In addition to the traditional major stock exchanges, many of which are amalgamating across boundaries, a new breed of smaller exchanges has sprung up, some affiliated to the big ones.
Alternative Investment Market
Usually known by its initials Aim, this is actually merely a part of the stock market reserved for smaller businesses. The idea is that eventually they mature, grow and graduate onto the main market, so it is sometimes called the ‘cadet branch’ of the stock market. This means that younger companies with a less-solid or shorter record of profits are allowed to join. But the costs for the business of getting on to Aim are almost as high as for the full listing, so the main attraction is the lower hurdle and access to the market publicity. Another problem is that Aim shares, like smaller quoted companies on the main exchange, go in and out of fashion with institutional investors.
That provides an opportunity for the small investor. Shrewd opportunists who spotted internet stocks as having a good future when they first appeared on the Aim market made a massive amount of money, since some shares rose tenfold in a matter of days. It is no guarantee though, because the self-same shares later plummeted and some of the much-touted businesses collapsed altogether. But then smaller companies are generally more vulnerable to problems. Companies quoted on this ‘junior market’ can also suffer from exaggerated share price moves as they are often entrepreneurial businesses, in which the founders retain a large chunk of the shares.
Since the market was set up to provide access to young and small companies – important for advanced technology businesses – the aim was for a lighter system of regulation. But this has brought criticism, especially from rival overseas markets, that Aim companies are too lightly regulated and hence less safe.
Worried at the criticism that the stock market was irrelevant to and provided no help for high-technology businesses, which are about to provide the future wealth of the country, and hoping to cash in on the dotcom boom, the London Stock Exchange launched an index in its market called Techmark (or techMARK as it would have it).
The principal aim was to attract companies involved with new technical ideas with the promise of rapid growth but without the trading record to be eligible for a normal quotation. As the literature points out, buying shares in this area is considerably more risky, since many of the so-called businesses are little more than a bright idea, and many of them have never seen profits.
Being in the group/index does not change how companies’ securities trade since it is not a sector in itself – the companies are also grouped into the usual industry sectors, which now contain a wide range, including computers and telecoms. There are three FTSE indices covering Techmark: the Techmark All-share includes all of them; the Techmark 100 covers small and medium-sized companies; and Techmark Mediscience covers small and medium-sized pharmaceutical and healthcare companies. Their only use for investors is to help them measure their exposure to technology companies in the same way that they can use sector classifications to measure exposure to banking, engineering or retailers.
This is the share and derivatives market created from the amalgamation of the exchanges in Amsterdam, Brussels, Lisbon and Paris plus the London International Financial Futures and Options Exchange. It therefore became the second largest in Europe, behind London.
The German Deutsche Terminbörse and the Swiss Soffex combined to become Eurex, Europe’s largest derivatives exchange.
London stock market. It was created in December 2005 as an evolution of Ofex, which was created in 1995 to trade shares in unlisted companies. It is designed as the first step for fledgling companies going public. They can then move on the Aim or even get a full quotation on the main market. The number of companies quoted on Plus is over 200. Around 7,500 UK and European securities can be traded on Plus. These include FTSE100 companies, European liquid shares and unlisted shares quoted on Aim. Information can be found on www.plusmarketsgroup.com
A midget rival to the London Stock Exchange, Tradepoint is a completely automated electronic order book market started in 1995, which curiously enough is itself quoted on the Aim part of the main Stock Exchange. The business is 54 per cent owned by a consortium of banks including the US merchant banks Goldman Sachs and Morgan Stanley Dean Witter. It has formed an alliance with the Swiss exchange SWX to create a new exchange called Virt-X, regulated by the London authorities, in which the Swiss have a 38 per cent stake.
In addition to trading in the normal UK quoted stocks (though it has only about 1 per cent of the total trade), it has set up clearance and registry systems to allow trading in Eurotop, the 300 largest companies in Europe.
Nasdaq is the acronym for the National Association of Securities Dealers Automated Quotation system. It is second only to the New York Stock Exchange (often called the Big Board) as the largest stock market in the United States and is one of the four big ones in the world. As it has kept costs of entry and administrative demands comparatively low, many young companies, especially in technology, have opted to be quoted there, including internet companies like the Amazon bookshop. Some, like Microsoft, Dell and Intel, stayed there despite their subsequent growth.
It has countered the threat of the internet-based share trading systems by forging alliances with some of them. There is a growing number of such schemes, including ones run by Bloomberg, Reuters and MarketXT. The computer-based systems can post quotes and execute trades on Nasdaq Intermarket, including in shares quoted on the New York Stock Exchange.
The operation has opened a Tokyo market, has a London office and is organizing a pan-European operation, which should make it a global exchange with a permanent and continuous trading system.
Nasdaq OMX Europe
Easdaq has used the principles and the software from Nasdaq to start a Paris-based operation but with markedly less success.
Chi-X started operating in March 2007, backed by Japanese investment bank Nomura. The venture claims to offer a system 10 times quicker and 10 times cheaper than existing trading systems and allows investors to deal in European stocks.
Like Chi-X, Turquoise is a recent rival to come on stream, providing electronic execution services to buyers and sellers of pan-European equities. It was launched in September 2008, backed by nine of the biggest investment banks, to compete directly with the main London stock market.
This was founded out of the United States-based trading system BATS, marking its move into the European equities market. It went live in late 2008.
NYSE Arca Europe
This is another pan-European trading facility, which is fully integrated into the NYSE Euronext systems. It is regulated by the Dutch regulator Autoriteit Financiële Markten.
Electronic trading exchanges may emerge. The internet is continuously providing new opportunities. Two market facilities already running are called Posit and Instinet, which are principally for institutional investors, but others are promised or at trial stages.
There is also talk of disintermediation (cutting out the middleman) by companies raising capital. Raising money by a public issue of shares is a costly business for a company, not least in the enormous fees to accountants, lawyers, stockbrokers and merchant banks. It would be attractive if all this could be bypassed by making the shares available over the net. Small investors for their part seldom get their hands on new issues because they are snapped up before they get there, or more often companies opt for the cheaper route of placing the issue with institutions. It could be dodgy for the smaller investor, however, since there will be less assurance that the professionals have crawled over the business to check its figures, managers and promises, and it is difficult to tell from the puff appearing on the screen whether a company even exists as described, much less whether its managers are competent and honest.