Odd Lot Arbitrage

There is a strategy called odd lot arbitrage that I recently learned about. I have decided to share what I learned, and show a practical application as well. This is a type of a traditional value investing type strategy that young Warren Buffett would have likely participated in. Or so I believe.

It is a one-time deal, with a potential for a small gain over a certain time period.

Basically, it involves a transaction where a company goes through a special situation, such as a spin-off for example.

It asks shareholders if they want to exchange their existing stock for shares of a subsidiary it is spinning off. There is a limit as to how many shares are to be exchanged as well at the ratio.

However, this exchange ratio could change based on the number of participants that engage in this strategy.  There is a provision for odd-lot holders – which are shareholders who own less than 99 shares of the original company. They are much more likely to receive the fixed exchange ratio, that is advertised in the prospectus.