Tag Archives: AIM

Episode 12. ‘The High Temple of Capitalism’



Some stories incarcerate, others emancipate. This episode explores the founding of the London Stock Exchange’s junior market, AIM. It follows the narrative of UK plc, exploring how it shapes the Exchange’s actions. We hear how the story slowly changes into something different, a vision of the market as the high temple of capitalism. We find out how the market makers and advisors lobbied successfully to maintain their advantages in the market. Despite all this, I suggests that we might find in the AIM story some germ of emancipation: a new way of understanding how a financial market could look.

Transcription

‘Some stories,’ says philosopher Richard Kearney, ‘congeal and incarcerate, others loosen and emancipate.’[1] But what does what? The task confronting the critically-minded citizen is precisely this, discovering which stories fall into which category; coming to know, as Kearney more colourfully puts it, whether ‘the voice I hear in my tent is that of the love of God or of some monster’. Perhaps we needn’t go that far, but Kearney has a point: stories are powerful and power-filled. They have a life of their own. They break free of their originators and travel, enrolling networks of support through which they might confront and dispatch lesser adversaries. It’s too much of a stretch, perhaps, to claim that stories have agency, but they certainly do things. Just look at the stories circulating in contemporary British politics: narratives of heroism, plucky Britain, a nation defined by a pugnacious smallness, continually punching above its weight. Every time you see someone dressed as Richard the Lionheart, stood outside Parliament and clutching a placard, you recognize the story at play. Does it incarcerate or emancipate? I’ll leave that up to you…

For a professional social scientist, this is just part of the job. Setting out to collect oral histories is setting out to deal with such a problem. As Kearney says, it’s hard to tell, and perhaps it’s best not to try. One cannot hope to provide an absolutely objective history: better to give the voices space to speak, and guide the listener through the result. We must look beyond the surface, catch hints and glimpses. When I investigated the 1995 formation of London’s junior market, AIM, I encountered the same story over and over: how European regulations forced the closure of London’s Unlisted securities market, pointing a knife at the beating heart of UK plc; how a plucky band of campaigners forced the Exchange to the negotiating table and demanded a replacement; how AIM arrived and has been the champion of British business ever since. This story is a fairy tale, as I showed in the last episode. The LSE was provoked by innovations from elsewhere, moving to shut down a rival market that was taking hold in the shelter of its own regulatory umbrella. The received story made no mention of this rival, dismissing its founder as a peripheral player, too small a fry for the big fish to worry about.

Some stories congeal and incarcerate, others loosen and emancipate; a story might provide access and shelter for some, yet slam the door against others. We must be alert not only to the facticity of a story, but also to its consequences.  When I probed further, I found in the accounts given by these men the faint traces of a woman. Named Theresa Wallis, she had been at the centre of things, she had got matters sorted, and then slipped quietly away out of the narrative. I’m sure she won’t mind me saying that she had something I suspect the men didn’t. She had faith: she believed in UK plc, she believed in the story, and that belief allowed her, in the words of one interviewee, ‘to walk through walls’. For Theresa Wallis did manage to start a stock exchange, and her design has become the model for a generation of imitators worldwide.

Hello, and welcome to How to Build a Stock Exchange. My name is Philip Roscoe, and I teach and research at the University of St Andrews in Scotland. I am a sociologist interested in the world of finance and I want to build a stock exchange. Why? Because, when it comes to finance, what we have just isn’t good enough. If you’ve been following this podcast – and if so thank you – you’ll know that I’ve been talking about how financial markets really work, and how they became so important. I’ve been deconstructing markets: the wires, and screens, the buildings, the politics, the relationships, the historical entanglements that make them go, all in the hope of helping you understand how and why finance works as it does. In the second part of this podcast series, I’ll be looking at the stories we tell about the stock market. You might be surprised how much power stories have had on the shape and influence of financial markets, from Daniel Defoe to Ayn Rand. I’m trying to grasp the almost post-modern nature of finance, post-modern long before the term was invented, the fact that finance is, most of all, a story. Start-ups are stories, narratives of future possibility; shares and bonds are promises based on narratives of stability and growth. Even money is a story, circulating relations of trust written into banknotes, credit cards and accounts. Stories set the tone, make the rules, determine what counts and what does not. A good stock market needs a good story, so if we’re serious about rebuilding financial institutions then we need to take control of those stories.

I began the last episode with a bit of nostalgia, looking back to the late 1990s and the wild excitement of the dot-com era in a London that had yet to be gentrified. That was on the way, of course. Financialization, the steady drift of profit-making into the financial sector that took everything else with it, transforming the capital into the steel and glass metropolis we know today, began in the 1980s. For many critics, it hinges on the Big Bang of 1986, when the City’s floodgates were thrown open to global capital flows. But the game certainly wasn’t over all at once, for the 1990s began with a valiant and genuine attempt to use financial markets for their stated purpose: the raising of capital for small and growing businesses. That was the remit of AIM. Like almost everything in this story it worked out in an accidental fashion. AIM created the world I had stepped into, and if we going to understand how that world took shape, we need to step back in time a little and investigate the formation of the market itself. If we want to know how to build a stock exchange, we should look how others have done it already.[2]

Just to remind you, AIM – or The Alternative Investment Market – is the London Stock Exchange’s junior market. Junior means that it is aimed at smaller, younger companies, and that it is easier for firms to get onto. The taxman treats companies listed on AIM as if they were still privately held, conferring certain tax advantages on shareholders. That is a reward, in theory, for risking their money in earlier stage ventures. You will remember from the last episode how a similar market called the USM had operated successfully throughout the 1980s but had been closed when the recession of the early 1990s stripped away demand and the Exchange’s bureaucrats tired of the administrative burden. Remember how a gang of important players within the USM world got together and founded a lobby group to pressure the LSE into establishing a replacement market.

