- As traders we’re interested in volatility in share prices, price movements are what create trading profits
- AIQ has just moved 20% this morning – is this something interesting to trade?
- Perhaps and maybe – but always consider liquidity and spreads
AIQ Limited (LON: AIQ) is an acquisition shell – a SPAC in the American – listed in London. The share price, as reported, has just fallen 20% this morning. So, is AIQ a good share to be viewing as a trading opportunity?
One approach is to consider what AIQ actually does. Which, as an acquisition shell, isn’t very much. Future value depends largely to near exclusively on who they identify as a merger candidate. As we don’t know anything about that it’s difficult for us to trade it.
Another view is that we can observe that AIQ bounces around a bit so we could just have a position and hope to time matters correctly, get on the right side of those bounces. That’s risky and not exactly a directed strategy.
We can also do one of those things which we should take note of in anything and everything we try to trade. Which is to check the liquidity of a share. AIQ is “offbook” trading. That’s very close to the older “matched bargain” idea. There is no marketmaker willing to trade with all comers. Rather, a seller must be matched up with an end user buyer and vice versa in each and every trade. This means that the AIQ shares are illiquid.
We should all know that liquidity reduces spreads. The more people buying and selling the same thing then the smaller the gap between buying and selling price. This has gone so far on the American markets that for most of the larger stocks those two prices are the same – there is now just the one “market” price with no spread at all. This is less so in London and the smaller the stock, the less liquid the market in that stock, the less this is so again.
Another way to think of the spread is what’s the “tax” the market is imposing on us in order to be able to trade? The wider that spread the more we’ve got to pay to trade in any particular instrument. Or, the same statement, the more the price has to move before we can profit from having taken a position.
Compared to the market in general, AIQ is extreme in this but isn’t wholly out of the ordinary in the world of matched bargains and offbook trading.
That 20% price decline today, that’s from 11p to 8.8p. Well, OK, that’s the price change. But a likely trading volume is in the hundreds to thousands of shares in a day. That’s not even every day either. Not hundreds of thousands, hundreds to thousands of AIQ shares traded in a day.
The result of this is that the spread – the current quote from the London Stock Exchange at least – is 7 to 15p. Buy at 15, sell at 7. That is, we need a 100% or so price movement before we can be in profit even by only just beating that spread.
It’s possible that AIQ will turn out to be a good investment, possible that it won’t. But with a spread like that, an active trading strategy will find it extraordinarily hard to make a profit.
A useful little test for any trading that we do. What’s the liquidity – how easily can we move in or out of a position? – and what’s the spread – what’s the price we’ve got to pay to take a position? The lower the liquidity the higher the spread is how it usually works – and the more difficult it becomes for active trading to profit.
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