Small and micro-cap stocks have become the hot topic in the world of finance, attracting not only retail investors but also the most sophisticated market participants, including high-frequency trading (HFTs) firms and algorithmic trading firms. These firms have significantly increased their activity in these stocks over the last few months, as evidenced by the bulk deal disclosures on the stock exchanges. With such high interest from the most experienced players in the market, it’s clear that small and micro-cap stocks are not to be overlooked.
HFTs are algo driven, and many are now active in shares with a market cap of less than Rs 500 crore. This signals the growing appeal of small and micro-cap stocks to some of the most sophisticated market participants.
It’s important to note that the majority of HFTs typically seek profits in stocks eligible for derivatives trading. Capturing the spread between spot and futures prices is a common strategy. If stocks are ineligible for derivatives trading, they must be highly liquid. This is crucial to the strategy of most HFTs since they move in and out of positions very quickly and don’t hold positions overnight.