The venerable London Stock Exchange was, by 1993, looking a little bit directionless. Big bang had broken up the trading floor and the LSE’s physical monopoly on the profitable business of market making. The jobbers, specialised traders who had evolved alongside the Exchange over 200 years, were suddenly gone. The LSE had been embarrassed by a huge and expensive IT fiasco, which resulted in the loss of its settlement function and the resignation of its chief executive. It had long operated as a membership organisation, owned by its members – a mutual – but this structure  had become deeply unfashionable and often gave rise to unacceptable conservatism in the Exchange’s rules and management decisions._

Its business proposition was moving from regulation towards the more nebulous provision of exchange services and data sales, but any firm could do this. The LSE was a national institution, but why? What made the LSE special?

Michael Lawrence, the new chief executive, clutched the lifeline that he had been inadvertently thrown by those campaigners touting the interests of UK plc. This was exactly what the Exchange was for: growing Britain as an entrepreneurial nation, not just in London but across the English regions, in Scotland and Northern Ireland! It would be pushing at an open door, for business-folk and policy-makers outside of London had also begun to believe that the financing of entrepreneurial businesses might offer a remedy to the economic collapse that followed the rapid de-industrialisation of the late 1980s. Lawrence saw an opportunity to fill the void left by the closure of regional stock exchange offices in the 1970s and 80s, and reckoned on an nationwide demand. ‘These smaller companies,’ Lawrence would say, ‘these earlier stage companies are not going to be walking about the City of London, you know, they’re going to be in the UK regions.’ There was money in the regions and received wisdom held that local investors preferred local businesses: ‘One of the things I heard and learnt when I first came on with the role,’ says Wallis, ‘was… investors, when it comes to small companies they’d rather invest close to home where they can go and visit the companies and they look them in the eye and all that sort of thing.’ The vision of all this lonely money and all these needy businesses would have set even the most stony hearted of financial middlemen trembling. At the heart of Lawrence’s seven-point plan for the revival of the London Stock Exchange was a proposal to transform the problematic Rule 535 over-the-counter market into a vibrant cash-raising facility for the entrepreneurs of UK plc: a strategic masterpiece dealing with the LSE’s biggest worries in one single movement.

And so began the slow process of talking this new market into being. Lawrence recognized that a new approach to listing would be vital, and that, in the conservative institutional culture of the LSE, this would require an entirely new team. The success of NASDAQ was credited in part to its independence from the New York Stock Exchange – it’s a completely different organisation, of course – but the LSE sought to imitate this independence, and thus NASDAQ’s success, within its own institutional setting. Lockheed – the aeroplane manufacturer – is famous for its ‘Skunk Works’, an autonomous group of engineers given freedom to go and create super-cool new things, notably the Blackbird spy plane.[3]

The model has been trotted out by business school gurus ever since as a successful tactic for developing innovation in big organisations, and Lawrence took a similar approach, though I doubt whether he did so consciously. He put a young and little known executive called Theresa Wallis in charge of a working party with a brief to think about listing in a completely new way. Wallis had already demonstrated her management – and marketing – skills at the Exchange by developing the Eurobond listing activities to match the customer-friendly, turnkey service offered by the Luxembourg Stock Exchange. A pivotal figure in this history, Wallis’ efforts have never been fully recognised, though it is clear she displayed a remarkable energy and competence in making the market happen. She had been instructed to ‘walk through walls,’ said one intervewee, ‘and she did’. Another described her as an ‘incredible leader, a team player, politically aware… phenomenal… it was a blessing to be working with her.’

Wallis was, as I have said, a believer. She was, she says, ‘inspired by the ability to [do] anything that can help the UK economy and can help… helping smaller companies grow, helping the UK economy.’ She was generous in her retelling of the market’s foundation, emphasising how much support the working group received from the rest of the Exchange; she remembers colleagues with deep expertise in listing practices and regulations and the minutiae of running an exchange, while her own team fizzed with excitement and a real commitment towards helping the British economy. Wallis and two colleagues sketching on a flip-chart came up with the ‘Alternative Investment Market’ name, while Lawrence subsequently suggested with the brand abbreviation. At the same time, the new market could make use of the LSE’s expertise, infrastructure, and prestige. ‘The Stock Exchange,’ says Simon Brickles, one of Wallis’ team and subsequently head of AIM,  ‘knew how to operate markets, it had got the facilities, it had got the people, it had got the resources, and it had got the prestige.  On the other hand, I became convinced that AIM could have its separate values, its own separate rules, its own separate problems, opportunities and so on and that was Michael Lawrence’s vision.’

A stock exchange is a bundle of wires and screens. But it is also a community of trust, shared expectations and commitment to certain norms. The LSE already possessed the former, so the team set about building the latter through an extended and iterative conversation with future participants. They sent out a consultation and the responses drove the construction of the new market. As responses were received they were distributed among the small team, reviewed, and discussed at a morning meeting. Megan Butler, then a young lawyer at the LSE (now Director of Supervision at the FCA) advised the group on developing the Rulebook and regulatory compliance. The team had to manage such technical issues, often with the support of the community from beyond the Exchange. But most of all, the new market had to be talked into being. Martin Hughes, a young executive on secondment to the team from Scottish Enterprise with the responsibility of promoting the market north of the border describes the process as, ‘Knowledge building, consensus building, to inform an emergent model…a continuous iterative process….It was all about the market, getting to understand it, and that engagement.  You could tell that the relationship was very close.  You could tell that it was understood why it was important…there was never anyone who was not willing to engage properly, and think about it.’ The consultation documents, responses from the community, follow-up telephone calls, meetings, or conversations over dinner, held to a steady pace by the Exchange’s somewhat pedantic and bureaucratic routines, slowly wove a market from threads of narrative and conversation. As a place of collective trust, recognition and expectation, the market was performed, acted out, spoken into being by the narratives and conversations that underpinned it. These in turn were held together by a shared commitment to the wonderful institution of UK plc.

