THINKING: Perspectives

Mission: Possible-Part 2: Strategic Small-Cap Stock Trading

Part Two: Fundamentals of Small-Cap Stock Trading

(September 10, 2018) – There are more than 8,500 stocks in the National Market System (NMS). These stocks have a broad range of quoting and trading characteristics; for example, average daily share volume (ADV) ranges from zero to nearly eighty million shares per day, and the average daily number of trades ranges from zero to more than two-hundred thousand. Statistics for international stocks vary by country, but many of their characteristics mirror U.S. equity markets. Penserra offers its institutional clients the necessary tools and capabilities to trade both domestic and international securities, with a special emphasis and proficiency for executing the buying and selling of small capitalization securities.

Penserra prides itself on its ability to trade small-cap stocks. Jason Valdez, Managing Director and Penserra’s Head of Equity Trading since 2009, has built a leading global equity trading organization based on superior data management processes, quality customer service, and state-of-the-art trading technology and techniques. When it comes to executing small-cap stock transactions, requiring either specific industry or country expertise, or a global perspective encompassing multiple variables, Penserra offers experienced trading personnel combined with the most advanced technological tools to deliver superior performance and results.

Trading securities of any kind involve a myriad of risks and opportunities. Part Two of Penserra’s four-part series examining small cap stock trading brings to the forefront three crucial variables that can substantially affect performance: liquidity, spreads, and venues.


Data reported by the U.S. Securities and Exchange Commission in April 2018 showed that half of all NMS securities had an ADV (average daily volume) of less than 100,000 shares, and collectively these stocks account for just under 2% of all daily share volume. The majority of these securities are considered small-cap stocks.

In U.S. markets, small capitalization stocks are equity securities generally valued at less than $2 billion. In international markets (particularly emerging markets), the $2 billion mark often characterizes mid-to-large capitalization stocks, with small stocks valued at less than $1 billion. In general, the smaller the capitalization of the stock, the lower the turnover and liquidity will generally be (though this is not a perfect relationship). Low liquidity can cause difficulties because it can become difficult to get in and out of stock positions at favorable prices. For example, imagine having to buy or sell 500,000 shares of a stock whose 30-day average daily volume (ADV) is 25,000 shares a day. The less liquid the stock, the greater the risk of negative price discovery from the market impact of a single order.


Quote spreads, effective spreads, realized spreads, and price impacts are measures of the transactions costs traders pay to buy and sell stocks. A January 2018 white paper published by the SEC defined the various measure of stock spreads as follows:

  • Quoted spreads measure the cost of immediacy and represent the round-trip transactions cost to immediately buy and then sell a single share of stock using market orders.
  • Realized spreads are a measure of the revenue traders earn for supplying liquidity after considering the price impact of the transaction. It is equal to the effective spread minus the price impact.
  • Effective spreads measure the actual transactions costs an investor pays when they buy or sell their shares.
  • Price impact is the extent to which a trader moves the price when they buy or sell a stock. It is often viewed as a measure of the adverse selection cost for supplying liquidity to traders that might possess proprietary information about the value of the stock.

In general, quoted spreads, realized spreads, effective spreads and price impacts are greater for less-liquid stocks, such as small-cap stocks, than for more-liquid symbols. Moreover, quoted volume depths at the inside markets are also smaller for less-liquid stocks than for more-liquid ones.


According to the previously-mentioned April 2018 study by the SEC, a higher proportion of volume in less-liquid small-cap stocks is traded off-exchange (i.e., dark pools) than in more-liquid large-cap stocks. For trading on exchanges, a slightly higher proportion of share volume occurs on the listing exchange of small-cap stocks relative to non-listing exchanges; for more-liquid large-cap stocks, a higher proportion of share volume occurs on non-listing exchanges relative to the listing exchange. Small-cap stocks have, on average, fewer exchanges available to them than more-liquid stocks.

If you have any questions or wish to learn more about Penserra’s ability to transition and trade small-cap stocks, please contact Zlatko Martinic, CFA at or Jason Valdez at, or call 800-456-8850.