With a Cass Business School study showing that over 90 per cent of equity trades on the Plus Markets Group’s (Plus) trading platform occur at prices at or better than the best prices available on the London Stock Exchange’s SETSmm, a slowly rising market share in Plus’ chosen segments points to this independent UK electronic market providing effective small cap competition to the LSE.
Highlighting the merits of Plus’ quote-driven versus an order book system for trading small cap securities, data analysed in a back test across 348 different stocks for an entire month earlier this year found actual trade prices on Plus saw price improvement of 77 per cent (quoted prices to transactions).
While trading costs were an average of 0.45 per cent using the Plus mid price and similar by comparison to the LSE’s SETSmm, price gains from trading on Plus were an average of a third of one per cent better over the price available on SETSmm.
Questioning figures
An LSE spokesperson cautioned the “accuracy” of the study arguing it had somewhat discounted the ability of market participants to add prices to the order book (i.e. the hybrid market in SETSmm).
A joint survey this August from accountants PKF and the Quoted Companies Alliance, stated that while Plus had “not yet convinced” Official list and Alternative Investment Market (Aim) companies of the benefits of trading on third-party platforms and just 7 per cent currently traded their shares on Plus, “a third (34 per cent) of respondents would consider doing so.”
While the study endorsed the need for more competition, the LSE said: “We believe that the high level of satisfaction [shown by PKF] of Aim companies – 79 per cent - reflects the quality of our market, and our ongoing commitment to deepen liquidity on Aim and widen access to a broader range of investors through changes such as the Aim enhanced indices.”
Nemone Wynn-Evans, director of business development at Plus Group, said: “Although order book trading suits some players like hedge funds and those trading algorithmically, the needs of other market participants quoting on behalf of the retail investor are different as they are trying to provide a low cost of execution.”
Ms Wynn-Evans says order book trading is popular among leading exchanges like the LSE in Europe because large trades often need to be broken up into smaller parcels to fulfill an entire order for a client. That yields to multiple trade reporting fees for the LSE, which is believed to be around £0.70 per share transaction, although the LSE says trade reporting is a “very small part of our business.”
The Plus service operates a free (zero) trade reporting, which offers an alternative execution venue for trading equity securities listed in the Official List and Aim, with independent price formation.
Ms Wynn-Evans claims that while the published live prices on the exact same securities between Plus and the LSE might be broadly the same, what is “crucial” is the actual trade(s) that are executed within the bid/offer spread. Plus contends that its platform facilitates this and in deeper pools of liquidity, thereby improving the average price.
Plus sprang to life in November 2004 with a mandate to restructure the old Ofex market model set up by John Jenkins. The Group announced recently that it intends to apply to the Financial Services Authority for recognised investment exchange (RIE) status. This, claims Plus, will enable it to “realise new business opportunities and attract an increased range of specialist issuers.”
Stunning success
Plus argues that despite the stunning success of the LSE’s Aim – with 1560 companies at the end of July 2006 – it “no longer caters” appropriately for companies at the smaller end of the listed companies spectrum.
Companies are less able to achieve the same “profile” that many were once able to secure, Ms Wynn-Evans asserts with the “pond now being much larger…and the fish substantially bigger”. The Plus executive claims that some corporate advisers she speaks to, advise prospect companies not go to Aim unless they are valued at more than £50m. Therefore, Plus is now is embarking on a path to fill the void.
And, for many entities seeking a listing, Ms Wynn-Evans argues that an Aim listing can prove a “step too far” in terms of costs, regulation and compliance. With the average listing cost for a Plus listing (include adviser fees) being put around £150,000, it not only compares favourably to the LSE Aim route but also for an entity raising £3m to £5m in an IPO it could mean significant savings.
Donald Stewart, a London-based partner at law firm Faegre & Benson, and a director of the Quoted Companies Alliance, says there is “definitely” a modicum of truth to the claim that the requirements of Aim are possibly a “step too far”.
He says: “The average size of Aim companies is getting larger and obviously the larger the high end of Aim companies is, the more it is helping to drag up the averages across the whole index. That said, there are still many Aim companies at the very bottom end. Where Plus I think is pitching its camp…is the £2m to £3m market cap range.” But the “reality” he adds is that the pool of available capital to people who come to Plus is “not in the same league” today as that for those coming to Aim.