But there was still battles to be fought, turf wars over who would enjoy the benefits of this new market. Would it be UK plc, really? Within the discourse of entrepreneurial team GB there was still plenty of scope for arranging the trading mechanisms in as comfortable manner as possible. As Brickles says, the LSE already knew how to operate markets. It already had the structures, the trading institutions and the technology. These, as we saw in previous episodes, had developed throughout the previous two decades pushed by reforming technologists and regulatory changes. One of the things that these technologists had achieved, according to the sociologist Juan Pablo Pardo-Guerra, was the institution of electronic order book trading across the LSE. Under this arrangement, buyers and sellers are automatically matched, cutting out the need for the expensive market-making middleman. The technologists saw themselves as visionaries pursuing a better kind of financial market that used technology to deliver efficiency, narrow prices, and to offer the eventual customers (investors) a better deal. Scholars like Pardo Guerra and Donald MacKenzie have shown that motivation at work throughout the technological development of digital markets; in this instance it was a rival firm called TradePoint that forced the LSE to adopt order books and disenfranchise the market-makers.[4] (Much of today’s episode comes from my own research, but as always full references are provided in the transcript on the podcast website.)

The alternative to an order book market is a quote driven market, where market makers offer buy and sell prices and make their money on the difference between the two. The more market-makers competing to offer prices in a single security, the narrower those spreads will be. With only a small handful of market-makers, Winterflood Securities pre-eminent among them, the USM had been a quote driven market and a comfortable one, with ‘spreads wide enough to drive an 18 wheel truck through’. The justification offered was always that that less liquid markets – those with fewer buyers and sellers – required some kind of intermediation in order to make transactions happen. Ironically, for even less liquid stocks order books become useful again, as market makers do not want to hold stock they might not be able to sell. John Jenkins’ notebooks, taking lists of potential buyers and sellers, were a version of order book market, but one that combined intervention as well – will the seller take 990 as opposed to a thousand, will the buyer be able to offer a 990 instead of 980, and so forth. At the more liquid end of Jenkins’ Rule 4.2 operation, however, his firm was offering quotes as a market-maker, and the community could see that this model could form the basis for the new market. There was no need to reinvent the wheel. ‘Here was a group of companies,’ says Andrew Buchanan, a small company-focused fund manager, ‘in which there seemed to be some perfectly reasonable trading activity but no obvious mechanism. And yet the lack of a mechanism didn’t seem to inhibit the liquidity in the stock.  So what was the problem?  They could build on 4.2 to make it a reasonable market, a quote-driven market place…’ Within the LSE, Wallis’ team had arrived at the same conclusion, proposing that they would re-regulate Rule 535.2 (as it now was) to an acceptable level, playing out the strategic objectives of the seven point plan.

The market-makers held onto their turf, for now at least.

A secondary problem concerned the kind of companies that might be listed on this new market, and who would take responsibility for them. An onerous admission process handled by the LSE’s listing office seemed out of step with the UK plc narrative and the entrepreneurial aspirations that it embodied. How could the companies of the future raise funds with some worried regulator peering over the shoulders of potential investors? Again, the new market took the success of Rule 4.2 as a model. It would be a market based on caveat emptor, buyer beware. ‘Private investors,’ said Wallis, ‘investors who are buying on Rule 4.2 don’t seem to mind – it’s very much a caveat emptor market – don’t seem to mind that it’s not regulated. They know what they’re going in for. Maybe this is going to be the solution, [if] we build a market around what was Rule 535.2 dealing.’ And here we begin to see the story changing: no longer simply about UK plc, but also about freedom of choice and the appropriate role of regulation in a capital market. For the neoliberal, of course, the role of regulation is not to protect consumers but allow them to protect themselves through freedom of choice, and that’s exactly how Brickles tells it: ‘I don’t think [heavy regulation] is the business of a Stock Exchange, we should be the high temple of capitalism, we should allow as much choice and freedom as compatible with a reasonable level of investor protection.’ Investor protection here takes the form of making sure that firms disclose all relevant information, so investors can choose properly. And how to do that?

Originally, one of the guiding principles of this new market was ease of access for companies, which in practice meant low costs. As most of the costs of listing on a stock market come from fees paid to advisers it was sensible to suggest that firms didn’t need them. In particular they might not need a sponsor, an expensive corporate finance house whose role it was to scrutinise the firm in the run-up to its public listing. There were squeals from the community: just imagine those poor, unprotected investors! Sotto voce: just imagine those rich fat fees! Most of the investors were institutions who knew their business well enough and would be happy to do without advisers whose fees they eventually would pay, as shareholders, but their voices were outnumbered as the consultation results came in. For decency’s sake, some kind of sponsor must be necessary. Wallis’ team hatched an ingenious compromise, proposing that each firm would employ a Nominated Advisor, or Nomad, with certain guaranteed professional qualifications and experience. These Nomads would police the companies on the market, ensuring full disclosure and certain basic probity, but without needing the Exchange to take on responsibility of oversight.

But who would police the Nomads? Who would guard the guards? Each other, of course! You could call this a reputational market, if you like. Everyone knew everyone else and if you gained a reputation for being somewhat sharp you would find future opportunities rapidly shrinking. Investors sold substandard merchandise have very long memories. This was scarcely a decade after the closure of the LSE’s trading floor, and the new market harnessed the close social networks that persisted in the City, many from before the Big Bang. It relied upon, in Brickles’ words, ‘the tools and instruments of a club’: blackballing and (mostly private) censure. Only in real cases of malfeasance would the Exchange pursue the nuclear option and offer a public reprimand. As one former director of the LSE put it, ‘When you run a stock exchange…you have two rulebooks.  One is the written rulebook and the other is the unwritten rulebook. When it came to AIM, there was a network underneath which says, that company, don’t touch it.  And so an awful lot of this stuff was unwritten, unrecorded…Can’t discuss it publicly, deny all knowledge.’ Some feel that market is not strict enough in dealing with errant Nomads. ‘It was always implicit,’ says the same director, ‘we would shoot one a year pour encourager les autres…I think the Stock Exchange didn’t do that.  They were too obsessed with the marketing, getting companies on.’

