Interesting Money Week article on AIM22 Nov 2024 08:56
Money Week notes of 60 companies that listed on AIM in '21, just 6 are now in positive territory.
It goes on to say -
"Until the introduction of the LSE’s Stock Exchange Electronic Trading Service (SETS) in 1997, all UK stocks were traded under a quote-driven system. This meant that when an investor wanted to buy or sell, they asked for a quote from one or more dealers (known as market makers) and traded with them if they accepted the price. SETS is order-driven, which means that the price and quantity the investor wants to buy goes into an electronic order book and is matched automatically with other investors if somebody is willing to trade at the same price, without the need for a market maker.
Electronic order books like SETS work well for liquid, large-cap, high volume stocks. However, when the system was introduced for the main market, the quotedriven Stock Exchange Automated Quote (SEAQ) system was retained for smaller, less liquid stocks such as those on Aim.
SEAQ has now mostly been replaced with SETSqx, which is a hybrid system, but mainly driven by quotes from market makers. (SEAQ is still used for bonds.)
UK stockbrokers earn very little from commissions – they make most of their money from other fees and from interest they retain on customers’ cash balances. However, Aim market makers enjoy significant revenue from market making with wide bid-offer spreads. It’s hard to know just how profitable a business this is, as most brokers don’t split out market making in their results. One exception is Close Brothers, the bank, which owns the market-making business Winterflood, which reported revenue of £73m last year. It was not able to make a profit on that revenue due to unfavourable market conditions, but a couple of years earlier in the more bubbly conditions of 2021, it had £182m of revenue and £61m of profit.
In theory, Aim’s SETSqx system allows investors to deal in illiquid stocks with lower volatility. Quote-driven systems have the ability to absorb more orders, because market makers are obliged to quote up to a certain size. However, it is not unusual to see Aim stocks quoted with bid-offer spreads of 5% or more, which puts off investors who can see the tighter spreads on larger, more liquid stocks.
In the past, better pricing – “dealing inside the spreads” – could be got by picking up the phone and asking the broker to contact the market makers. It is likely that Aim’s structure could be improved with a matching engine that improved liquidity and narrowed bid-offer spreads. However, the current system generates revenue for market makers, and they don’t seem convinced that the benefits of higher liquidity outweigh the almost free money they earn from quoting wide spreads."
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