Building Blocks for Building Block Trades
Traders Magazine Online News, January 28, 2013
Perritt Capital Management specializes in “ultra micro” stocks, with market capitalizations of roughly $250 million and below.
Yet since 2005, the buyside firm based in Chicago has built up a specialty in large trades, not small.
Block trades now account for 35 percent of its total volume. Its average block trade: 25,000 shares. And that pushes the average for all its trades to 15,000 shares, according to its director of research and equity analyst George Metrou.
Perritt does this, as well, without relying on electronic markets that specialize in large blocks, such as the Liquidnet dark pool.
Instead, the firm operates in what might be considered the old-fashioned way: It has built up a network of 40-45 brokers across the country that it trusts and relies on to send it indications of interest every day in stocks that it holds positions in. And then, it responds. In “voice negotiations.’’ That is to say, phone calls.
Here are the building blocks it uses to trade in large blocks, effectively.
1. Publish the portfolio, for all to see.
The firm manages two main funds, with roughly $400 million in assets between them:
Perritt MicroCap Opportunities Strategy Fund (PRCGX), which invests in companies that are listed in the bottom 20% of major stock exchanges as ranked by market capitalization. Initial investments have a market capitalization between $50 and $500 million.
Perritt Ultra MicroCap Strategy Fund (PREOX), which invests in companies that are listed in the bottom 10% of the major stock exchanges as ranked by market capitalization. The initial investments are in firms with a market capitalization below $300 million.
At any given time, the firm holds roughly 150 “unique positions.” The holdings are disclosed in 13F filings with the Securities and Exchange Commission, every quarter. Only a handful of other names draw interest, which can be communicated directly to the broker network.
The firm expects that any broker that plans on doing repeat business with it will familiarize itself with those positions. Because those are the stocks in which it will entertain propositions to buy or sell large blocks. Changes in positions – turnover in holdings – at Perritt is only about 30% a year.
2. Adhere to the 100:1 rule.
Perritt asks its network of brokers to send indications of interest every day, consistently.
But it doesn’t send out indications of interest, itself, very often. The ratio of incoming IOIs to outgoing is about 100 to 1.
"We have worked to make the ratio of inbound indications and outbound indications on natural liquidity highly in our favor,” Metrou said. “We want for opportunities to arise and be presented to us to respond to.'’
Each morning, its investment team reviews a half dozen to a dozen indications of interest that come in from its network.
And responds only when it makes sense. Perhaps once or twice a week
“We’re more of a passive responder,’’ asserts Metrou.
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