The Smallcap Liquidity Problem Hiding in Plain Sight
Impact-cost analysis on 340 smallcaps shows how much of the index cannot be exited at screen prices in a stressed tape.
We run impact-cost analysis across 340 smallcaps to estimate how much of the index can realistically be exited at screen prices in a stressed tape. The answer is meaningfully less than position sizing in most retail portfolios assumes.
- Names analysed
- 340
- Stress haircut
- −65%
- Decile 10 exit
- 16 days
- Suggested cap
- 8% ADV
Key findings
- Screen liquidity overstates exitable liquidity
Median daily turnover flatters the picture badly once impact cost at realistic order sizes is modelled against a stressed-volume assumption.
- The tail is where the risk concentrates
A substantial share of the sample would require multiple sessions to exit a position sized at a modest percentage of a portfolio, at prices below screen.
- Liquidity correlates with everything else that goes wrong
Impact cost rises precisely when you most want to reduce exposure, which is why modelling it in normal conditions is misleading.
Estimated sessions at a defined impact budget under stressed volume. Sample data.
How impact cost was estimated
For each name we take median daily traded value, apply a stressed-volume haircut consistent with historical drawdown episodes, and compute the number of sessions required to exit a defined position size within a specified impact budget.
The assumptions are conservative but explicit, and every one can be adjusted in the attached model.
What this means for position sizing
The practical conclusion is a liquidity-adjusted cap on position size in the smallcap sleeve — a limit expressed as a share of median daily turnover rather than as a share of portfolio value.
We publish the specific cap we apply in our own framework, along with the reasoning behind the parameter.
What we are not saying
This is not a directional view on smallcaps. It is an argument about how much of a position you can actually convert to cash under pressure, which is a separate question from whether the businesses are good.
A liquidity-constrained holding in an excellent business is still an excellent business — it is just a smaller position than the screen suggests you can take.
Download the full report and model
22-page PDF plus the three-statement model as an editable spreadsheet. Change an assumption and see what the answer becomes.
Downloads are available to subscribers on the Professional and Premium tiers. Demo links on this build are inactive.
Head of Research · SkyGrowthWealth Research
Maintains the model behind this note and publishes every revision to it.
Share
Read next
The Capex Cycle Nobody Is Underwriting Yet
Order books across industrials have compounded for seven quarters while the market still prices these businesses on trough-cycle multiples. We size the gap.
Private Banks: Where the Margin Reset Actually Lands
Deposit repricing is not uniform. We decompose the NIM impact across eight lenders and identify which balance sheets absorb it best.
Nifty at the 78th Valuation Percentile: What History Says Next
Ten years of forward-return data conditioned on entry valuation. The distribution is wider than the averages suggest.