Investing in small and mid-cap stocks has become increasingly difficult in recent years due to a variety of market structure challenges.
In the past, the majority of investors in small and mid-cap names were local which made accessing liquidity a relatively straightforward process for brokers. However, there has been a global diversification amongst investors so, for example, large US fund managers now have significant holdings in small and mid-cap UK names. As a result, it has become far more difficult to get a complete picture of liquidity across the market.
As liquidity has fragmented, the sell side has found it uneconomical to produce research on small and mid-cap stocks, market makers have become less willing to commit capital to the space and the lack of trading has led to a lack of effective price formation.
Chris Jackson, global head of equity strategy and head of EMEA equities at Liquidnet, said the investment market wants greater portfolio diversification, the diversification benefits of a small and mid-cap portfolio are well understood. In addition, at a policy level, governments want to support smaller companies to drive economic growth and employment.
“We are doing some innovative work to address some of the core problems,” he added. “There is potential to marry local specialists with global electronic distribution.”
Another firm looking to address this challenge is TP ICAP MidCap, also part of TP ICAP Group. With their specialist model, they act as an agent for European small and mid-cap corporates in order to provide bid and offer prices throughout the trading day for their stocks.
“TP ICAP MidCap makes markets but the risk is taken by the corporate from their treasury stock which is a very innovative way of ensuring proper price formation, a critical component of liquidity,” said Jackson. “This points to new models for the small and mid-cap space.”
Charles-Henri Berbain, managing director at TP ICAP Midcap, said: “The aim of the market making contracts is to create a full order book which gives asset managers the confidence to trade in these names.”
He believes this is critical to rebuild true and viewable liquidity in the small and mid-cap space. Berbain also indicated that TP ICAP Midcap produces independent research when mandated by the issuer and brings together asset managers and small and mid-cap listed companies.
“A research report is more of an invitation to think about an equity story and meet management,” added Berbain.
TP ICAP Midcap hosts its annual conference, held this year on May 11 and 12 in Paris, which brings together asset managers and small and mid-cap firms.
Half of the liquidity that TP ICAP MidCap creates is through blocks, which cannot be found on Euronext or other electronic markets according to Berbain. TP ICAP Midcap is a corporate broker to more than 100 listed companies in Italy and France, and has specialised staff who know the relevant shareholders.
Jackson said: “There is real demand in the market for products and services to promote small and mid-cap stocks, to make pricing more efficient, to improve distribution from a local to a global structure and make this process efficient using innovative structure and technology.”
This article was first published in Markets Media
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