NanoViricides Inc. (NNVC)

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THE DANGER OF LOW LIQUIDITY

That trading algorithms dominate trading is not news. It's estimated that about 75% of the volume done is automated trading. This includes high frequency trading but also includes many slower moving strategies. Some are based on predictive models but most are playing the bid-asked spread. The latter category is nothing more than automated market-making. This is especially true in lightly traded small and micro-cap stocks. As long as the spread is wide enough and there is enough activity from other sources the algo traders quietly crank out consistent but small returns on capital. The returns are so consistent that many of them operate largely with borrowed capital.

The one crucial ingredient for this business model to work there being sufficient interest in the stock from non-algo traders ( people). It's a low margin business and it needs volume. When trader/investor involvment drops below a certain level the algos can't make a go of it and look elsewhere. I believe this is now occurring in NNVC. I estimate the minimum daily volume required to keep the algos involved in NNVC, given its bid-asked spread is around 100,000 shares. A single day below that level will not be enough to drive the machines away but consistently low volume will and it becomes a self-reinforcing process.

The danger is important news in the face of low liquidity can cause large price swings, up or down. I assume NNVC is aware of this. This may be a factor in NNVC management being reluctant to let it all hang out.

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