Clubs are never quite as strict as they claim to be.

Back to our narratives. The narrative of the market as the engine of an entrepreneurial UK plc has metamorphosed into a narrative of the market as a high temple of capitalism focused on choice and disclosure; but the narrative of UK plc was never, as we saw in the last episode, free from special pleading and the self-interest of one group or another, and so it remained. UK plc proved durable enough to pull participants into the new market and to give rise to an organisational structure where orders are filled through a quote-driven mechanism, preserving a profitable niche for a handful of market-makers, particularly Winterflood Securities (that name again!). And the administrative underpinnings of capitalism’s high temple, the necessity for full disclosure so that investors can take their chances on an informed basis has grown into the requirement that listees retain an advisory firm with its executives drawn from a small and carefully qualifying pool – those who had already conducted a certain number of transactions in the market. The Exchange, as one interviewee put it, didn’t want just anyone turning up and building a reputation on the back of the market they needed to already have a reputation. If you wanted to play, you already had to be in the club.

This sounds like a coup to me. And you won’t be surprised to hear that by the late 1990s Theresa Wallis had slipped quietly away from the market she created, away from the Exchange as a whole, almost out of the story altogether. The chaps were back on top.

Finance scholars describe the Nomad system as ‘private sector regulation’ and there have been long debates about whether it works or not.[5] But there’s no ignoring the fact that AIM’s model has been a success. Hundreds of companies have joined the market and raised funds through it. The combined capitalisation of the market is roughly a hundred billion pounds sterling. The model has been adopted worldwide, especially since the NASDAQ model fell out of favour in the post-dotcom world. The ambition to help growing firms seems stronger now than it did in the market’s second decade, an era of globalisation that I will cover in a future episode. The battle over order books has persisted and the market operates a hybrid system, with electronic matching for larger firms and market-makers still very present among the less-often traded securities. Watching these traders at work is remarkable, in fact, and I’ll pick this up in due course, too.

And I wonder if, after all, AIM’s structure helps us to see new possibilities for the organisation of financial markets. For giant global financial markets, as scholars have repeatedly shown, are modelled on a particular conception of how markets should work, the efficient market hypothesis proposed by the economist Eugene Fama. In essence, Fama’s hypothesis suggests that markets are fundamentally efficient and that all the information you need is in the price. Fama’s theory, as literary scholar Paul Crosthwaite and others have shown, claims an intellectual lineage from Adam Smith’s Invisible Hand through the neoliberalism of Frederick Hayek: a commitment to the market as an all-powerful, computationally supreme mechanism, capable of spontaneous organization, what Hayek calls a ‘catallaxy’. [refs] Financial markets epitomize this all-knowing, self-organizing, quasi-natural phenomenon. Moreover, if markets offer a glimpse of pure knowledge, the proliferation of obscure derivative contracts seems less like a massive increase in knowable risk , and more like an increase in the resources available to future-divining trade-seers.

The role of market operators, then, is to get everything else out of the way to allow a clear, synchronous, global view of that wondrous price, so that buyers and sellers can adjust their behaviour accordingly. AIM’s organisation is more akin to that of a producers market, where those supplying goods keep an eye on each other and work out prices among themselves. It’s more like a farmers market than a Fama market. Sorry, I couldn’t resist.

Does this offer ways forward for rethinking finance? To be honest, I’m not sure, especially in view of the story I’ve just told you. It does certainly offer a means of stepping away from the global, all-knowing, Fama market which some might suspect not to be as efficient as all that, especially in the decade-long wake of the financial crisis. It does seem to offer a way of doing things differently. Despite the capture and social closure, the incarceration, as Kearney would put it, I wonder if there’s a germ of emancipation in here somewhere. Hats off to Theresa Wallis and her gang for figuring this out.

I’m Philip Roscoe, and you’ve been listening to How to Build a Stock Exchange. If you’ve enjoyed this episode, please share it. If you’d like to get in touch and join the conversation, you can find me on Twitter @philip_roscoe or email me on philiproscoe@outlook.com. Thank you for listening. Please join me next time, when I’ll be back to 1999 and the moment of dotcom madness.

 

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Sound effects under an attribution licence from freesound.com

Prison door lock https://freesound.org/people/RobertMThomas/sounds/151136/

Footsteps and locks https://freesound.org/people/RobertMThomas/sounds/151120/

Champagne cork https://freesound.org/people/KenRT/sounds/392624/

Champagne pouring https://freesound.org/people/Puniho/sounds/169193/

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[1] Richard Kearney, Strangers, Gods and Monsters (Abingdon: Routledge, 2003), 179.

[2] This episode relies upon my history of London’s smaller company markets: Roscoe, P. (2017) The rise and fall of the penny-share offer: A historical sociology of London’s smaller company markets. University of St Andrews. 120 p. Available https://research-repository.st-andrews.ac.uk/handle/10023/11688

[3] https://en.wikipedia.org/wiki/Skunk_Works

[4] Juan Pablo Pardo-Guerra, Automating Finance: Infrastructures, Engineers, and the Making of Electronic Markets (Oxfoird: Oxford University Press, 2019); Donald MacKenzie and Juan Pablo Pardo-Guerra, “Insurgent Capitalism: Island, Bricolage and the Re-Making of Finance,” Economy and Society 43, no. 2 (2014).

[5] According Gerakos et al., firms listing on AIM underperform peers listed on more regulated exchanges, less regulated exchanges (e.g. the American ‘Pink Sheets’ OTC market) and even private equity, and are more likely to fail than firms on other markets. On the other hand, Nielsson argues that AIM-listed firms are of equivalent quality to those listing in more regulated markets, and simply do not meet the listing criteria of more established markets. Scholars do agree that AIM offers a successful fund-raising venue for smaller companies. Joseph Gerakos, Mark Lang, and Mark Maffett, “Post-Listing Performance and Private Sector Regulation: The Experience of London’s Alternative Investment Market,” Journal of Accounting and Economics 56, no. 2–3, Supplement 1 (2013); Ulf Nielsson, “Do Less Regulated Markets Attract Lower Quality Firms? Evidence from the London Aim Market,” Journal of Financial Intermediation 22, no. 3 (2013).


