NYSE kicked the order back to ARCA. The best bid on ARCA was $18.85 which is where ARCA filled the order. According to the representative ARCA's responsibility under SEC rule NMS was fulfilled when it transferred the order to the exchange with the best national offer. All of this would have happened in less than a second. Theoretically, if there was a higher ask price than $18.85, it would have been legal to fill the order at even a significantly higher price, since apparently there is no circuit breaker to prevent a fill in these circumstances that is too far away from the national best offer. Also, the NYSE and NYSE ARCA are apparently treated as two separate stock exchanges so NYSE ARCA did not have to fill the order at the best price posted by the NYSE, even though both companies are owned by NYSE Euronext, which is quaint if true.
I am not vouching for the accuracy of what was told to me but simply relaying what I was told over the phone by a NYSE ARCA representative.
Regulation NMS requires the exchange to seek the best price for customers rather than to offer the quickest executions. Regulation NMS - Wikipedia Rule 602 --Dissemination of Quotations in NMS Securities
More information about NMS is available from the SEC's web site: Responses to Frequently Asked Questions Concerning Rule 611 and Rule 610 of Regulation NMS (page 38 deals with odd lot orders)
As I see it, my latest problem, the execution of the 50 share market order for STDPRB, has less to do with odd lot orders than with market orders in general. If the NYSE had kicked back a 100 share order to ARCA for STDPRB, it would have been filled at 18.85 too, which was ARCA's best ask price at the time and possibly the best ask at any exchange other than the NYSE. If there had been a better price than $18.85, then the ARCA representative says ARCA would have kicked the order to the exchange with the better price than $18.85.
So I am going to cut down on the use of market orders in general, both for round and odd lots.
I also found this policy statement from Interactive Brokers that prohibits routing odd lot orders to NYSE ARCA: www.interactivebrokers.com
Also, it is natural to ask and to wonder out loud why Knight Trading sent my order on 3/26 to ARCA when the best national offer was at the sister exchange, the NYSE. If the order had been sent to the NYSE rather than ARCA, it is my understanding that my order could not have been kicked to ARCA by the NYSE, since ARCA did not have the best national offer.