Is it or isn't it a bear market? Perhaps that's not the question, but rather whether a young, new stock exchange in London like PLUS Markets Group can survive the volatility that's been seen in the stock markets in the past few months.
Ask these questions to PLUS's director of business development Nemone Wynn-Evans, however, and she does not flinch.
“Many people would look at current valuation levels in London today and say that we were in a bear market,” said Ms Wynn-Evans. “Indeed, many people would look at the smaller end of the London equity market and say that it has been in a bear market since the end of last year.
“From our perspective, our business model is very robust and it is arguably well-suited to a bear market. We believe that even if there are difficult financial conditions ahead, our business model is set up to capture market share both in terms of liquidity and also London listings.”
While PLUS is looking to maintain strong levels of liquidity, it is seeking to capture a larger market share of what is available in the small to medium-size capitalisation company sector.
Indeed, what's important to PLUS Markets is not whether the cake is getting bigger in a bull market or smaller in a bear market, but how big the slice of cake that PLUS can get, said Ms Wynn-Evans. “We are capturing market share and we are now an established pool of small and mid-cap liquidity, competing credibly against other trading venues. In addition, there may be other business areas in which there is customer demand for us to compete.”
Taking on the LSE
PLUS Markets, which became a fully-authorised stock exchange last year, considers itself a direct competitor and ideal alternative to the giant London Stock Exchange – a historic monopoly – for small-to-medium-size enterprises. Although commentators have often likened PLUS to the LSE's AIM market, PLUS doesn't limit its competitive ambitions just to AIM, said Ms Wynn-Evans.
Ms Wynn-Evans realises that it's no mean feat to take on a well-established competitor such as the LSE. However, she said, “Not so long ago if you wanted to fly from Britain, there was only one airline you could book and that was British Airways. If you wanted to make a phone call, you could only use British Telecom. Now there competitors for air travellers and phone users, and in the business of trading and listing equity in London, customers now have a choice of equity market providers.”
The exchange received “Recognised Investment Exchange” approval from the U.K.'s Financial Services Authority in July last year, prior to the implementation of the European Union's Markets in Financial Instruments Directive (MIFID) in November, which dismantled competitive barriers of existing stock exchanges across Europe.
The growth of PLUS trading activity in recent months has been impressive. For the first two months of 2008, over 750,000 trades worth over £5.8 billion were executed on PLUS, and trading activity remained strong while other markets saw falls.
The average daily number of trades on PLUS exceeded that of other small and mid-cap markets such as AIM, while PLUS captured over 50% of all UK retail trades for the first time in January. Over 600 small and mid-cap companies now see the majority of their trading taking place on PLUS, of which over 400 companies are listed or quoted on other markets.
Due to the low cost of listing, observers say that the PLUS-quoted market attracts companies with an average capitalisation of up to £25m and an associated placing/fundraising of around £5m.
As of February 2008, there were 220 companies on the PLUS-quoted market, and in the first few months of the year, 10 companies have already joined PLUS-quoted. Significantly, double the funds were raised by companies on PLUS in 2007 over the previous year. In 2008 to date, fundraising activity remains strong, with an increase of 17 percent total funds raised in the first two months of the year to £9.9m.
Attraction of PLUS for investors
Perhaps the biggest attraction of PLUS to investors and companies alike is its reduced execution and listing costs compared to accessing other markets such as the LSE, which is why PLUS may be even more attractive in a bear market.
In particular, PLUS's trading income is not based on execution fees like it is for the LSE and just about every major stock exchange in Europe. Instead, PLUS uses the US exchange model where execution fees have eroded away to nothing, and traders and exchanges make their money on selling the data from their markets.
So, for every trade on the LSE, there is a fee. “That isn't necessarily the case on PLUS, so the importance of execution fees linked to absolute trading levels is much less critical on PLUS. Our business model is predicated on capturing trading activity, through offering best execution opportunities at low transaction cost, and then selling our proprietary market data cost-effectively,” said Ms Wynn-Evans.
From a listings perspective, there are two markets which companies can access via a listing or quotation on PLUS, she added:
“Our PLUS-quoted market is designed to cater for smaller companies who are seeking an appropriate market on which to raise smaller sums of money,” said Ms Wynn-Evans. “In more challenging market conditions, you find that smaller IPOs of well-run companies can still raise small amounts of money from specialised small cap funds, where larger IPOs dry up completely. While other markets across Europe are reporting difficult times for IPOs, we have never been so busy. We are attracting companies through our door who still want to take a step onto a public market, even in turbulent financial conditions. They're finding that other markets are too expensive; they don't need to raise large amounts of money; and, indeed, current market conditions suggest that they probably couldn't anyway. But a market like ours can still provide a home for those businesses and a platform for their future growth.”
Considering PLUS's business model, Ms Wynn-Evans is not concerned about potential rocky times ahead on the stock markets worldwide. “We do not fear a bear market. We are confident in the attractiveness of our offering to investors and companies seeking access to small and mid-cap liquidity and capital in London, the heart of the world's financial community.”