THINKING: Perspectives

Mission: Possible-Part 4: Strategic Small Cap Stock Trading

Part Four:  Trading Small Cap Stocks- A Glimpse into a Trader’s Mind

(September 25, 2018) – After having covered previously the basics of small cap stocks and persuasive differences in transitioning small cap stocks, Penserra continues to highlight some of the challenges that a skilled small cap trader will encounter and discuss strategies to overcome them.

Jason Valdez, Penserra’s Head of Equity Trading, arrives at his desk every morning knowing that to be successful at his job he needs to absorb, analyze, and compartmentalize a never-ending stream of information. He also knows that as an institutional equity trader he can make a meaningful difference to asset managers everywhere by drawing on his vast professional experience. Whereas technological advances have turned the trading of large capitalization stocks into a predominantly passive exercise, the high-touch trading required of less-liquid small capitalization stocks remains as much art as it is science. That’s why an experienced trader like Valdez, who over the course of a twenty-plus year career has developed the nimbleness of a cat, gained the patience of Job, and acquired the wisdom to understand the subtle nuances of what the global financial markets are communicating, can add tremendous value to Penserra’s customers.

Part Four of Penserra’s four-part series examining small cap stock trading presents a narrow glimpse into the practices, techniques and methodologies employed by Jason, along with those whom he has hired and trained at Penserra, when presented with the challenge and opportunity of trading small cap stocks.

Initial Plan

Pre-trade reports prepared by transition managers are but one tool a trader considers while devising trading tactics at a micro level that will achieve a customer’s expectations. There’s also a plethora of important and significant questions that run through the trader’s mind. What happened overnight in Asia? Is there any follow through in Europe? Has a competing broker upgraded or downgraded any specific stocks, sectors, or asset classes, and if so, how may that affect his basket of stocks? What are some of the recent trends in the industries that are being traded? Are there any news headlines to be aware of? Has the liquidity in specific stocks increased or decreased? Because of these and other factors, experienced traders, especially those with the skill and training to trade small cap stocks, have come to realize one simple truth; every day is different.

Opening Strategies

As the clock ticks towards the opening bell, Valdez and his team of Penserra traders use every minute to assess whether, and how much, to participate on the market’s open. This is especially true with small cap stocks. Is the opening the best time to capture liquidity, and if so, to what extent and to what levels? Going in too heavy can set the price sentiment adversely, while being too passive could result in a missed opportunity. Skilled traders exercise discretion and look for opening imbalance opportunities and outsize them where available if they work toward their customer’s benefit.

Similarly, execution and liquidity strategies are employed at market closes as well. Recent trends have shown that as much as 30-40% of an individual stock’s daily volume can occur at the market’s close.

Keeping the Pulse of the Market

Throughout the trading session, seasoned traders executing small cap stock strategies constantly reassess market conditions. Are spreads widening or tightening? Which exchanges and dark pools offer the best sources for liquidity? Many outsiders not familiar with trading strategies believe that technology has evolved to make the profession somewhat mechanical, that set-it-and-forget-it trading algorithms have overwhelmed the industry. Even seasoned traders may describe their techniques as instinctual in nature, muscle-memory execution skills they have acquired and honed over time. But an accomplished trader such as Jason Valdez believes he adds incremental performance for Penserra’s transition management clients by maintaining one simple trading discipline he has discovered over the years—the value of having an opinion. Whether it’s about the direction of the market, the price limit of a single stock, or the decision as to what percentage of a program’s basket he wishes to execute at that moment, Valdez believes the key to his success has been understanding what the market IS offering your program or basket versus what you believe it SHOULD be offering you.

Techniques and Practices

As a best practice, when it comes to trading small cap stocks or baskets, Penserra prefers to avoid the use of trading algorithms. Especially those that are completion-based, such as volume-weighted average price (VWAP) or time-weighted average price (TWAP). Should an algorithm be employed, a passive strategy, such as a volume-participation algorithm with very tight price limits, would be preferable.

When it comes to accessing dark pools of liquidity, because they have built-in preferences, Penserra prefers to execute the dark pools and dark order types directly versus relying on dark pool aggregators.

Careful yet Deliberate Execution Style

The task of trading securities with varying liquidity profiles can be challenging.  Having to deal with periods of little or no trading volumes, a trader must show patience as they work through their orders and yet not be too aggressive at any one point in time for the sake of completion.  On the flip side, recognizing opportunities because of the presence of information asymmetry, a provider must be able to quickly and discreetly capitalize in times of regional sentiment shifts, temporary price dislocations, idiosyncratic data releases, and sudden patches of liquidity.

Giving traders an opportunity to succeed begins with a thorough pre-trade discussion regarding portfolio performance behavior, price sensitivity and trade characteristics as it presents opportunities to respond deliberately in changing market conditions. An in-house execution desk with direct market access (instead of having it farmed out to 3rd party broker-dealers) enables a trader to enter and exit the marketplace without exposing the event to information leakage. Randomizing trading patterns and behavior, maintaining tight price limits, and knowing when to speed up, slow down, or get out of the way are all hallmarks of Penserra’s implementation strategies when it comes to trading small cap stocks. In a world where many believe stock trading has become a commodity service, Penserra and its team of savvy, experienced traders believes they can bring significant incremental value to your transition management needs.

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.