Episode 11. UK plc



In 1995 the London Stock exchange set up its junior market, AIM, an engine for UK plc. This episode explores how the narrative of entrepreneurial Britain brought this new market into being. That’s how the story goes, at least. The history turns out to be a little more complicated. This episode looks back to London of the mid 1990s, as a the country found itself transformed by the new dynamism of globalization. There’s a little bit of social theory, and in coming episodes we’ll be seeing stories through the eyes of a much younger me, so I get an introduction too. [Warning: some market vulgarity in this episode.]

Transcription

The heroes’ hideout in Lock Stock – just across the road from our office

In August 1999 I was twenty-five years old and didn’t have a clue what I was doing. I like to think that makes me one of the good guys, an innocent swept up in the maelstrom of dotcom speculation, but in truth it made me into kind of collaborator, happy to be wined and dined and to repeat the lines that I was spun by the less scrupulous as they promoted their wares to a credulous and excited public. I was naive enough not to realise that regular lunches at London’s finest restaurants do not come free; that there is always a reason, and that someone is always paying. Besides, I wasn’t long out of university and in my sheltered life no one had really lied to me before. Not the barefaced lies of the kind I was to encounter as a journalist. No one had ever sat there, leaned back, puffed on a cigar, looked me in the eye and told me a barefaced, million-dollar lie.

I was a young reporter at the newly formed Shares Magazine. I liked the job.  I liked the deal it came with even more: being handed the first gin and tonic as the hour hand crept towards one pm; riding across London in the back of a black Mercedes, on the way to air my views in a television studio at Bloomberg or the Money Channel; the buzz of young colleagues and new technology and the sense that the world was changing for the better. I liked the fact that a mysterious woman called Bella, whom I never met, used to telephone me regularly for syndicated radio news bulletins that I was never up early enough to hear. Most of all, I liked the smell of money being made and believed that somehow, in a small way, some of it could be mine. When one is twenty-something and impoverished student days are a very real memory, it is a fine thing indeed to be a stocks and shares hack in the middle of a boom.

Those who only know London now can’t begin to imagine how different it was just twenty years ago. There was no Gherkin towering over the London skyline, no Shard on the south bank. The tallest building in the city was the Tower 42: most people still thought of it as the NatWest Tower and could remember the plume of smoke trailing from the top after the IRA bombed it in 1993. There was no Facebook, no YouTube. Alta Vista was the go-to web search engine, and the smartphone remained a developer’s dream. If you wanted to ‘go on the Internet’ at home you plugged a cable from your computer into the phone socket and listened to beeps and wheezes as the connection dials up. No one had ever heard of al-Qaeda.

But times were changing.

Hello, and welcome to How to Build a Stock Exchange. My name is Philip Roscoe, and I teach and research at the University of St Andrews in Scotland. I am a sociologist interested in the world of finance and I want to build a stock exchange. Why? Because, when it comes to finance, what we have just isn’t good enough. If you’ve been following this podcast – and if so thank you – you’ll know that I’ve been talking about how financial markets really work, and how they became so important. I’ve been deconstructing markets: the wires, and screens, the buildings, the politics, the relationships, the historical entanglements that make them go, all in the hope of helping you understand how and why finance works as it does. In the second part of this podcast series, I’ll be looking at the stories we tell about the stock market. You might be surprised how much power stories have had on the shape and influence of financial markets, from Daniel Defoe to Ayn Rand. I’m trying to grasp the almost post-modern nature of finance, post-modern long before the term was invented, the fact that finance is, most of all, a story. Start-ups are stories, narratives of future possibility; shares and bonds are promises based on narratives of stability and growth. Even money is a story, circulating relations of trust written into banknotes, credit cards and accounts. Stories set the tone, make the rules, determine what counts and what does not. A good stock market needs a good story, so if we’re serious about rebuilding financial institutions then we need to take control of those stories.

The story for today is one of UK plc, and it came to prominence in the stock market world during the mid-1990s through a particular combination of politics and organisational happenstance. It’s a story that lay behind the world I discovered in London in the late 1990s, the bread and butter of my work at Shares. UK PLC.

You’ll remember from the last episode how the first great novelist, Daniel Defoe talked of projects, ‘vast undertakings, too big to be managed, therefore likely to come to nothing. His age, the turn of the eighteenth century, was an age of projects and projectors (his charming name for those who speculated on these projects in hope of gain, what we might call an entrepreneur today). So too were the 1990s, in London at least, rich with ‘the humour of invention’, which produced ‘new contrivances, engines, and projects to get money’. All around central London, jackhammers shrilled as tower blocks and profits shot upwards together. The general public was piling into the stock market, everyone hoping to get a part of the next dotcom sensation.  ‘Shares Magazine’, or just plain ‘Shares’, had been set up early in 1999 to capitalise on some of that exuberance.

It was fronted up Ross Greenwood, a cheerful, kind-hearted Australian pundit, now finance editor for Australian Channel Nine, who was at the time taking a sabbatical in London. The cover of one of the early issues featured a newspaper small-ad, bolded and circled in red pen: earn £100,000 a year investing from home, the block print proclaimed. As hordes of punters, many with remarkably little financial literacy, strove to find their little piece of the dot-com magic, copies of the magazine flew off the shelves and the publishers, tough veterans of trade magazines and commercial advertising sales, rubbed their hands with glee. It was boom time.

Their only problem was getting the staff. Not just competent staff, but anybody at all. The British economy was in overdrive, and young professionals hopped from job to job with abandon. I emerged blinking from a long stint in university libraries to find my friends racing around in cobra-striped hatchbacks, some of which even had six gears. Everyone I knew with any skills at all had a job and enough freelance work on the side to put down a deposit on their flat (for property in 1999 was still almost affordable, even in London) with enough left over for the inevitable purple emulsion. I attended an undemanding interview with Ross, after which, with the mixture of derring-do and desperation born of economic ambition and organisational crisis, Shares Magazine hired me.

