Liquidity Drivers on AIM

AIM’s market capitalisation fell by over 60 per cent in 2008 as less than £1 billion of new money was raised compared with the £6.25 billion generated the year before. Now, with over a third of AIM companies valued at less than £5 million and more than two-thirds under £20 million, the market’s oft-criticised lack of liquidity is under more scrutiny than ever.

In Growth Company Investor’s latest study, Liquidity Drivers on AIM, carried out in association with BDO Stoy Hayward LLP, the goal was to look beyond the usual valuation tools and attempt to assess the market according to trading liquidity. In so doing, we hoped to identify the factors that account for why the most traded companies have achieved significantly higher liquidity than the average for AIM as a whole.

Methodology – discerning liquidity drivers
In order to discern what drives liquidity among pre-eminent stocks, we assessed the trading statistics of every single AIM company over the six months from August 2008 to January 2009 inclusive. We excluded any company that did not witness at least 50 per cent of its share capital traded in that time – and arrived at a list of 166 stocks.

If the company did not have a market cap of at least £10 million in August 2008 it was omitted from our study, and this filtered the sample size down to a total of 106 companies.

Unearthing trends
Before we examine the results of this select group, it’s worth lingering on the overall liquidity trends that we have unearthed. From August 2008 to the end of January 2009, 166 AIM companies, ten per cent of the market, saw at least 50 per cent of their entire share capital traded on the stock market.

In that same period, 728 companies saw at least ten per cent of their shares traded and 869 companies, or 54 per cent of AIM, saw less than ten per cent of their shares traded. Digging deeper, we find that there are 252 companies that had less than one per cent of their shares traded.

Furthermore, companies that do not separate the role of chairman and chief executive were found to be ‘less liquid’ than those that do. The 180 companies across the whole of AIM that have no senior independent voice had an average of 13 per cent of their shares traded, compared with the 20 per cent average enjoyed by those companies with ‘better’ corporate governance practices.

The role of market-makers
AIM’s lack of liquidity is caused, in part, by the habitually poor price spreads offered, especially on penny shares. Most AIM stocks are traded on a quote-driven system of competing market-makers and, while there is some degree of cause and effect at play in the employment of market-makers, a competitive market implies that the more you have, the better the spread and the more liquidity can be squeezed out.

The report found that the strongest correlation was between trading volume and the number of market-makers supporting a company. Our select band of 106 stocks has, on average, six market-makers, compared with AIM’s overall average of less than four. This selection (see Table 4) has four stocks employing 11 market-makers and another seven with ten.

This group – the bulk of which are focused on the natural resources sector – are all heavily traded, though they differ quite widely in size: from Jubilee Platinum, Braemore Resources and Hambledon Mining, which all ended the period with a market cap below £20 million, to £727 million Sibir Energy and £435 million Peter Hambro Mining.

Among this group, despite all having done their utmost to maximise liquidity via retention of a proliferation of market-makers, there is a wide contrast in the percentage of shares traded, from around 50 per cent to Peter Hambro’s 126 per cent.

‘Pre-eminent’ AIM stocks
The most traded stock (see Table 1) within our select population was Titan Europe, a maker of wheels for agricultural and mining vehicles. A possible takeover by its former parent company collapsed in September, leading to plenty of trading as investors sought an exit.

In this flurry of market interest, its share capital effectively changed hands almost three times over – as 265 per cent of its share capital was traded – during the period, with its shares falling by 80 per cent.

The second most active stock is Tanfield, the maker of electric vehicles and aerial work platforms, which has, in its 371 million shares, more than nine times the number of shares than Titan. It witnessed over 29,000 bargains and its share capital was traded more than twice over – 233 per cent. Its shares were one of the most volatile on AIM, subject, it seems, of much retail day trading, with the share price oscillating ferociously throughout the period.