How to buy illiquid securities

[spartan]

Hey everyone,

 

I'm sure there is a lot of material on this site about buying large amounts of illiquid securities.

 

Can someone please direct me to a thread or other reading material on this topic?

 

Specifically, can I place a limit order with my broker that represents 10x the average daily trading volume, or do I place a bunch of smaller orders and hope they get filled? What's the smartest way to go about it?

 

Thanks!!

 

[Tim Eriksen]

I don't think there is a simple approach.  Personally I mix it up.  Sometimes I will put out a large order for a few days, then pull it off and replace it with smaller orders.  I have had no action on both approaches and also had quick fills of a large block and steady fills for smaller blocks, and everything in between.  Reality is you have no real way of knowing who wants to sell and how many shares they want to sell.  They may not post there full sales order either.  What is often hardest for value investors is buying at the ask, but over time the bid/ask price difference has minimal impact on total returns.  Don't expect to perfectly get the bottom price when buying or top price when selling. 

[TwoCitiesCapital]

I don't think there is a simple approach.  Personally I mix it up.  Sometimes I will put out a large order for a few days, then pull it off and replace it with smaller orders.  I have had no action on both approaches and also had quick fills of a large block and steady fills for smaller blocks, and everything in between.  Reality is you have no real way of knowing who wants to sell and how many shares they want to sell.  They may not post there full sales order either.  What is often hardest for value investors is buying at the ask, but over time the bid/ask price difference has minimal impact on total returns.  Don't expect to perfectly get the bottom price when buying or top price when selling.

 

This.

 

If you're patient, large/small limit orders do the trick and you'll eventually get your fill without having to pay massive spreads over the bid.

 

Also helps to have a broker that doesn't sell order flow and focuses on execution. Had tons of instances where IB was able to fill an order for me where Scottrade failed to do so.

[omagh]

Buying at a fair price is the easy part.  Inverting -- Selling at a fair price means that you're on the opposite end waiting patiently for a buyer to take your shares off your hands.  Illiquidity should always require a premium as the security is illiquid for a reason.  Leverage with an illiquid position is asking for trouble.

 

I usually have long-dated bids or asks.  Setting my own prices usually works out, but it takes patience and it often requires new long-dated bids or asks when the original expires.

 

I don't think there is a simple approach.  Personally I mix it up.  Sometimes I will put out a large order for a few days, then pull it off and replace it with smaller orders.  I have had no action on both approaches and also had quick fills of a large block and steady fills for smaller blocks, and everything in between.  Reality is you have no real way of knowing who wants to sell and how many shares they want to sell.  They may not post there full sales order either.  What is often hardest for value investors is buying at the ask, but over time the bid/ask price difference has minimal impact on total returns.  Don't expect to perfectly get the bottom price when buying or top price when selling.

 

This.

 

If you're patient, large/small limit orders do the trick and you'll eventually get your fill without having to pay massive spreads over the bid.

 

Also helps to have a broker that doesn't sell order flow and focuses on execution. Had tons of instances where IB was able to fill an order for me where Scottrade failed to do so.

[writser]

I don't think there is a simple approach.  Personally I mix it up.  Sometimes I will put out a large order for a few days, then pull it off and replace it with smaller orders.  I have had no action on both approaches and also had quick fills of a large block and steady fills for smaller blocks, and everything in between.  Reality is you have no real way of knowing who wants to sell and how many shares they want to sell.  They may not post there full sales order either.  What is often hardest for value investors is buying at the ask, but over time the bid/ask price difference has minimal impact on total returns.  Don't expect to perfectly get the bottom price when buying or top price when selling.

 

Basically this. Sometimes a big bid will move up a stock because other people will front run your order. In that cased working your order over time is preferable. Other times a big bid means that a big holder finally sees an opportunity to get out and you will get an unexpected fill at a nice price.

 

One thing: the more time and effort you put in the better your results. If you enter a buy order at $10 and wait for a few weeks chances are somebody else will dime your order and enters a buy order at $10.05. Or you'll miss a seller entering an order at $10.10. Or some terrible news comes out and you'll feel stupid for buying at $10. If you don't have the time to keep track of your orders you'll have to accept that your executions will be sub-par. In that case it might even be preferable to buy at the ask. As Tim said, if you think a stock is 50% undervalued the cost of paying 3% extra is negligible compared to potentially not getting a fill.

 

Buying at a fair price is the easy part.  Inverting -- Selling at a fair price means that you're on the opposite end waiting patiently for a buyer to take your shares off your hands.  Illiquidity should always require a premium as the security is illiquid for a reason.  Leverage with an illiquid position is asking for trouble.

 

I think this is nonsense. Illiquidity works both ways. As a seller you have to wait patiently for a buyer and as a buyer you have to wait patiently for a seller. And illiquidity doesn't require a premium - illiquid instruments should trade at a discount instead as they are harder to convert into cash when required.

[spartan]

I can't thank you all enough for your input. My suspicions were correct - basically, it ain't easy!

 

As a general note, this message board has proved invaluable to my learning. There is so much material and so many talented minds. It's so useful to be able to hear different perspectives about any given security. Prasad, if you're reading this, thank you for gathering all of us in your little corner. I have no one to talk to about these things in real life, so coming to your forum is probably one of the best parts of my day. (I work in Big4 audit...for the most part, the people that work here are nice but intellectually dead and solely interested in career building..)

 

Looking forward to adding more value as time goes by.