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WFE Focus December 2011
Growing need for innovative SME exchanges in Europe
Carl Johan Högbom
Alternativa Aktiemarknaden
Henrik Wagenius
Partner/Head of Legal,
GXG Global Exchange Group AB

The need for well-organized and innovative exchange solutions for small and medium sized companies (SMEs) in Europe and the western world is becoming more apparent than ever.

The ongoing global financial crisis has triggered an acute lack of funding that has severe effects on the SME sector. This money draining is induced by banks holding out on traditional loans and is coinciding with the investor community trying to reduce risks by moving towards interest-bearing financial instruments, such as large cap corporate bonds.

No growth capital for SMEs

This diminishing availability of growth capital is now hitting the SME sector at the same time as the international community is becoming more aware of the need for maintaining and stimulating national production in an almost mercantile sense. How to prevent the growth of trade deficits has become a pressing issue in top-level discussions all over Europe. After the political and financial mills have ground through the outstanding issues, the overall consensus will most likely be that the legislator must stimulate growth in the SME sector by making capital more available.

New legislative initiatives

Already now the European community is working on possible solutions for this pressing issue. By reading through the suggestions for new legislations in the MIFID II, the intention of the legislators becomes clear. There is a need for new thinking in the financial sector, and a lot of focus is put on exchange solutions for SMEs and new financial instruments. The ideas and the political will are there, but as we all know time is of the essence. We need solutions in order to adapt to the current situation.

Solutions are far from simple

How to effectively stimulate growth in the SME sector has always been a hard nut to crack. The best solution we have found so far is to make these companies available for investments through listing them on some kind of marketplace. But stock exchanges targeting this sector have always been struggling with critiques regarding insufficient liquidity and the perception of unscrupulous business owners trying to use the exchange to shift unsuccessful ventures on to new shareholders.

Back to basics

As many large exchanges today naturally focus on the largest companies, high-speed transactions and computer driven algo-trading, the viable solution for the SME markets could be to do the opposite; to go back to basics.

This anachronistic strategy could, for instance, entail the idea that there is a difference between new and old shares, as the money deriving from newly issued shares actually benefits the company. It needs to be clear that it is people making the investments, as opposed to computers, that the investors make investments because they actually believe in the prospects of companies that they invest in (as opposed to short- selling, etc.), that the investors from time to time participate in the company’s annual meeting of shareholders and that the investors, once the company is prosperous, receive dividends on their investment. This may sound like a fairytale to many of us looking back at the last three decades, but the financial markets were, as we all should know, originally designed to accommodate the needs of the companies. The capital strength and innovative force of pure capitalism in the financial community has distorted this original, fundamental economic purpose, and turned the market into a gambling arena on which the companies in many ways have been reduced to gambling chips.

The power of innovation

However, it does not suffice to go back to basics – the initiative needs to be taken back and maybe most importantly the power of innovation. It is hard for the company that lacks sufficient funding to be innovative and change the way that things are done. A company seeking funds will normally be in the hands of a team of consultants that have a problem knowing who their actual customer is: the company or the investor. As we all know, fundraising in the SME sector is the prerogative of corporate finance boutiques and stockbrokers, a fairly conservative and not so innovative sector. If we turn to this sector we will not find any ground-breaking innovations, apart from new and interesting ways of charging companies for the services rendered.

It is evident that there is a need for an external party, preferably driven by economical reasons (as legislative and political initiatives tend to create new problems when attempting to solve old ones), to step in and take the role as the innovator. As we see it, there are a few such innovative forces that can be part of the solution.

“Alternativa” in Sweden and France

My background in this industry consists of almost twenty years at the Stockholm Stock Exchange, the national stock exchange in Sweden. With all the changes that took place during that dramatic period, the closing of the trading floor, demutualization, mergers and listing of the Exchange, I learned to listen and to be open to new ideas. Ever since I left the Exchange in 2001 (since 1998 a part of the OMX Group), I have been looking for new ways to help companies in the SME sector. As a first step in 2003, I founded “Alternativa” (translates as “the Alternative”).

