Micro Mining Market Mechanics

Let me start out by saying I have no idea what I'm doing on the trade execution side.  My goal is to buy shares in companies for less than they are worth, hold them, and then hopefully sell them for more than I paid for them as their price closes the gap to what I think the company is worth.  I'm wrong a lot, but seem to be right a little more than average, which is enough to grow my wealth over time.

I've started investing in microcaps, especially microcap mining/exploration stocks.  Suddenly market mechanics start to matter, because the market isn't always liquid and even my small amounts of money can momentarily affect the share price.

Let's dive into some examples.  All prices and volumes were randomly chosen when I happened to look at them and are just for illustration.  As are the companies.  Full disclosure I own all of the mentioned companies except Apple.  All were bought in the open market and I have never received any compensation from any companies.

Starting Easy - Apple Computer

AAPL on NASDAQ Bid $146.73 x 1000 Ask $146.74 x 900.  Average volume 80.3M

Apple computer trades over $1 billion USD per day so unless your name is Bill Gates or Warren Buffet you aren't going to need to worry about affecting the stock price at all.  The bid the best price somebody who wants to buy shares is offering to buy them at, the ask is the best price somebody that owns shares is willing to sell them for.  For Apple that spread is almost always $0.01, which in percentage terms of the share price is 0.006%.  Unless you are a high frequency trader trading many many times per day you just don't care about that spread.  Put in your market order and buy or sell your stock.  You can still use a limit order, but you don't need to in order to protect yourself unless you are worried about that 0.006%.

Just Kidding Apple Isn't Easy

If you are in the USA and use one of the major brokers most likely your broker will offer you free trading on the major exchanges.  They can do that because of payment for order flow.

Let say you went and sold 100 shares of Apple.  Your broker could route your order to a high frequency trader that could buy your shares for $146.735.  You just got an extra $0.50 total ($0.005 / share) on your order compared to if you had sold them as the best bid price 0f $146.73.  

The high frequency trader could then turn around and try to sell your shares for the best ask price of $146.74, and if they do they would make $0.50.

Of course the high frequency trader's job is more complex.  They have to kick back some to the broker and they have to deal with owning shares for a bit that might change in price to where they lose money on the trade.  Other high frequency traders are trying to trick their competition into making lots of tiny losses instead of lots of tiny gains.  And there are multiple high frequency traders competing for your brokers business either by offering to give you more of the price improvment or to kick back a bigger chunk of the potential price improvment in the bid/ask spread to the broker.  

Most retail investors still come out ahead.  If you used to pay $10 or $12 per trade your broker is probably getting a lot less than that every time you trade now and you are giving up just a little price improvement as a result.  That's also why your broker would rather you traded things where they make better money like options or crypto.

For big name high volume stocks just buy when you think they are cheap and sell when they are expensive and the friction on the buy and the sell will be so irrelevant to compared to if you were right.

Start Paying Attention - EMX Royalty

EMX on AMEX Bid $2.69 x 4600 Ask 2.71 x 200.  Average volume 142K.

EMX also dual lists on the Toronto Stock Exchange Venture Exchange (TSX-V also known as VENTURE).  But the US and Canadian dollar exchange rate isn't too wild and Toronto and New York are in the same timezone, so the shares stay in sync and other than the price of gold not much happens trading wise while you sleep.

$318,980 is how much is traded on AMEX in a typical day.  Another 2.2k shares on the TSX-V, which is 1/64th the volume.  A retail investor trading $30,000 USD worth of EMX probably won't push the price around too much in a day, but they still probably want to use limit orders to avoid finding gaps in people willing to sell at the current market price.  They may also want to spread the orders out over several days to minimize their impact.

This stock also is really hard for large institutional funds or index funds to trade in.  Say a fund wanted to invest $30m in EMX.  First, they'd end up owning like 10% of the company  which probably triggers all kinds of regulations, yuck.  Then they'd be 100% of the market for 94 days, triple yuck.  

A comparable royalty company Franco Nevada has average daily volume of $69 million USD, so that same fund could invest their $30m in half a day.  

Trading liquidity is part of why retail investors have an advantage in smaller companies.  A smaller company could be trading at a bigger discount to its earings power or asset value but a bigger fund couldn't invest in it and might have to invest in a bigger company anyway.

Pay Very Close Attention - Serabi

SBI on the TSE.  Bid $1.15 x 7000 Ask $1.19 x 100.  Average volume 2.77K.

Serabi dual lists on the London Stock Exchange (LSE) and the Toronto Stock Exchange (TSE also known as TSX).  These are in very different time zones and in different currencies, this makes keeping the shares trading consistently tricky.  

The volume on the TSE is basically $3185 per day on average.  If you add the London volume it's still peanuts.  Even small retail traders will see their effect on the price.  Like you might make the only trade that day, or not have somebody buy or sell at your limit all day.  It will take you awhile to establish a position and you'd better plan to hold for awhile because it will take you awhile to sell when you decide to exit.

That's also like a 3.4% bid ask spread, so if you are even thinking about trading more frequently you might rethink that.  Especially if your broker charges a pretty hefty commission to trade on the TSE at all.

A lot of brokers have PER SHARE fees to trade on foreign exchanges.  Interactive Brokers for example has a CAD $0.01/share fee capped at 0.5% of trade value.   That means there is a real advantage of buying stocks in Canada with higher share prices as your commision as a percentage goes down.  They also have a minimum of CAD $1 so you should probably always buy at least 100 shares.

share price commision %
$20 0.05%
$10 0.1%
$5 0.2%
$2 0.5%
$1 0.5%

Pay Very Close Attention - Salazar

SRL on VENTURE.  Bid $0.320 x 2000 Ask $0.350 x 6000.  Average volume 109K

On stocks trading for low per share amounts the spreads can seem small but actually be big.  The bid ask spread when I looked was $0.03, which doesn't sound bad until you realize it is 9.375% of the bid.  If you pay that coming and going you would be out 18.75% before you pay comission of 0.5% each way (1% round trip) and any market price impact.  Buy and sell stocks like these every couple months and it's easy to lose your shirt.  


Pay attention.  Use limit orders.  Be aware of comissions.  Be aware of your market impact, even if you don't have a lot of money.  Don't trade with a lot of frequency.