Taking stock of a Welsh Stock Exchange

Bulls, bears and shares?
It's another idea that refuses to die - a Welsh Stock Exchange.
(Pic : BBC Wales)

This idea of a Welsh Stock Exchange has been raised on-off for a decade or so, mostly as a way of stimulating debate into how to properly capitalise Welsh businesses, and reduce the reliance of Welsh businesses on structural funds and grants from the Welsh Government (and/or its associated bodies).

It's time for - as other have put it - our business culture to "grow up" a little bit.

More recently, a high-profile proposal for a Development Bank of Wales has been put forward as a replacement for the Welsh Government's finance arm, Finance Wales, as part of a review into business finance led by Prof. Dylan Jones-Evans.

The issue of a stock exchange has been resurrected yet again following a recent article from former economics lecturer, John Ball, at Click on Wales.

In his article, John outlined that a 1993 academic paper by Raymond Atje and Boyan Jovanovic linked strong stock markets to strong economic growth, while they found no similar trend when it came to bank lending. So while the emphasis has been on establishing a "Bank of Wales", maybe a regional stock exchange isn't being given the attention it deserves.

A 2004 study by Prof. Robert Huggins – from what was then called UWIC – explored the idea in more detail, claiming that if Wales had 60 extra listed companies it would boost our economic output relative to the rest of the UK by around 9%. That might not stand up to scrutiny now, but when you consider the current figure is stuck at around 73% (UK=100%), then that would be a significant closing of what's been dubbed "Offa's Gap" – the difference in economic productivity between Wales and the rest of the UK.

In terms of a Welsh Stock Exchange as public policy, in 2008, the Welsh Government provided a £13,000 grant to explore the idea, but the concept seems to have been shelved as a serious option.

In the Assembly itself, it was raised by former AM, now Liberal Democrat peer, Jenny Randerson, and made it into the Welsh Lib Dems 2011 Assembly Election manifesto. The idea hasn't been raised again in the Senedd since November 2011 as far as I can tell.

However, despite the political reluctance, Cardiff University has developed a virtual trading floor for Masters students, while OSTC – a derivatives trading company – established what was at the time described as "the largest trading floor in the UK outside of London" in Swansea.

The foundation to support a Welsh stock exchange is coming together, but the question is how to make it a reality? There are huge problems to overcome.

Firstly, a Welsh Stock Exchange will require lots of regulatory oversight. It would be right to ask why companies would bother with the potential risks of a new, smaller Welsh exchange when the London Stock Exchange (FTSE) is well-known and well-respected globally?

Secondly, will local companies even be willing to list? A stock market would no doubt be good for Welsh prestige and pride, but a "Field of Dreams approach" – build it and they'll come – doesn't always cut it.

There's a warning from the West Midlands. Investbx was established in 2007 to encourage local people to invest in local businesses and provide investment opportunities for companies that couldn't access bank finance. It was a flop, with only 3 companies listing. Investbx was sold for £1 in 2011 despite costing £3million in public funds to set up.

The Irish Stock Exchange has 25 listed companies on its main securities market and another 25 on its enterprise securities market (for small and medium-sized businesses).

You would therefore expect a Welsh exchange to need somewhere between 40-50 willing companies of all shapes and sizes to be viable. There are plenty to choose from if you take a glance at the Western Mail's annual Top 300 list. As John Ball argued, this could be expanded to include things like sports clubs (Cardiff City or the regional rugby teams), green energy start-ups and other SMEs.

A speculative Welsh Stock Exchange would therefore be some sort of Wales-based Alternative Investment Market (AIM) with a similar cap on investment as Investbx (£500k-£2million), rather than a full-blown exchange like the FTSE.

Last but not least there would need to be political will to see it thorough. If a Welsh Stock Exchange were established with Welsh Government backing then collapsed, it would end careers. Ministers get flak a lot of things, but I don't think any of them – or ordinary AMs – would want to be judged by how shares in Peter's Pies or gocompare.com are doing.

The Welsh political class are risk-averse at the best of times, so it's highly unlikely the parties will stick this in their manifestos come 2016, unless there were a high-level study that gave the idea the academic equivalent of a thumbs up, and enough interest in listing from willing companies to make a Welsh exchange viable.

Ideas like this are often written off as fanciful, and maybe they are. But it's worth remembering there used to be several exchanges located around the UK, including the Coal Exchange in Cardiff, with Scotland having its own stock exchange until 1973.

Re-balancing the UK economy between London and South East England and the rest of us is a gargantuan task. That means no option - however ridiculous - should be taken off the table. Maybe a little bit of The City needs to come to Wales instead of the other way around..