The rival platform to the LSE is also receiving “a lot” of interest from companies wishing to understand more about Plus, how they can have their shares traded on Plus and what it means to have their shares traded in more than one venue. And, as all this has happened, institutional investors are “increasingly” supporting companies on their market - something that was not the case under the Ofex market model.
“I think what the institutions have to bear in mind is how the changes in market architecture will affect their day-to-day business,” states Ms Wynn-Evans.
“If you have an investment in a FTSE Fledgling company and you want to track what is happening in the trading patterns or buy more of that stock, then if more than half of that liquidity in that stock is not on your LSE screen but on a Plus screen…one clearly needs a Plus screen to see that complete business.”
Fluid liquidity
She also contends that even though the Plus service might be designed for the use of the retail broking segment, institutions will not be able to ignore the fact that increasingly liquidity will not just be in one venue. “So for their own dealing purposes, they will need to understand the availability of other venues and indeed that liquidity could even shift,” she adds.
Plus now has three services: company services (companies paying for a Plus quotation, corporate advisers who are paying to advise on that market); membership services (providing brokers/market makers with a facility for trading small cap stocks); and, information services (selling data and information to information vendors like Reuters, Bloomberg and Thomson).
Current Plus market makers include six participants such as KBC Peel Hunt, Teather and Greenwood and Winterflood Securities, with 45 brokers having joined Plus as of 10 June 2006. Also 45 broker-dealers had joined Plus (including Barclays, HSBC and TD Waterhouse).
Plus’ move to embark on a fundamental restructuring of Ofex’s model involved changing a ‘matched bargain’ trading, single market-maker under Mr Jenkins to a quote-driven model and competing market markers.
Having built a new trading platform with £2.5m of funding from City institutions in response to customer and member demands, the new system was built in three months and unveiled quietly in the UK market last December. Stock coverage was then expanded in conjunction with market demand since last December to include FTSE Small Cap, FTSE Fledgling, FTSE Aim and FTSE 250 this June (now around 800 companies including the old Ofex).
In Plus’ chosen market segment it claims to have a 15 per cent market share in dealing volume in FTSE Small Cap and FTSE Fledgling (pre-10 June 2006). With all stocks on the same platform, Plus is pushing to get broker dealers to embrace a streamlined membership, that allows trading of Plus-quoted securities (the Ofex name has virtually been dropped due to technical formalities) and Plus-traded securities (the Plus service of securities traded on other exchanges – Aim, small and mid cap).
Though brokers can trade on either segment and Plus-traded has risen 30 per cent, certain upgrades by firms are needed to execute business in Plus-traded securities.
“The only reason we are doing what we have undertaken now in terms of the trading side is in response to market demand,” says Ms Wynn-Evans. “We built a new platform because the customers wanted it and they also paid for it.”
So far there have been no system outages, but as Ms Wynn-Evans acknowledges: “It’s a simple quote driven model...we’re not talking about a fantastically expensive platform that will reduce latency from three milliseconds to one. Milliseconds don’t matter to retail investors.”
Investors can now see a market through two market screens: one on Plus and another on the LSE’s SETSmm. Plus also restructured the market (Ofex) from top to bottom as it was “predicated on the wrong business model” that failed to meet the needs of the companies or investors, and introduced a new rulebook.
Since launch, Plus has seen over 209,000 trades with a value of over £1.26bn, with some 800 companies now admitted to trading across three market segments (Plus-quoted - i.e. old Ofex, Plus-traded unlisted and Plus-traded listed).
Kicking off
Just prior to installing the new system, Plus witnessed a turnaround in primary market listings from mid-2005, thereby arresting a five-year decline. Today there are around 162 Plus-quoted companies including the likes of Arsenal football club, as of 19 July seven more companies were in the process of applying to join with 67 companies having joined between January 2005 and that latter point.
Plus has two sets of customers: on the primary market it offers an alternative to companies where Aim is “a step too far” for smaller companies, while on the secondary market side it offers an execution and trading reporting venue primarily targeted at the private client broking community.
Private client brokers now have a choice of two execution venues (and two screens) for small caps: the LSE’s SETSmm for Aim and Plus. And, with the British chancellor having made some changes in his spring budget to VCT rules he has effectively“restricted” fund raisings in which VCTs are getting involved to around the £2m to £3m fund raising level.
Plus’ Wynn-Evans asserts: “Fund raising at that level isn’t practical today on more senior markets…but is on Plus. The practical impact should be an increased channeling of VCT money onto our market and away from Aim.”
Donald Stewart, Faegre & Benson
