#26-22 Adjustments due to annual transparency calculations by ESMA

ESMA's annual transparency calculations will be applied to shares listed on NGM effective Monday April 6, 2026 (technically Tuesday April 7, 2026 because markets are closed on April 6). The calculations determine the average daily number of transactions (ADNT) on the most relevant market in terms of liquidity (MRM), which informs the tick-size regime under Commission Delegated Regulation 2017. This is a technical market-structure update unlikely to materially move broad market prices, though it could affect tick sizes and liquidity profiles for individual securities.

Analysis

A mechanical change in tick-size classification tends to shift the marginal economics of liquidity provision: when ticks widen for a subset of micro- and small-cap names, quoted spreads can widen 10–30 bps immediately while displayed depth behind the best quote can increase as passive liquidity becomes more profitable. That directly benefits systematic market-makers and ETF/arb desks that capture spread and depth asymmetries, boosting intraday revenues for these businesses while raising execution costs for active small-cap managers and retail-heavy names.

Cross-listing and MRM effects create a two-speed market: names with meaningful liquidity on larger venues will see arbitrageurs concentrate quoting on the MRM, compressing cross-market spreads but amplifying order-flow concentration and occasional latency-driven dislocations. Expect knee-jerk relative-volume rotation over days (algos repricing), with structural rebalancing over 4–12 weeks as execution algorithms and broker algos update cost models and as borrow/short costs adjust.

Tail risks center on classification errors and transitory quoting vacuums: misapplied tick bands can create temporary one-way liquidity shocks and gamma squeezes in small-cap options where they exist — a 24–72 hour window post-change is the highest-probability period for outsized microstructure-driven moves. Over 6–12 months, dealers and smart-order routers typically arbitrate away persistently exploitable frictions unless regulators iterate rules again, so alpha is front-loaded.

Contrarian angle: the market will likely overestimate persistent harm to small-caps. In many cases modest spread widening is offset by greater displayed depth and reduced price impact for larger trades, improving institutional execution for mid-sized orders; therefore, the largest permanent losers are not all small issuers but active traders who cannot adapt execution algos quickly.

Key Decisions for Investors

• Long FLOW (Flow Traders, FLOW.AS) or VIRT (Virtu Financial, VIRT): 1–3 month trade to capture higher market-making revenues from wider ticks and deeper posted depth. Entry: initiate 3–5% position size on 1–2% pullback; target 15–30% upside as Q2 intraday flow improves; stop-loss at 8% to limit execution-model risk.
• Relative-value pair: short a curated basket of NGM small-caps (select illiquid names identified by ADNT/microstructure change) vs long broad Sweden large-cap ETF EWD: 1–3 month horizon expecting relative underperformance as trading costs rise. Position sizing 0.5–1x notional each leg; look for 3–7% relative move; skew risk if a liquidity provider steps in — cap loss to 4% of NAV.
• Execution alpha: shift client/prop execution to mid-point and discrete auction liquidity for affected names for the next 2–6 weeks; use passive post-only and midpoint PEG orders to harvest widened ticks. Target improvement: reduce implementation shortfall by 10–30 bps vs marketable-limit tactics; operational risk: increased opportunity cost if liquidity vanishes, monitor fill rates daily.
• Options/hard-to-borrow hedge: where options exist on NGM-listed names, buy small, short-dated put spreads (or call/put straddles for anticipated volatility) over the 1–4 week window to monetize expected microstructure-driven vol spikes. Risk/reward: limited debit of 1–3% notional for 10–40% potential payout on idiosyncratic moves; ensure borrow availability before initiating short stock exposure.