Small-capitalization stocks tend to be less liquid than their larger peers, which traditionally has made them difficult to trade using algorithms. A new Goldman Sachs algo, however, is designed specifically to find liquidity in smaller names.
As buyside desks take more control of their trading activity, they are being asked to do more with less, said Peter Sheridan, head of algorithmic distribution for the Americas at Goldman Sachs. The buyside is looking to automation to help them with capacity, while leaving the trader to focus on the more difficult transactions.
According to Sheridan, five years ago the vast majority of Goldman’s algo business was in the area of large-cap stocks. Today, large caps make up about half of the algo business, while the rest has migrated to mid-cap and small-cap stocks.
Todd Lopez, head of sales for equities electronic trading in the Americas at Goldman Sachs, said his firm designed its new small-cap algorithm so it would not be constrained by some of the traditional measures of volume and time.
"The algorithm has a lot more discretion, if it finds an opportunity, to take advantage of it," Lopez said. "Simply going along with volume in a small-cap name has the potential to create a lot of impact. We try to minimize how often the algorithm is forced to trade, especially when conditions are unfavorable."
Information leakage is always a concern, and especially so in illiquid names. Lopez said algos have to use different techniques when placing orders for lightly traded stocks, or they’ll end up showing their hands in the marketplace.