Alternativa is structured as a combination of an exchange and a brokerage firm, with simple application, low formal demand on disclosure ­ but at the same time with a rating given to the company based on the level of information that it discloses to the market. Call auctions are held once per quarter, once per month or weekly, depending on what the company decides. Alternativa offer its customers low listing fees and a full range of services in IR- and issuer-related matters. The investors can choose to trade directly on the market or use traditional brokers. As mentioned above, Alternativa was conceived and started in 2003 before the world ever heard of MTFs and OTFs but the ideas behind Alternativa are similar.

Today Alternativa trades in approximately 30 companies and has more than 5000 connected investors, both institutional and private. In 2007, the Alternativa concept was launched in France but the setup there is a bit different due to the French wealth tax. But the purpose is the same – to help small-and medium-sized companies to get in contact with growth capital.

The idea behind the Alternativa concept is that if you offer a well functioning secondary market designed especially for SMEs, it is easier for a company to raise funds. And if you do this without forcing companies to face a complicated set of exchange regulations every day, management are allowed to focus on running the company instead of dealing with the demands from the financial market. Short and simple.

GXG Markets in Denmark and UK

In 2009, Henrik Wagenius, a former college who recently had left Alternativa (and the co-author of this article), introduced me to a team of people that he was working with. The team had big ideas and was trying to create a new pan-European marketplace for SMEs. The result is GXG Markets, a new marketplace with a three-tier business model containing an OTC market, an MTF and a Regulated Market. GXG is a fully licensed European exchange operator focusing exclusively on the listing of SMEs and new instruments.

The GXG business model is very simple, and one thing was made clear early – GXG has only one customer, the listed company or the company responsible for the listed instrument. The model is based on volume, they have their own electronic exchange system, a front-end for traders and they charge virtually no transaction fees. GXG Markets operate in accordance with the European MiFID legislation under the supervision of the Danish FSA. This means that the license to operate the marketplace is Danish but valid throughout Europe and the EES (European Economic Space). GXG has recently opened up a marketplace in London that could become a hub for SMEs from all over Europe.

GXG is now aiming to establish a global securities exchange for the listing and trading of TIGRcub® Securities (Top-Line Income Generation Rights Certificates) together with the US based financial innovator Entrex. The new marketplace, “Entrex Exchange,” will also target SMEs and TIGRcub® securities to offer issuers a chance to share income instead of profits with Investors. This has great implications for both parties, especially when it comes to investments in private or thinly traded public companies. We believe that a transparent and tradable market for such debt-bases securities could be one way to help SMEs to become far more attractive to the investment community.


Providing capital for SMEs is a key issue today. If we are serious about wanting to solve the financial difficulties that the world is facing today, we need to find a solution to the acute lack of funding that affects this sector. The world today depends on the SMEs for future growth.

Markets focusing on SMEs are not competitors to traditional exchanges; they should rather be seen as feeder markets, supplying the larger exchanges with well-prepared companies for listing. In Sweden, we have seen this in many cases since alternative markets became a fact. But primarily, the purpose of SME exchanges is to create an environment where companies have a better chance to raise capital and also to help them become better prepared for the future, whether they choose to stay on an alternative market or move on to a traditional stock exchange.

All initiatives that help SMEs develop need to be supported. How? By providing honest financial arenas for growing companies, arenas where companies can choose between different levels of regulation and price. Let us tell the politicians-Yes, we can! Let us together show the world that the financial markets can reinvent themselves and that we are innovative, not only when it comes to finding new ways to fill our own pockets.

About Carl Johan Högbom

1981 to 2001 at the Stockholm Stock Exchange (part of OMX since 1998), CEO between 1998-2001. Since 2001 independent consultant in the financial area. Founder and Chairman of "Alternativa" in Sweden and France (member of "Comité Stratégique"), member of the Disciplinary Committee of the NasdaqOMX Stockholm and the Swedish Brokers association. Chairman of GXG Markets in Denmark and member of the board of the Swedish shareholders association.

About Henrik Wagenius 

Financial entrepreneur and former corporate finance executive. Has since 1997 been involved in the Private Equity sector with a main focus on companies within the TIME sector (Technology, Internet, Media and Entertainment). Since early 2009 part of the management team at GXG Global Exchange Group and Head of Legal.

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