Small caps: LSE offers research

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By:
Peter Koh
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The London Stock Exchange is launching a service to provide research coverage for the small-cap stocks listed on its main market and on junior market AIM.

The research, available on PSQ Analytics, as the venture is to be called, will be provided by three independent research houses: Argus Research based in New York, Independent International Investment Research based in the UK, and Pipal Research based in Chicago. The three providers will work together to produce standardized, high-quality, cost-effective equity research according to an agreed template and will be distributed, free of charge, on Bloomberg, Thomson Reuters and a dedicated web portal in order to reach the widest possible audience of investors.

The service, with a target audience of about 1,000 companies, will be fully ready by the autumn. Companies that wish to benefit from the service will pay £10,000 ($19,800) a year to be covered by one of the research houses, opening up research to companies for which current market offerings are not economic. The exchange itself will not make any revenue from the venture, which it says is solely for the benefit of the market. The nature of the coverage will be fairly basic and not include any investment advice or recommendations.

"The exchange supports a huge diversity of smaller companies that are competing to attract investor interest," says Martin Graham, head of Aim and director of equity markets at the LSE. "Equity research is a key tool to allow them to get their message heard. The market feedback we have received demonstrates that there is huge value for companies in this scheme. By paying for research to complement the services already provided by brokers and other research firms, companies can increase visibility and understanding of their stock, leading to a wider investor base and ultimately enhanced liquidity."

An improvement in the quality of the market in small-cap stocks is becoming an increasingly important issue in London, where small-cap brokers have become increasingly dissatisfied with wide spreads and the LSE’s perceived neglect of the retail brokerage community.

Rival exchange Plus Markets has gained a significant share in small-cap volumes by targeting smaller brokers with an advanced quote-driven trading platform suitable for illiquid stocks and lower fees.

Plus now claims to consistently attract a market share of at least 50%, by number of trades, in almost 400 small-cap and mid-cap LSE companies. It also claims 55% of the trades in 225 FTSE Fledgling stocks and 40% of the market by volume in the 80 AIM stocks that it trades.

Chi-X, the pan-European MTF targeting high-volume traders with an ultra fast, ultra cheap platform, has also made significant inroads in more liquid stocks, claiming a peak 13.8% market share in FTSE 100 trading and over 30% of the volume in particular stocks on some days.

This May, the LSE reported pre-tax profits up 22% to £311.6 million but warned that client business was slowing down. The LSE has also been hit by a fall in the volume of IPOs in London, which fell over the past financial year from £53.7 billion to £38.1 billion.