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TABB Research Examines Liquidity Trends and Trading Solutions for Small-Cap Stocks

In new research, TABB Group likens intraday liquidity for small-cap stocks in the US to spotty cell phone service where there are sporadic bursts of liquidity and dead cell zones with barely any liquidity at all.

In today’s complex market structure, says TABB, one-size-fits-all trading solutions are no longer viable options. Stocks with different capitalization and trading volumes require specialized algorithmic strategies to navigate liquidity across 50-plus broker trading systems. “Lower volume stocks face an even greater challenge in sourcing liquidity without leaving a large footprint and risking information leakage,” according to TABB senior analyst Sayena Mostowfi, who authored “US Equity Market Structure: Trading the Dead Zone.”

The research examines liquidity trends for hard-to-trade stocks; key algorithm and trader attributes required for these stocks; examples of algorithms adaptive to hard-to-trade names; internal and external factors in evaluating algorithm performance; ticks sizes and decimalization; and essential workflow modifications.

In the decades following the creation of a National Market System (NMS), there have been a series of advancements towards the goals set out by Congress, including technology- and regulation-based changes. As Mostowfi explains, “The convergence of these changes leaves market participants in a conundrum as to how to achieve best execution, especially for small- and mid-cap securities.”

Short of holistic market structure changes, or metaphorically erecting new cell towers, market participants need to choose paths where they can optimize their execution quality through the dead zones of limited intraday liquidity. One key component in this navigation process is the selection of the appropriate algorithm. However, Mostowfi warns, “you need to independently verify performance data and if it doesn’t meet if not exceed expectations, feel free to terminate or upgrade your service, switching to another algorithm provider.”

The 14-page report with 7 exhibits can be downloaded by TABB Group Research Alliance Equity clients and qualified media. For the Executive Summary or more information, visit www.tabbgroup.com. To purchase the report, write to [email protected].

About TABB Group

Based in New York and London, TABB Group is the research and consulting firm focused exclusively on capital markets, based on the interview-based, “first-person knowledge” research methodology developed by Larry Tabb.

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