Enhancing Trading Liquidity is Management’s Responsibility – Not the Market’s
Public companies under $2 billion in market capitalization often face trading liquidity challenges. The impact of poor trading liquidity on a company’s performance in the capital markets is profound. It’s a barrier to further investment, holds current investors hostage, creates volatility, and contributes to long-term valuation discounts.
Most management teams are not aware of the strategies and tactics at their disposal to improve their trading liquidity. Rather than taking proactive measures, many management teams simply shrug their shoulders when confronted with poor liquidity. They will often claim that all of their long-term holders have no interest in selling their shares. But every investor has a price and time at which they would sell. And no investor appreciates being stuck in their position at a discount. Senior leadership within an organization are typically shareholders as well. Finally, an underperforming share price related to poor trading liquidity is not great for employee retention either. By failing to take proactive steps to address their liquidity challenges, management teams are turning their stockholders into stuck-holders, with dire long-term consequences for all.
Why is Trading Liquidity Important?
Trading liquidity is a fundamental quality of an efficient market and the fair valuation of a security. Healthy trading liquidity allows a security to reflect its fundamental valuation, even while investors move in and out of their positions. Healthy trading liquidity reduces the risk of owning a security by ensuring the purchase and sale of a security does not have an irrational impact on the security’s valuation.
Trading liquidity is a positive feedback loop. The greater the liquidity of a company’s shares, the easier it is to attract retail and institutional investors. The more investors that are attracted to the story, the greater its liquidity.
The Four Levers Management Has to Enhance Trading Liquidity
The levers involved in addressing liquidity challenges for companies are market access, market awareness, constructive news flow, and market demand.
Market Access
Market access refers to the mechanical supports required to facilitate trading in a specific trading venue or jurisdiction of interest. Trading venue liquidity is the fundamental enabler of the rapid and fair exchange of securities between capital market participants. It promotes a fair market and efficient price discovery. Different trading venues offer different levels of liquidity and activity. Companies can enhance the trading liquidity of their shares by trading on a higher liquidity venue.
Liquidity tends to improve as companies graduate to more mature markets and exchanges.
Enhance U.S. Investor Access
U.S. institutional and retail investor access will enhance trading liquidity. This can be facilitated by establishing the necessary market infrastructure and pursuing up-listing strategies onto more mature exchanges. MCI can help coordinate the technical requirements to reach U.S. markets.
At the most basic level, an over-the-counter (“OTC”) listing on OTC Markets’ OTCQB or OTCQX exchanges can establish a company’s eligibility to be cleared through the Depository Trust Company (“DTC-eligible”), which allows the stock to be transferred and settled through the U.S. clearing system. This means American investors in select states are able to trade the shares electronically.
MCI can guide management on the implications of Blue Sky compliance on their access to investors across key states. Blue sky laws are state-level regulations designed to protect investors from securities fraud by requiring the registration and disclosure of securities offerings. (Securities listed on national exchanges are exempt from state Blue Sky laws, but OTC securities are not) Blue Sky support means broker-dealers in a specific state can solicit both accredited and retail investors without violating securities regulations.
Charting an up-listing from OTC markets to a national exchange (NASDAQ or NYSE) when timing and qualifications allow is wise. An up-list boosts a company’s visibility and credibility with larger institutions. However, it also comes with higher costs and reporting obligations.
By making the Client’s stock DTC-eligible and Blue Sky compliant, and by preparing for an eventual NASDAQ/NYSE up-listing, MCI can expand the pool of U.S. investors who can easily invest in your company.
Enhance Canadian Investor Access
MCI can also chart a path for a company’s up-listing to the Toronto Stock Exchange when timing and qualifications allow. Such an up-list can boost the company’s visibility and credibility with larger institutions. However, it also comes with higher costs, reporting obligations, and market expectations, all of which MCI can help your management team navigate.
Final Thoughts on Market Access
Awareness and Demand are moot if trades cannot be settled. Implementing the supports necessary to facilitate trading across key jurisdictions is an important first step in driving liquidity.
Market Awareness
Once a company has access to a market, it’s up to management to implement the strategies required to drive awareness and demand. This means moving key buy and sell-side relationships into the capital markets conversion funnel.
