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How to access a rebound market of small and mid-cap stocks

Small and mid-cap companies are due for a rebound, according to Barclays who screened nearly 400 of its small- and mid-cap stocks in late July. Even though small and mid-cap companies with typically weaker credit profiles have generally taken a harder hit by the Covid pandemic, the bank nonetheless found a number of high-conviction names with improving near-term fundamentals and resilient business models. This coincides neatly with research by Matthew Bartolini, head of SPDR Americas Research, which shows that mid-cap stocks have been the top performers during long recoveries after major stock-market declines since the mid-1990s, defying conventional wisdom that large-cap companies will fall the least during a panic. 

Buyside interest in small and mid-cap stocks may be piqued, yet it is extremely difficult for these investors to access this side of the market as there is no guarantee of liquidity. This article examines new methods that help with the book-building process, empowering institutional investors to dramatically improve the illiquid public equity market.

Liquidity problems

Regardless of company size, the buyside needs access to liquidity at minimal market impact, through transparent and efficient markets. The introduction of MiFID II, however, with its unbundling of research and execution has skewed the ease of ability to trade small and mid-cap stocks. The reach of brokers has accordingly diminished, meaning a liquidity problem now exists. For example, if you have 5 days ADV or more that is put onto a block venue or exchange, chances are that you will not be able to get a match on the other side. Asset managers will typically have to revert to a manual process of making a telephone call to a broker, who will in turn go round and try to drive demand by building the book and finding the other side for the trade. Most interested buyside players often end up having to outsource the management of liquidity to the Equity Capital Markets (ECM) desks - with the associated costs and potential delays.

ECM Platforms  

New solutions and approaches leveraging technology are needed to alleviate this state of inefficiency in Equity Capital Markets. Automated platforms such as that developed by Appital have now been developed which build books of demand, on a digital basis. This approach provides an efficient and transparent book-building platform, proactively driving demand and matching supply in trading 5+ ADV of illiquid, small and mid cap equities. This enables deal participants to uncover and unlock liquidity, providing buyside firms with greater exposure to deal flow opportunities they have not been able to access before. Institutional investors are provided with the ability to build a comprehensive picture of liquidity in highly illiquid, small and mid-cap stocks. In addition, deal originators gain the opportunity to execute large volumes, often in excess of 5 days of Average Daily Volume (ADV), with minimal market impact or risk of price erosion.

In stark contrast to today’s opaque legacy practices that are mainly driven by phone interactions in the ECM space and lacking fully automated audit trails, these innovative new platforms are based on unbiased, unconflicted allocation methodology. Deal originators benefit from a real-time view of the book building activity and platform interactions directly on their desktop. At the same time, deal participants will receive relevant notifications to their desktop.

Digitised access

As the economy readjusts to these pandemic times, some investors believe that adding exposure to small- and mid-cap stocks may indeed help their portfolio perform better. Product innovation has now been accelerated to assist with investing in these previously difficult-to-access stocks with the advent of a digitised ECM solution. These types of automated ECM platforms are opening up a new world of opportunity for institutional investors by leveraging technology to dramatically improve a currently illiquid equity market into one that is safer, faster and better connected.

By using process automation, digitisation and dynamic profiling, we - at Appital - are able to connect relevant flow to global portfolio managers instantly, increasing market efficiency and creating opportunity for all participants.


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Mark Badyra

Mark Badyra



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06 Oct 2020



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