The days of a single trading strategy or algorithm for trading today’s universe of equities in the current market structure are over.
That’s what TABB Group said in a recent report, “U.S. Equity Market Structure: Trading the Dead Zone,” that examined liquidity trends and trading solutions for small-cap stocks. For equities with different capitalizations and trading volumes, in particular small-caps, the buyside needs specialized algorithmic trading strategies in the current fragmented marketplace, the consultancy added.
Likening intraday liquidity for small-cap stocks in the U.S. to spotty cell phone service where there are sporadic bursts of liquidity and dead cell zones with barely any liquidity at all.
“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 the report.
The research report examined 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.
Despite regulations designed to bolster trading, Mostowfi explained that 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 complete 14-page report with exhibits can be downloaded by TABB Group’s website.
