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Maximizing Portfolio Efficiency: Insights from the 2024 Q1 Market Impact Report

In the ever-evolving financial markets, understanding the intricacies of trading costs across different market cap categories is paramount for fund managers and investors alike. Our recent analysis in the "Market Impact Report" for the first quarter of 2024 sheds light on the trading costs and market quality index for Large Cap (LC), Mid Cap (MC), Small Cap (SC), and Micro-Cap (Micro) stocks, offering valuable insights for strategic portfolio management.


Trading Costs Breakdown:

The report reveals a detailed analysis of trading costs, calculated for an order of 10% of Average Daily Volume (ADV) executed using a full day Volume Weighted Average Price (VWAP) strategy. Notably, trading costs vary significantly across market cap categories:

  • Large Cap stocks stand at 17.0 basis points (bp),

  • Mid Cap at 18.7 bp,

  • Small Cap at 28.9 bp, and

  • Micro-Cap at a staggering 77.5 bp.

This variance illustrates the higher costs associated with trading smaller cap stocks, with small cap trading costs being 69% higher than large caps, and micro-cap trading costs 3.55 times higher. The implications for fund managers are clear: to justify the inclusion of small and micro-cap stocks in portfolios, these investments must deliver excess alpha, significantly above that of large cap stocks, to cover the higher round-trip trading costs.


Market Quality Insights:

Our Market Quality Index analysis offers an overview of the current trading environment's efficiency and the information content of trades across the different market cap categories. The findings indicate:

  • Large Cap at 98% market efficiency and 2% information content,

  • Mid Cap at 97% and 3%,

  • Small Cap at 96% and 4%, and

  • Micro-Cap at 92% and 8%.

These results suggest that market efficiency is at a historical high, possibly due to advancements in market structure, increased price transparency, and the equitable distribution of company information among investors. This has led to more consistent intrinsic price estimates across the board.


Conclusion:

The "Market Impact Report" provides a comprehensive overview of current trading costs and market quality, essential for making informed decisions in portfolio management. The insights from our analysis underscore the importance of strategic investment choices, especially in the context of trading smaller cap stocks.

For fund managers and investors aiming to navigate the complexities of today's financial markets effectively, understanding these nuances is crucial. We invite you to delve deeper into our findings by downloading the full "Market Impact Report", where we explore these topics in greater detail, equipping you with the knowledge to optimize your investment strategies.

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