The magazine’s offices were in a shabby, unpleasant, overheated building in Southwark. Throughout history, Southwark has had a peculiar relationship with the City of London. It lies due south, across the river. It became the lawless no man’s land on the city’s doorstep, its ancient flint cathedral rising from among dens of squalor and iniquity. The city’s prison, ‘the Clink’, was built there in Clink Lane. Brothels and gambling, which were prohibited in the City itself, were permitted. Even in 1999, it remained the City’s poor relation, offering cheap space for those providing goods and services to their rich neighbours on the other side of the river. Borough Market, now famous as a gentrified foodie hangout, served as the fruit and vegetable market for much of London. One stepped out of the newly opened steel and glass underground station and back in time: shouting porters, forklift trucks shifting huge crates of vegetables, the green paint of the Victorian ironwork overhead covered in a thick layer of soot and grime. Trains to Dover and Brighton rattled along overhead tracks banked up on Victorian redbrick arches, and rats feasted on remains of fruit and vegetables pulped by the wheels of delivery vans and handcarts. Across the road, a pub called The Market Porter enjoyed special licencing privileges, and at eight in the morning the doors would be wide open, the voices of those just off shift carrying out on air rich with the smells of drink and fried food.

This isn’t intended as a paean to 1999. If it is, it’s a story of how we grasped something special, then spaffed it all away, as our prime minister might say. It seems to me that we had a glimpse of a new set of possibilities, a collaborative, democratic future enabled by technologies, the significance of which we were just beginning to grasp. It seemed that politicians had finally cracked the boom and bust thing, and that the steady growth of prosperity and material comfort in large parts of Britain (though not, of course in others, which I could not see from my privileged and isolated viewpoint) would go on for ever. We were wealthy enough for the scruffiness of Borough market to seem cool, not so wealthy as to have airbrushed it out of existence. Globalization shimmered with promise in the space where, scarcely more than a decade earlier, we were still terrified of nuclear annihilation. We were Europhile, even Francophile: Joanne Harris published her novel Chocolat to a huge audience just discovering the glories and idiosyncrasies of rural France. There was an idea that Cambridge’s Silicon Fen might soon rival Silicon Valley. Academics wrote trendy books  about the coming knowledge economy, and the excitement in the stock market seemed based on a genuine possibility that some of this new prosperity might be shared around. It really did look, for a moment, that history was going to end well.

Of course, it did not work out that way, and maybe it was never going to. Perhaps it was just my youthful enthusiasm that gave rise to such a romantic vision. Inevitably, we ate it all up: the lure of other people’s money is always too much for some to resist. In Silicon Valley, the grab was already underway, as the giants that shape today’s world began to appear: Amazon, founded in 1994, Google in 1998, and Facebook a latecomer in 2004. Global free trade meant globally free money, and it wasn’t long before corporations had given up any pretence at contributing to the national coffers of those countries where they traded. If today’s contemporary Brexit discourse of a buccaneering Britain straddling global trade sounds depressingly like a broken recording of the 1990s script, that’s because for many people globalisation took us in some quite unexpected directions. Unlike the Brexiters, I know we can’t go back in time, put the genie of globalization back in its box.  Let’s do some proper history instead.

You’ll remember from episode 4 how Sixtus surfed the growing wave of enthusiasm for of all things entrepreneurial to set up his business angel magazine. At the same time, as Britain shook off the grimy, grey, strike ridden 1970s and embraced Margaret Thatcher’s new ideas about markets and business – the government began to pressure the London Stock Exchange to finance entrepreneurial firms. Of course, this is a story too: there was just as much industrial unrest under Thatcher and much of Britain liked organised industry and the security that came with it a lot more than it did independent, dynamic entrepreneurship. But still, the LSE, an august institution that had only opened its doors to women in 1973, and not long previously had refused to admit car manufacturer Fiat, presumably on the grounds of being too Italian, suddenly found itself chastened for not being entrepreneurial enough.

Meanwhile, an over-the-counter (OTC) market had sprang up entirely independently of the LSE. Stockbroking firms could apply to the DTI for a licence to deal in securities and become a ‘licenced dealer’ able to act in ‘dual capacity’ as broker and market maker. MJH Nightingale, later known as Granville & Co, was an early innovator. It was all above board: the government backed venture capital house ICFC had a small department investing in privately held firms and bought heavily from Nightingale. But the cowboys were along soon enough. You’ll remember Tom Wilmot – yes, of the pink Bentley with its boot full of sausages (and if you don’t remember him, check out episode nine) – who did a great deal to damage the reputation of the over-the-counter markets. But he wasn’t the worst. That honour goes to the infamous Barlow Clowes affair which eventually cost the government £153 million in compensation. Barlow Clowes was a licensed dealer, except it didn’t have a license – not to start with at least. The firm’s risk-free bond investment opportunity turned out simply to be a means for its founder, Peter Clowes, to buy things – a yacht, three private jets, a helicopter and a French chateau – that he couldn’t afford without borrowing the life savings of pensioners. When, in 1985, someone pointed out that Clowes didn’t have a license, the DTI obligingly issued one and renewed it, annually, for the next two years; by the time the authorities got round to winding up the scam £190 million had disappeared. Peter Clowes was sent to jail for 10 years, but was out after four, much to the disgust of those who had lost their savings. He too provides a postscript, though it is rather tawdrier than the Wilmots’ effort: in 1999 he was caught making false claims for jobseekers allowance and did another four months in prison.

