Tips for buying wide bid/ask spread illiquid stock

[Combo]

I am trying to build a relatively small position (~$4000) in an illiquid stock. Using limit orders I was able to buy ~$1000 of shares this week at 2 p with the bid at 1.8 p (10% spread).

After these trades (contributing most of the volume this week), the bid/ask was widened to 1.8p/2.5p (30% spread). Moreover, the market maker is only selling 5000 shares at this ask price ($125 worth).

Effectively the market maker made the shares 25% more expensive to buy today due to $1000 of buying volume.

Any tips on purchasing the remaining $3000 worth of stock without being ripped off by this MM? e.g. should I put in orders for small amounts spread a couple of days apart (commission is $9.99 though), or what? How close to the ask price should I set my limit order? Does the MM know these orders are coming from the same person or are they received anonymously?

The MM is obviously covering themselves with this huge spread, but killing the market rather than making it. Thanks for any advice...

 

[Combo]

Anybody? In the meantime I am just trickling small buys every day or two in the hope it doesn't push the price up. Today I picked up $300 worth. Paying $9.99 commission on these small buys is painful though -- any other ideas?

 

[VielGeld]

Why do you want to buy an illiquid stock? If it's hard to get in, it's gotta be hard to get out. Sometimes, there's a reason they want it to be hard. Are you sure you're buying for the right reason?

But as for purchasing an illiquid stock, best you could do is maybe go directly to the order book. Might be able to do something there. Don't ask me how to, though; stocks ain't my instrument.

 

[wackypete2]

The best thing I can tell you is buy in small increments. Since it's illiquid you are probably buying from the MM. He sees the larger than normal buy orders coming in and he doesn't want to be stuck short in case you know something, so he'll widen the spread to make it more expensive for you and have a bigger cushion for himself.

Peter

 

[wackypete2]

Anybody? In the meantime I am just trickling small buys every day or two in the hope it doesn't push the price up. Today I picked up $300 worth. Paying $9.99 commission on these small buys is painful though -- any other ideas?

Call your broker. There's a chance you can place a large order with them to be broken up during the day. If so they will only charge you 1 commission rate for whatever you buy for the day. Several factors determine whether or not they will do this for you but you should ask. Alternatively, ask if they have a different commission structure such as a penny or so per share with only a very small minimum.

Peter

 

[Combo]

Thanks for the suggestions everyone. I will definitely try calling the broker tomorrow to see if they can help with a different commission structure or agree to break up the order.

I don't usually buy illiquid stocks. The problem is I am in the US right now and my broker (etrade) won't do AIM stocks. I'm in a hurry so buying their US listed holding company instead.

And you're right, it has crossed my mind that selling them later may be problematic, but I'd rather be in than out at this stage. I compared the operating company price chart with the holding company chart and the holding company has mirrored it for at least 5 years, but the liquidity difference is obvious in the chart too.

 

[Combo]

Well damn it, today I got a little ambitious and bought $500. The MM kept the bid at 1.8p and increased the ask from 2.0 p to 2.84p. What a complete b*****d!!! A 37% spread and the shares now cost 42% more than they did this morning.

 

[safvan]

Well its really you versus the Market marker. Like peter said,,just do not buy it every day unless you know something that might explode the stock sooner than you can build your position into.

There is little any one can do here for you but good luck with this trade.

 

[N Rothschild]

just get on the bid and hope someone hits it..

 

[Combo]

After calling several US brokers, I eventually learned that Fidelity allows AIM trades over the phone.

Will stop playing these ridiculous games with the MM now. Hopefully funds transfer over to Fidelity by the end of next week and I can buy the liquid shares then.

Wasn't exactly my plan to have $2k of holding company shares and $2k of operating company shares with a different broker, but ah well.

Slightly miffed with etrade for not doing AIM and with the MM for taking the p**s!

 

[CityTrader]

Dont understand anything about your post. You state the stock was bid at 1.8p and had a 10% spread, and yet you seem pleased at having paid 2p this is the offer!

You are mixing us$ ($4,000) with GBP (1.8p 2p) what on earth are you trading?
is it an order book stock?
A quote driven stock?
a hybrid?

 

[Combo]

CT, ah yes that probably looks confusing. To clarify, I am in the US and was initially buying $4000 USD worth of the US holdings company which trades at 1.8 cents an 2.0 cents -- not p, that's a force of habit as I am from the UK.

I gave up last week after the spread increased to 1.8 c/2.5 c after tiny buying pressure (from me) and it has since become even wider at 1.8 c / 2.78 c. Horrible MM! Though somewhat understandable given the typical daily volume is 0, but they're hardly 'making' the market either!

When the remaining $2000 is transferred to Fidelity, I plan to convert it to GBP and buy the operating company in pence.