Multilateral trading facilities (MTFs) looking to diversify into small- and mid-cap stocks will find the going tough, according to Simon Brickles, CEO of UK stock exchange PLUS Markets.
Their trading technology tends to be geared to more liquid stocks, he argues. “In general, MTFs’ systems are not suited to trading small and mid-caps,” he says. “Most of the new entrants are concentrating on the top 350 stocks in the UK. Once you get below that, the nature of liquidity alters.”
The order sizes in less-liquid names are smaller, the stocks are traded less frequently, and there is a higher proportion of retail trading, Brickles argues. “One of the reasons we have done well is that the London Stock Exchange was putting more and more stocks on its hybrid order book system, and that is not necessarily appropriate for all types of securities,” he says.
PLUS focuses on the UK small- and mid-cap segment, and almost all the trading on the exchange is retail. But the exchange is hoping to attract more institutional business by launching two initiatives – the PLUS Pool and the PLUS HQ hittable quotes board – in Q1 next year.
The PLUS Pool will be a dark pool for trading small- and mid-caps stocks, which Brickles says will be the only venue of its kind. “The value of a dark pool is more apparent in the mid-cap than the large-cap space,” he says. “Day-to-day volumes tend to be smaller and retail-based, but periodically somebody will execute a disproportionately large order, which can move the market against them.”
Brickles estimates that average trade sizes in the FTSE Fledgling Index, which comprises very small UK listed companies, are generally between £2,000 and £5,000, but trades of £250,000 and £500,000 occur periodically if, for example, a hedge fund or small-cap fund takes an interest in a particular stock. “If you are able to put that larger order in the PLUS Pool, you will be able to trade without moving the market against you,” he says. “Just about every serious institutional trader or broker at some point is dealing in the small- and mid-caps, and therefore the PLUS Pool is something they need.”
The PLUS HQ initiative aims to capitalise on the retail trading in liquid stocks that already takes place on PLUS. The exchange attracts large volumes in certain large-cap stocks that have a lot of retail interest, such as high street stores and banks, when significant event or news affects these firms. In October, for example, PLUS captured 12.74% of the trading in UK bank HBOS.
With PLUS HQ, trading in large-cap stocks will shift from PLUS’s quote-driven market to a new hittable quote board, which enables institutional orders to interact with the retail flow on PLUS electronically. “The good solid foundation we have got in retail is drawing in the big players,” says Brickles. “We don’t have the bridge between retail and institutional trading at the moment, but PLUS HQ and the PLUS Pool provide that.”