The “high-frequency” traders who have come to dominate stockmarkets with their computer-driven strategies pay less attention to small firms, preferring to jump in and out of larger, more liquid shares. Institutional investors, wary of being stuck in an illiquid part of the market, are increasingly following them.
Another factor is the near-evaporation of research on small firms, which has been undone by the rise of passive index investing and by rules that banned the use of investment-banking revenues to subsidise analysts. With less funding to go around, analysts are increasingly concentrating on large, frequently traded shares, says Larry Tabb of TABB Group, a consultancy.
If this is true, there should be more and more mispricing visible in the micro to small cap market. This would, of course, go on as long as someone will declare that the beat the market solely investing in micro and small cap-- and then Mr. Market would start paying attention to this overlooked chunk of the market.
