Small caps need special attention in UK market overhaul
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The UK is embarking on the biggest shake-up of stock market regulation in 40 years.
The changes aim to attract the type of blockbuster IPOs that London lost out on, as well as retain its large global companies. Dual-class share structures and a more relaxed attitude towards executive pay might help.
But UK markets will need more than just a few new whales to get back on top. Small and medium-sized stocks are suffering a worse malaise. And as attention is lavished on attracting and retaining the biggest companies, this growth engine is at risk of being overlooked.
Junior markets such as London’s Aim should be humming. But companies are disappearing from Aim at a faster rate than they are from the main list. Warnings, such as from Steven Fine of Peel Hunt, about the risk of the segment’s eventual collapse should not be taken lightly.
AIM has lost more than 100 companies since the start of 2020 or a decline of about one-fifth. The FTSE All Share has a tenth fewer companies in that period. Contrast that with the US, where the Nasdaq has gained about 600 new companies, up about a quarter over that time.
Two obvious differences across the Atlantic are greater competition between US exchanges and the higher number of retail investors there, says Alasdair Haynes, who set up Aquis Exchange as part of an effort to remedy the first problem in the UK.
Both go some way to explain the better liquidity in US stocks where bid-offer spreads are well below 1 per cent of the bid price on average for both large and small-cap companies. That compares with similar spreads for UK large caps and about 5 per cent on average for Aim-listed companies, according to LSEG data.
The Aim market, which benefits from tax breaks, has a higher share of retail investors than the main list. An overly high proportion on a share register can sap liquidity, because they tend to demand instant execution on small, frequent trades. Institutions are happy to wait longer for larger trades.
For small caps, better price discovery can come from increasing the proportion of slower-moving institutional money in the mix. That contains price moves and narrows spreads, thinks the World Federation of Exchanges. Getting more UK pension fund money to back domestic stocks of any size is going to be tricky enough. Special measures will be needed if London’s renaissance is to include a small-caps revival.
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