Growing Need for Innovative SME Exchanges in Europe

Author Name: 
Carl Johan Högbom and Henrik Wagenius

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 apposed  to  computers,  that  the  investors  make  investments  because  they  actually  believe  in  the  prospects  of  companies  that they  invest  in  (as  apposed  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 SME’s, 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 SME’s 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.  


Stockholm December, 2011