Britain’s small-cap sector is collapsing

The City has been full of rumours during this last week with the names of possibly three small-cap brokers which may not survive the winter. One is expected to fold before Christmas. A senior corporate financier told me that their phones are ringing every week with firms wanting to be bought out.

There is a dearth of new business, very little successful fund-raising and ever increasing regulatory demands and costs.

The Adam Smith Institute, in a damning report on the new financial regulatory structure, said that the Financial Conduct Authority (“FCA” – the successor to the Financial Services Authority) shows “no sign of understanding markets and plans to busy itself interfering in City businesses.” The Institute suggested that the FCA should be terminated which will not happen and would be too late to prevent the carnage in Britain’s small-cap financial sector.

One wonders whether anybody really cares. This was brought home by the lack of press reaction to the announcement put out by ICAP, the rescuers of PLUS Markets. Their new ICAP Securities & Derivatives Exchange (“ISDX”), the old PLUS trading facility housing around 150 companies, is going to –

  • try to improve liquidity by adding Peel Hunt and Shore Capital as market makers. This is unlikely to add anything. There was no real detail except an ominous reference to the ‘largest stocks’. Winterfloods covers those stocks anyway. It is possible that perhaps 120 stocks, even more, will remain illiquid as the market makers refuse to take positions.
  • there is to be a new admissions framework (in 2013) to ensure stricter common standards.

This demonstrates that nobody involved with ISDX has ever done a deal on the Market. PLUS was over-regulated if it was to serve its true role as a feeder market to AIM. One presumes that ISDX sees itself taking on lower AIM. But that could provoke a price war which increased regulation does not permit. What a muddle.

ISDX is part of the capital markets which is the real purpose of a trading platform: to raise capital. There was no concrete information on how ISDX will offer access to sources of equity funding.

On 13 November 2012 the Group members will be signing off ‘The Drury Report’ which carries ten recommendations for the consideration of Government on how the small-cap sector can be revived and make its contribution to the revival of the UK economy.

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