Liquidity: the small cap’s holy grail

The recent rally in stocks has filtered from the Main Market through to AIM.

But equally encouraging has been the increased liquidity in small cap companies, writes Oliver Staple, an associate in the corporate group at law firm Faegre & Benson.

The latest London Stock Exchange (LSE) figures for AIM show that the average daily number of bargains in September was 19,150, which is well up on the figure of 11,058 registered in January. Chi-X Europe, the largest pan-European equity multilateral trading facility (MTF) for equities that are listed on primary exchanges such as the London Stock Exchange, Frankfurt Stock Exchange, Euronext and OMX, has also seen steady increases in terms of number of trades, share volume and turnover. September was Chi-X’s third busiest month since its inception in March 2007.

The most remarkable increase in activity, however, was reported by UK exchange group PLUS Markets, whose trading numbers were up 270 per cent in the third quarter against the same period in 2008. This increase coincided with the resolution of the long-standing legal battle between PLUS and the LSE which centred on an LSE rule requiring trades in AIM stocks conducted away from the LSE to be reported to the exchange. Since the dispute was resolved earlier this year, market-makers have been able to quote and report trades in all AIM securities on PLUS’s markets without any additional trade reporting requirements to the LSE.

In its first full month of reported flow in AIM stocks, PLUS has already secured the majority of trading in approximately 300 AIM companies’ shares, calculated both by volume and by value, and attracted non-order book AIM trading of almost 47 per cent and over one third of total AIM trading (36 per cent). This is clearly good news for PLUS, but also for AIM: the average daily number of bargains for AIM companies in September was 9,385, bringing the total number of daily AIM bargains through both exchanges close to 30,000.

One of the most frequently heard complaints from AIM companies is that there simply isn’t enough liquidity in their shares. Accordingly, any increase in trading, whether on PLUS or another exchange, is welcome. Apart from generating investor interest in AIM companies, liquidity provides a more consistent system of two-way trading, fairly reflecting supply and demand as opposed to the jerky and disproportionate share price moves resulting from illiquidity. It also means a company is more likely to be able to use its stock as a currency in acquisitions, thereby assisting its growth whilst preserving its capital.

This is not to say AIM is without its problems. It is still synonymous with smaller and riskier companies than those found on the Main Market, whose shares may be held too tightly to attract significant levels of interest from investors. That reluctance to invest may have been exacerbated by negative news flow regarding certain companies being fined or even suspended for non-compliance with the AIM rules, coupled with a number of nomads being publicly censured and fined for their failure to monitor properly companies under their stewardship. Similarly, the vast swathes of voluntary delistings that have occurred in the last 12 to 18 months hardly bode well for the wary investor, albeit that the number of companies leaving the market is subsiding (September saw 15, compared to 37 in March).

But all is not lost. The reduction in numbers of AIM companies this year (down to approximately 1,350 from a high of almost 1,700 at the end of 2007) is a good sign, to the extent that those remaining are of a higher calibre than those that fell by the wayside. A move away from the minnows in the long tail of AIM can only be good news for the reputation of the market and its longer-term prospects. For AIM companies, it is more important than ever that their financials are sound, their management teams experienced and their investor relations effective. Those who will benefit most from any general increase in liquidity will be the companies who have the best tale to tell and who make sure it is heard.

Leslie Copeland

Leslie Copeland

Leslie was made Editor for Growth Company Investor magazine in 2000, then headed up the launch of Business XL magazine, and then became Editorial Director in 2007 for the online and print publication portfolio...

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