Yet the over-the-counter market thrived. Shares traded on the OTC qualified for a whole range of tax reliefs. The Business Expansion Scheme, launched in 1983, offered very generous tax breaks on money invested in growing companies, so generous, in fact that one financier remembers it as a kind of scam in its own right, albeit a government sanctioned one. In an era when the top rate of tax was 60%, if one got the tax back on an investment, one did not have to be a mastermind to generate an acceptable return. For a while property investment was also included, though this perk was removed after a while as it was being ‘abused’ by many financiers making a tidy living selling property deals through the scheme. The LSE was nothing to with this market, but if you throw enough mud around some of it will stick to passers-by, and the LSE, under pressure from all sides and determined to ‘ingratiate itself with the new Conservative government’, set up its own junior market Unlisted Securities Market (USM) in November 1981.[1] It was much easier to get onto than the Official List and was perfectly timed for the mid-eighties bull market[2]. Sir Nicholas Goodison, businessman and chairman of the Stock Exchange from 1976 to 1986, described the introduction of the market as ‘a very important event in Britain’s commercial history…[the USM] greatly helped the progress of the British economy in terms of products, services, and jobs… this new market did a lot to alter attitudes to risk among investors who, during the 1960s and 1970s, had become averse to risk’.[3] Goodison captures the story here: a Britain transformed from a risk averse, socialist backwater to a vibrant engine of commerce, risk-taking and entrepreneurial. This was UK plc, and it offered plenty of opportunity for those well-placed to take it. (As always, full references are available in the transcript on the podcast website; most of the episode relies on my own history of these markets, which you can download if you wish[4]).

You’ll remember Brian Winterflood from episode five, the young jobber whose partner advised him to ‘mind his fucking eye’ trading with the firm’s money. By now Winterflood was a partner himself, in Bisgood Bishop, one of the larger firms. He recognised the USM opportunity for what it was and, despite a lukewarm response from his colleagues, determined that his firm would offer prices in every single USM stock. This was a stroke of genius. Remember how the old stock exchange trading floor was organised by sector, with markets in South African stocks, say, physically separate from those in the leisure or mining industries. Winterflood realised that brokers had no desire to trail round the house trying to find buyers for these strange little USM shares, and that they would rather come straight to him where they knew that they’d get a deal. Soon his firm’s pitch was a ‘wall of stocks’ and his nickname ‘Mr USM’. Market-making on the USM could be a profitable business. ‘Winterflood,’ said one interviewee, ‘made a fortune because his bid-offer spreads were embarrassing…you could drive an 18-wheel truck through them’. It need not be as risky as all that. Market-makers could avoid the worst of the risk by trying not to hold stock; you did not have to, in the pithy words of one interviewee, ‘put your cock in the custard.’ For students of gender and masculinity in the markets, there’s another gem.

The crash of 1987 eventually caught up with the USM. The boom years that had made it an easy venue to raise money had ended: in 1992 only two companies had joined the market, from a peak of 103 new arrivals in 1988. A Stock Exchange consultation, published in December 1992, conceded that ‘the quality and attractiveness of the USM has deteriorated in the eyes of companies and investors.’ The sentiment was shared by many in the City. The USM had a ‘spotty reputation’.  New European regulations lightened the requirements of the official list, and eroded the USM’s offering. For these reasons, so the story goes, the LSE decided to close its junior market, with an unnamed official joking in a speech, ‘it is often said that you cannot have too much of a good thing, but to have two, almost identical, markets in one exchange is going too far.’[5]

In fact, that’s not quite the whole story. What makes a stock market? Well, as we have seen, it needs buildings and screens and wires, but these existed anyway because they serviced the main market or Official List. The clue is in the name: a stock market is also just a list, telling the doorman who is allowed in and who must be kept out, and a set of rules of conduct for those who make it inside. In these terms, the USM was just an appendix, an afterthought, a small set of rules heavily cross-referenced to the Official List rulebook, making the continuation of its very existence a tedious administrative chore. The burden was carried by the LSE’s listings department, which existed as an almost entirely separate entity from the rest of the Exchange. Its office contained market sensitive information and was separated by coded door locks. It had a reputation for bureaucratic stolidity. It had unparalleled expertise in the regulatory aspects of market administration, but was disconnected from the commercial side of what was by then a business in its own right. Fed up with the administrative work on this failing market, the Listings Department decided to shut it down. ‘They weren’t commercial,’ said one interviewee, ‘I remember the…management meeting, and the Head of Listing came into the room and said, “We’ve been looking at the USM…there’s really no point in maintaining a separate section. What we’ll do is bang the whole thing together. Yeah, and we’re going to write to the companies and say they’ve got a year to either comply with the main market rules or basically they can piss off”…And, of course, there was an absolute maelstrom.’

Perhaps it’s time for a little economic sociology. Neil Fligstein, an American scholar and one of the biggest names in social theory, has proposed an account of social change based upon conflict in what he calls ‘strategic action fields’.

‘A strategic action field,’ he writes, ‘is a meso-level social order where actors (who can be individual or collective) interact with knowledge of one another under a set of common understandings about the purposes of the field, the relationships in the field (including who has power and why), and the field’s rules…’.

These fields are distinguished by two things. First of all, everyone knows the rules. Everyone knows the purpose of the field. Second, there is scarcity, of customers, of resources, of paper for the photocopier. As there is never enough to go around, fields are characterised by continual internal struggle. Some actors – be they people in an office-level squabble over resources – or corporations in a global battle for sales – are more powerful than others. And Fligstein’s really crucial insight is as follows: these powerful actors make use of their status and control over resources to further strengthen their status and control over resources. Fligstein’s vision of the world is one of strife and competition, one-upmanship, and it makes me shudder (it seems to be a peculiarly American vision, if I may say so). But, in the end, the usefulness of a theory is determined by its ability to explain, and I find the notion of competition within fields very useful for thinking things through. When the first London jobbers tumbled out of the coffee houses of Exchange Alley and into their own building in Threadneedle Street, which they purchased to rent to newcomers and less successful peers, what we see is field dynamics at work: the big fellows stamping on the heads of the little ones, again. The very existence of the London Stock Exchange is down to this kind of strategic interactions.

