Exchange Market Size (EMS) was previously called by the term Normal Market Size (NMS). So, what is Exchange Market Size? It shows the number of shares market markers need to trade at the currently offered price. Simply put, EMS represents the number of shares you can trade safely, without the market marker charging you extra when widening the spread.
How do you Calculate EMS?
We will take the London Stock Exchange as an example. For each stock, EMS is set differently. To meet the SETS securities, it is 1% of ADT (average daily turnover), of shares. You divide it by the average share price for the period of average daily turnover calculation (upper cap is around 25k British pounds and the lower cap is 2.5k British pounds).
Why is EMS Important During a Trade?
Let’s start with a simple example: you want to buy shares in a company of your choice, and their current share price is 11.5 pence and Exchange Market size is of 50,000. By multiplying the share price by EMS, you can determine the quote you receive should be up to the £5,750 value. This is how you know that anything above this number would mean the market marker would have the right to widen the spread. Thus, offering a worse price.
Always pay attention to Exchange Market Size. When the market for a particular security change without expecting it, the market will always offer quotes in Exchange Market Size. Until then, you could’ve traded up to four times without being charged, but now this is not the case. This is when investors risk being charged if they want to buy or sell.
Why is EMS Relevant to Smaller Cap Companies?
Because of the way EMS is calculated, companies with lower EMS are mostly smaller cap companies. What is the catch? If you don’t have Direct Market Access to circumvent market markers, you would have two options. They include trading within reasonable range/Exchange Market Size, or securing your strategy so it won’t need to react too much.
If you did your research and you think you can trust the fundamentals of the company of your choice over the longer-term, you don’t need to trade when the market is volatile and quoting only in Exchange Market Size.
Key Points to Remember
The two fundamentals in the stock market are price and volume. Financial media usually reports regularly about this, so make sure you are following it every day. Once you know how to calculate volume, it will become easier to understand various terms such as liquidity, deep trading and more.
Trading volume is important because in New York, Frankfurt or London stock exchanges, transactions are publicly displayed and recorded. You can always access this list and see various prices when a stock changes hands. There is also a possibility to see how many shares were traded at a certain tame. That is why it is relatively easy to calculate the complete traded shares number in one day. The total number of shares that changed hands represent the total market volume. Trading volume is reported in the form of the number of traded shares, including the dollar amount of trading. The total dollar values of trades are equal to the dollar trading volume for the specific market.
Liquidity is another important term for every trader because once you know what exchange market size is, you will need to get familiar with it. The greater the trading volume, the more liquid the stock or the whole market becomes. A liquid market means there will be many sellers and buyers. Thus, meaning a lot of opportunities to trade. It is important to keep that in mind. You will have to wait for a lot before you sell a particular stock or buy it since buyers and sellers will be hard to “lure out.” Liquidity results will benefit the investor directly. It’s useful to know big stock markets such as the NYS have great trading volume and are far more liquid than smaller trading markets.
If you are a developed trader, Exchange Market Size (EMS), will greatly help you whenever you want to trade. It can help you prevent some losses and predict what the outcome can be. If you are a beginner, it’s important to thoroughly digest these terms and see the market patterns to understand what you are getting into. It certainly doesn’t hurt to be informed.