JV Article: How ICP Premium harnesses algo trading to work for small and mid-cap stocks

High frequency trading has transformed the capital markets since its introduction over 20 years ago – in many ways for the better, says David Campbell, one of the founders of Toronto-based consultancy Insight Capital Partners. 

But it’s also introduced challenges for junior miners. 

“It’s, in my view, inadvertently hurt this sub-sector of the marketplace because of the relative liquidity issues that are occurring, especially when things don’t look good in the sector overall,” he said.  

While these traders add liquidity to the market, they use a mathematical approach to trading to maximize their chances of making a profit that can decouple a stock from its fundamental value, Campbell explains.  

“When they come into the marketplace, they’ll make a determination of how they should enter their order strategies,” he says. “Because we’ve seen a downtrend in the TSX Venture over the last 10 to 12 years, they will determine statistically, at the automated level, that they are better off to enter their securities from the sell side.” 

That activity can overwhelm the pricing signals for small and mid-cap companies, says Campbell, who has over 25 years of experience in capital markets, including running trading desks for large institutional investors, and expertise in electronic trading with Virtu Financial predecessor ITG.  

“And therefore, we have what we call ‘heavy’ quotes, meaning the quote looks much heavier for sale and there’s more offerings.” 

But what if small and mid-cap companies could harness electronic trading to their benefit? 

Campbell and his business partner Ian Clark at ICP recently launched a market making service based on an algorithm that they say does just that. 

‘Balancing’ the quotes 

ICP Securities’ proprietary algorithm, ICP Premium, helps balance out quotes for the company’s clients, Campbell says. Launched in January this year, it’s already proven it can make the quotes more attractive to institutions and the high-frequency traders who follow and magnify that activity. 

Balancing the quotes in this way will convince some electronic traders to enter a stock from the buy side instead – because they’re statistically better off doing so. 

“Once we do this for enough time and with the consistency of the market maker on the quote operating at the millisecond speed, that combines to send the signals that this quote is balanced,” Campbell says. 

In the six-month period ending in June, ICP Premium helped increase liquidity for its clients by 100%, while the market capitalization of companies valued at $50 million or above rose by an average of 22%. 

“We are phenomenally delighted with those results given the time period they occurred in,” Campbell said, adding financing was tough because of uncertainty over interest rate cuts at the time. 

Since ICP released those initial results, it says it’s almost doubled its client base, about 60% of which are in mining. 

ICP Premium also delivers monthly reports with a senior trader available to share real-time insights into a client stock’s trading. 

That provides a clearer understanding of what the market is valuing them at, and therefore their true cost of capital. 

Incidentally, Campbell says the algorithm hasn’t uncovered any evidence of the naked short-selling some juniors say plagues their stocks. 

“We’re not saying it does not exist, but we haven’t seen it in the client bases that we have followed – i.e. we are able to trace securities back to where they come from and where they go.” 

Tracking anonymous trading 

The “sweet spot” for ICP Premium and where it’s had great success in helping stock prices rise is in companies with a market cap of between $50 and $300 million, which high frequency traders are already active in. 

But ICP has also seen positive results in early stage, high-risk companies with market caps under $50 million as the algorithm doubled average daily trading volume compared with the previous 12 months. 

And companies with market caps of over $1 billion are also interested in ICP Premium, especially inter-listed stocks that see some “gamification” of trading patterns, and to track where anonymous trades are coming from. 

“We can help them understand those larger trade flows,” he says. “For example, if we uncover that we see a predominance of buying coming out of Europe and management knows that they were just at a conference or on a roadshow there, they’ll have a good understanding if they’re getting the kind of response that they’re looking for. It’s very difficult for management teams to untangle that otherwise.” 

Although other market makers use automated implementation-style algorithms, they predominantly enter orders manually, Campbell says. In contrast, the low-latency ICP Premium algorithm is co-located in the same data centres that host the exchange engines, making it at least 20,000 times faster than a human. 

ICP Premium’s success comes from adapting the traditional market making service to the new technology that’s been introduced over the past 15 years, Campbell said. And with high-frequency traders representing a growing share of overall institutional activity (around 40% in the United States and 32% in Canada), it’s in companies’ best interest to work with them. 

“We’ve applied the same processes, but in a new language that speaks to this new community that has not existed in the market before,” Campbell said. 

The preceding Joint Venture Article is PROMOTED CONTENT sponsored by Insight Capital Partners and produced in co-operation with EarthLabs, which owns The Northern Miner Group. Visit: www.insightcapitalpartners.com for more information.