Back to our story. If this small company world – the USM – is taken as a field, who would the high-status actors – the big fellows – be? Brian Winterflood, ‘Mr USM’, who had cornered the action as far as market-making went; Andrew Beeson, then senior partner of Beeson Gregory, a successful small-company stockbroker; and Ronnie (now Sir Ronald) Cohen, a leading venture capitalist, who depended upon the USM as a mechanism for getting his money out of successful investments. These men had staked out profitable claims in the junior market, and all of a sudden their entire field threatened to collapse into a much bigger one. They made a noise. They shouted loudly about UK plc, and how important it was, and by implication, how important they were and how they should be allowed to carry on doing what they were doing. Cohen argued that without a means of exit, financial contributions to the venture capital sector would shrink, and an important part of the entrepreneurial engine of UK plc would grind to a halt. Winterflood, then in the process of selling his recently-founded Winterflood Securities to Close Brothers for £15 million, campaigned most forcibly. Cohen, Beeson and Winterflood formed a ‘ginger group’ (in Winterflood’s words) to lobby politicians and the LSE on behalf of UK plc. This group became the City Group for Smaller Companies (CISCO, later the Quoted Companies Alliance, or QCA. CISCO argued that there was an underlying demand for a junior market, that the Exchange was reacting too hastily to a long and deep recession, and that better economic times were coming. Its April 1993 newsletter contained a long plan for a three tier equity market, the lowest tier being an ‘Enterprise Market’. The documents even hinted that CISCO would be prepared to support a new market beyond the purview of the LSE, if necessary, and Cohen spent much effort trying to set up a pan-European market.[6]

Those managers at the LSE who faced the financial community after the closure of the USM remember a deep anger among brokers and investment managers in the City and across the regions. There was a concern that a uniquely British small-company equity culture would wither away. The community saw the Exchange as out of step with the zeitgeist of a nation trying hard to recover from a sharp economic downturn. By March 1993 Nigel Atkinson, head of the LSE’s Listing Department, had begun to give ground. The LSE agreed extend the USM’s life by several months and set up a working party to consider a new market.  But here’s the thing: the LSE was still the big beast in the room. It did not cave in to pressure at once. It denied the fundamental claim that it was prejudicing the entrepreneurial dynamism of the United Kingdom. ‘I totally refute suggestions that…the Exchange is somehow stifling entrepreneurs,’ said Atkinson. Not everyone believed the apocalyptic predictions about the end of entrepreneurial Britain, either. As one broker pithily put it, ‘if you couldn’t deal in a stock it was because it was shit.’

It is probably true that the Exchange felt unusually vulnerable at the time. In March 1993, the London Stock Exchange had been forced to scrap its Taurus paperless settlement system, a vast fiasco of an IT project that embarrassed it in front of the City and caused it eventually to lose its settlement function entirely. The LSE looked directionless and its chief executive Peter Rawlins resigned. The media did not spare its barbs: Rawlins, reported the Independent, ‘was a frustrated thespian whose early search for fame took him as far as an appearance on Bruce Forsyth’s Generation Game.’ But still, the suggestion that a handful of big hitters took on the LSE and forced it to create a new market seems far-fetched, persistent though the story may be, and useful to the men that it lionizes.

What can field theory tell us? Don’t forget that the LSE is a participant in a field too, and it also has to look out for its strategic advantage. Was it the constant refrain of UK plc from these agitators who buzzed like angry wasps around the gorilla that was the London Stock Exchange? Field theory says not: these are participants in their own field, providing services to investors and companies, not that of the LSE, a competitive market for exchange services. Exchanges are business too, a factor that has shaped their development from the earliest days. You may remember John Jenkins, the jobber who specialized in matched bargains, piling up orders in his notebook. In episode 8 we saw how he set up a business trading over the counter stocks, two guys and a sofa above the record shop in Finsbury Square, but still under the Exchange’s regulatory aegis. Jenkins was a trustworthy operator, so he thrived, but nonetheless the LSE could not help noticing and being discomfited by a fledgling capital market growing independently within its own backyard. That discomfort must have increased when entrepreneurial corporate advisors started re-purposing the Exchange’s own public issue documents to raise money for start-up firms with no track record and sometimes very sketchy prospects. And when Jenkins did a deal with Reuters to disseminate market prices and inadvertently stumbled into the exchange’s new preserve of data sales, that was too much. It was forced to act. The new market that emerged in place of the USM was designed to put a stop to all of this, and entrench the London Stock Exchange as dynamic contributor to UK plc.  The narrative that had begun with the vigorous protestations of the CISCO lobbyists was taken up by the Exchange. It shaped the market that came to be known as AIM and the world that grew up to service it, of fledgling companies, private investors, whizz-bang start-ups and of course, credulous young journalists hoping for a taste of the big time. I’ll carry on that story in the next episode.

I’m Philip Roscoe, and you’ve been listening to How to Build a Stock Exchange. If you’ve enjoyed this episode, please share it. If you’d like to get in touch and join the conversation, you can find me on Twitter @philip_roscoe or email me on philiproscoe@outlook.com. Thank you for listening, and see you next time.

 

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[1] Posner, The Origins of Europe’s New Stock Markets, 66.

[2] This market offered much lighter admission rules including a three, rather than five-year trading record, no minimum capitalisation or pre-vetting of listing particulars, and a smaller public float. Sridhar Arcot, Julia Black, and Geoffrey Owen, “From Local to Global: The Rise of Aim as a Stock Market for Growing Companies: A Comprehensive Report Analysing the Growth of Aim,” (London: London School of Economics, 2007).

[3] Buckland and Davis, The Unlisted Securities Market.

[4] You’ll find my narrative history of these markets, with comprehensive sources, at https://research-repository.st-andrews.ac.uk/handle/10023/11688

[5] Posner, The Origins of Europe’s New Stock Markets, 66.

[6] Cisco Newsletter, February 1993, p.8; April 1993, p.5-16.