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Margareta Pagano: Why the Stock Exchange’s new boss should sell AIM

It’s an open secret that Oliver Hemsley — one of the City’s most successful stockbrokers — is the favourite to buy a controlling stake in the Nex Exchange, the mini-stock market owned by Michael Spencer’s Nex Group, itself about to merge with the Chicago Mercantile Exchange.

Hemsley wants the Nex equity cash market to use as a platform to create a small companies exchange to rival AIM, the London Stock Exchange’s junior market.

It’s a great move — AIM needs competition as there is no earthly reason why the LSE should have a monopoly on raising capital for small companies, or indeed big companies.

Yet Nex Exchange, which was formed by Spencer when Icap bought PLUS Markets six years ago, is a tiddler, having never achieved the scale that was hoped for. Although it has a couple of high-profile listings such as Arsenal, Nex has 85 listed companies compared with AIM’s 1000.

Here’s a more ambitious idea for Hemsley to consider: why doesn’t he take aim at AIM?

The recently retired founder of Numis Securities is just the sort of entrepreneur who could put the much-needed risk-taking spirit and oomph back into the LSE’s growth market.

Hemsley would be more than welcomed by the City small-cap fraternity, having turned Numis into a £400 million business and positioning himself as one of the UK’s most influential brokers to mid-sized companies, for talk is getting louder by the day that AIM is chuntering along in second gear.

Critics claim that a fresh spirit is needed for a shake-up. They want new ways for private investors to get better access to research — as Mifid II is blocking brokers from sending out research in the way they used to — and more practical rules to improve the Nomad system.

Indeed, some City institutions and investors have been so fed up with AIM’s performance that they have tried already to prise it out of the exchange. They made an offer to the former LSE chief executive, Xavier Rolet, to buy AIM during his merger talks with Deutsche Börse, on the grounds that if the deal were to go through, AIM would be an irrelevance to the giant £21 billion new exchange. But the failed merger — and Rolet’s dramatic departure — put paid to those discussions for the time being, although I hear there are still plots being laid.

Those who have done the numbers say AIM — which represents only 0.8% of LSE revenues — would cost about £10 million to buy. Without the LSE’s overhead allocation structure, it could even make a profit in its first year of independence.

The LSE has a new boss in David Schwimmer, the Goldman Sachs banker who takes over in August, so the timing could be propitious for another bite. Hemsley — if not the original bidders — should persuade him that AIM will remain under-resourced so long as it is controlled by the LSE.

How would the exchange respond to such a bid? No doubt the board would claim the 21-year-old market hasn’t done too badly. That it has raised £98 billion of new capital, is the biggest small-cap market in the world and is essential to grow the next generation of UK plc companies.

They would be right in many ways. But so are those who want AIM to be independent, arguing as they do that the LSE hangs onto the market more as a PR stunt to show politicians they are helping small-caps than because they have made a commitment to it. Although it’s fair to say that under Rolet’s ancien régime, LSE persistently lobbied Westminster and succeeded in getting important tax breaks.

By contrast, Schwimmer, who has been advising exchanges from his New York base, will have bigger fish to fry than championing SMEs. He has to position the LSE ahead of the next wave of competition among the world’s exchanges, and to adapt new technologies such as Blockchain which have the potential to revolutionise trading and settlement.

Today only a third of LSE revenues come from capital markets; the rest is made from the post-trade services, technology and information business so integral to 24/7 international electronic trading. Letting AIM take flight would show that the LSE is being true to its primary function — raising capital and letting others have skin in the game. It could also launch another exchange.