Sell-Side Relationships – Support & Coverage
Companies must navigate toward the right broker-dealer relationships tailored to their current size and strategy, focusing on partners that will bring their “A-team” rather than consign the company to the sidelines. Relationships are required across the entire broker dealer franchise with investment bankers, research directors, corporate access teams and sales desks. MCI’s strategy for garnering broker support is holistic, ensuring companies gain liquidity across four key areas:
Analyst Coverage:
The company needs to acquire and maintain research coverage through a credible, systematic approach. The first step is to identify analysts and broker-dealers whose focus aligns with the company’s size, sector, and stage. By ensuring a strong fit, and developing relationships with patience, discipline, and education, a company can secure analyst coverage that acts as an independent, credible voice to the buy side. Sustained research coverage will amplify the company’s story with clarity and credibility across the capital markets.
Corporate Access:
Institutional Marketing – Non-Deal Roadshows – Sell-side Investor Conferences
The broker-dealer’s corporate access team can deliver effective non-deal roadshows and introductions to high-conviction investors. They also coordinate broker-dealer led conferences that serve the same function but in a concentrated setting.
It’s up to management to support the broker-dealers corporate access teams in filling the schedule with targets that match the company’s profile to maximize each marketing opportunity.
Active Trading:
Management needs to regularly engage with the broker-dealer’s sales desk to address any misperceptions and keep the company’s story top-of-mind so that traders are motivated to pitch the stock. Encouraging trading desks to actively make a market in the stock is essential to improving liquidity.
Retail Network Access:
Where possible, companies should leverage a broker-dealer’s retail client network for distribution. Presenting to retail broker groups can unlock access to substantial investor assets and boost daily trading volume.
Conclusion
By building healthy, mutually beneficial sell-side relationships, and connecting the company’s story to the broker-dealer’s platform, a company can strengthen trading support and broaden institutional and retail ownership. Over time, this comprehensive broker support program will translate into greater liquidity, lower volatility, and a deeper pool of investor demand in the market. But this requires management teams to maintain a positive orientation to the sell-side.
Buy-side Relationships – Targeting and Engagement
There are three different levels of accredited and retail investor targeting to identify and capture key audiences in the capital markets.
Accredited Institutional Personas – Institutional persona development should be done leveraging an institutional investor database with up-to-date ownership and fundamental financial information.
- Quantitative analysis – to identify suitable buyers with significant buying power based on the buying activity of fundamental quantitative analogues. The quality of the targets depends entirely on the quality of the targeting algorithm, ownership data, and fundamental data. In this business, you generally get what you pay for.
- Thematic analysis – Identifies suitable buyers with significant buying power of companies that match investment themes parallel to the company.
Individual Personas (Retail & Non-Accredited) – Individual persona development leverages key demographic targeting criteria available within various databases and digital channels. Companies can define retail targets based on job roles, location, intent signals, etc.
Independent Investor Conferences
Independent investor conferences can provide management teams with valuable exposure to a mix of institutional and retail investors. There are a multitude of high quality, independently produced investor conferences that focus on specific industries, market caps, and themes. Independent conferences are an important supplement to the investor conferences organized by broker-dealers for their institutional clients.
Constructive News Flow
Constructive news flow drives demand and trading amongst investors that are aware of the company’s story. Smart management teams provide investors with a long-term roadmap to value generation that includes milestones and performance metrics. As the company does what it said it would do, executing its strategy, it should achieve critical milestones. As a company achieves these milestones, it creates constructive news flow opportunities. How a company executes on these opportunities will make a significant difference to market support and liquidity.
Driving Demand
Converting Awareness into Demand Through the Capital Markets Conversion Funnel
A healthy capital markets conversion funnel is essential to convert awareness into demand for your company’s shares from the buy-side. It is also how the company acquires active coverage from the sell-side. The conversion funnel relies heavily on the company’s active use of conventional and digital communication channels. The goal is to capture investor interest and convert engagement into investment.
Driving Liquidity and a Fair Valuation
Steuart Henderson Britt once wrote that “Doing business without advertising is like winking at a girl in the dark. You know what you are doing but nobody else does.” 90% of liquidity issues are the result of management teams turning a blind eye to the market. Then they wonder why no one is trading their shares. Deploying a balanced capital markets strategy, that expands market access, awareness, and engagement will ultimately drive greater demand and liquidity.