Anthony Hilton: Set AIM free from a London Stock Exchange deal

Stock exchanges weren’t invented so that a load of hedge fund managers in Geneva could take a punt on the success or otherwise of Abenomics in Japan or Brexit in London, or the likelihood of Donald Trump getting elected in the US.

It was never the intention or within the imagination of the founding fathers of these exchanges that we would arrive at a world in which overwhelming amounts of global capital would switch on a daily or even hourly basis between equities and bonds, in what is known as a risk-on/risk-off trade, depending on whether the current mood about the global economy was positive or negative.

Exchanges were developed to make it easier to move money from where it was to where it was needed — from savers looking for somewhere to invest their capital to entrepreneurs looking for finance to start or develop their businesses.

The experience thus gained created an understanding that a dynamic properly functioning stock exchange has a large part to play in creating a dynamically functioning economy whose ownership is concentrated not in the hands of an elite but throughout the wider population.

This original intention is too often forgotten these days, not least by many of those working in the business.

The primary capital-raising function of exchanges has long since been dwarfed by what one should think of as the second-hand market — the buying and selling of existing assets. This tail not only wags the dog, it has almost become the dog.

It is instructive that in all the words written about the proposed merger, announced last week, of the London Stock Exchange and Deutsche Börse, its German equivalent, the comment has been entirely about the synergies to come from combining the activities of the two groups in financial futures and other derivatives, clearing, netting, index products and so on, the better for the big international fund managers to deploy the capital under their control. Cash equity markets, the original purpose of the exchanges, barely gets a mention.

This is in stark contrast with what happened on the two occasions, one each side of the turn of the millennium, when this Anglo-German combination was previously proposed. A major focus of debate then was whether the combined business would continue to meet the domestic needs of British companies seeking capital.

The consensus view, particularly among those brokers and fund managers who focused on the needs of small to middle-sized companies, was that it would not.

Of course, things were different then because back in those days the leading investment banks, the big accountancy and law firms, the broking community and the media all took AIM seriously. They appreciated the role it and its predecessor, the Unlisted Securities Market, played as a provider of capital and a nursery for growing business.

Business was better then, too, because markets were also largely free from the over-protective regulation of today which makes it ever harder for the investing community to put clients into small, more exciting companies that nanny considers too risky.

Accordingly, on the first occasion it was proposed that while the international business of the stock exchanges should go ahead and link up, it was suggested by Brian Winterflood and others that a new domestic stock exchange should be spun off to meet the needs of domestic companies and investors. Second time around, a group including the still-active Stephen Hazell-Smith actually sought to create such an exchange with the launch of what was called Plus Markets.

On the first occasion, the bid went away so the domestic exchange option was not pursued. On the second, once the bid was defeated, it rather pulled the rug from under Plus Markets, which tried relatively unsuccessfully to differentiate itself from Aim. As a result, it never really got traction although the core business — now called ISDX — still trades on within Michael Spencer’s Icap.

So the big question is what will happen this time? It is commonplace to say these days that companies no longer raise equity through the stock market, a point highlighted by Professor John Kay five years ago in his Government-commissioned study of markets. But while this is largely true of big companies that have access to the bond markets and find it easy to issue debt, it is not true of the small to medium-sized businesses to be found on Aim, or which are aspiring to join that market, and which we are constantly told are the most dynamic part of the economy.