The Alternative Stock Market
2006 Bulterworths Journal of International Banking and Financial Law, n.º 9
On 29 May 2006 the Alternative Stock Market (Mercado Alternativo Bursátil or MAB) was implemented as a less regulated market for close end funds (SICAVs) and stocks with small market capitalization.
The main driving force for the creation of the MAB was to amend the Spanish Law on Undertakings for Collective Investments (the “NUCIL”). Prior to the enactment of the NUCIL, closed ended mutual funds (SICAVs)had to be listed in a stock exchange to qualify as a collective investment scheme and benefit from the tax benefits associated therewith (i.e., 1% CIT levied upon the disposal of the investment). In turn, the NUCIL set forth that liquidity could also be obtained through arrangements similar to the ones applicable to open ended mutual funds (i.e., redemption at liquidation value by the mutual fund) and by listing the shares in an organised trading system such as the MAB.
The MAB has, however, a more ambitious goal. Following the path laid down by the London Stock Exchange with the introduction of the Alternative Investment Market (AIM), by the end of 2007 the MAB expects to offer smaller growing companies all the benefits of being traded on a stock market, within a simplified regulatory environment. In particular, the MAB is expected to serve as new source of financing for small and medium enterprises (SMEs) in a scenario of increasing interest rates, as well as providing alternative exit strategies for middle market venture capitalists.
With over 332 SICAVs listed to date, the implementation of the fist stage of the MAB has been more than auspicious, laying down a solid base on which to develop the second stage of the MABs.
The MAB, is an un-official, self-regulated and organised trading system, owned and operated by Bolsas y Mercados Españoles (BME), the holding company under which all relevant Spanish stock exchanges are assembled, that provides trading, settlement and registration of securities that are either issued by close-end mutual funds or have small market capitalisation.
Whilst the MAB is authorised and supervised by the Spanish Securities and Exchange Commission (CNMV), MAB authorities are in charge of enacting the particular regulations by which the market is governed. As we shall see in he following paragraphs, this self-regulation capacity provides the market with ample room in which to customise the generally stringent market regulations to the specific characteristics of the securities traded in the MAB.
Members and Participants
Entities that qualify to become members of the MAB include brokers, broker-dealers and credit entities.
Furthermore, entities performing legal or contractual duties in connection with the securities traded in the MAB may join the market as “participant entities” and benefit from the services, reporting and operative facilities provided by the market. This feature of the market is meant to benefit from the pooling of the administrative efforts that are inherent to going public which, in companies with a relatively small overhead, could be particularly cumbersome. In particular, it has proved very useful to discharge issuers of certain clerical tasks, such as the market’s communication of the liquidation value of the SICAV at the end of each trading day. In addition, it has also showed to be an important factor in diminishing the trading costs for investors: by joining the MAB as a “participant entity”, SICAVs and their management companies are allowed, without the intervention of a market member, to execute the trading orders made by their investors at liquidation value (see below).
The MAB has enacted rules of conduct applicable to both, market members and market participants.
The rules of conduct applicable to market members include obligations aimed at avoiding conflicts of interests (i.e., rules aimed at avoiding favouring the orders executed on their own behalf over orders on behalf of their customers or requiring the disclosure of any conflict of interest to their customers), insider trading (i.e., not disclosing, or trading on the basis of, insider information), preserve equal treatment between the customers (i.e., not favouring the orders of one customer over the orders of other customers, not offering special economic arrangements to particular customers, etc), information supplied to customers (i.e., timely provide clear and full information to their customers of the transactions carried out on their behalf), as well as regulations establishing the obligation to set up proper internal controls.
In turn, market participants are subject to much lighter obligations, mainly linked to the provision of information to the market and equal treatment of customers when using the market’s operational facilities.
The MAB has set up a Complaint Service that offers dispute resolution facilities to resolve controversies between market members and between a market member and its customers.
In Spain, there are two trading systems in place: the traditional “outcry system” (i.e., multilateral trading by an open outcry of bids and offers for securities, made in the stock exchange arena, followed by the execution of trade by verbal agreement between the brokers), and the electronic system.
The “outcry system” has been used in the Second Market for Small and Medium-Sized Companies of the Barcelona Stock Exchange which, until the inception of the MAB, was the traditional exchange for SMEs.
To enhance liquidity and further reduce the costs associated to market trading, the authorities of the MAB chose the Spanish Stock Exchange Interconnection System (SIBE), the electronic and automated trading platform used for Spanish blue chips and operated by the Sociedad de Bolsas, a subsidiary of BME. Since the SIBE links the four Spanish stock exchanges on a real time basis, this choice ensured a single point of liquidity for the shares listed in the MAB, unquestionably boosting this market’s liquidity and depth.
Given their particularities, the securities traded in the MAB are not, however, traded on SIBE’s Main Trading Market, which is an order-driven continuous market with an opening auction at the start of the session and a closing auction at the end. Trading of securities may be carried out through two different systems.
- The new “Liquidation Value” system, proprietary to SICAVs, where the investor may request the SICAV to sell or buy its shares at their liquidation value at the end of the trading day (or on the next possible date, for certain SICAVs with an international portfolio that cannot be mark-to-marketed until the opening of the markets were such portfolio is traded). As noted above, this alternative entitles the SICAVs to carry out the order without the involvement of a market participant - a cutback which, however, may be set-off by the commissions that SICAVs are allowed to charge in these circumstances.
- The “Fixing Market” system, a module of SIBE in which the securities with low capitalisation and liquidity are usually listed. Through this system, the securities are auctioned during the session but, with the aim of facilitating an efficient price and reducing volatility, the orders are not matched and allocated until the end of each of the two daily auctions. Under this system, and unlike the “Liquidation Value” system, orders should be: (i) carried out with the intervention of a market participants; and (ii) priced, either as “market orders” (i.e., orders made without a specific price limit and which are traded at the best opposite-side price at the time of entry), “limited orders” (i.e., orders to be executed at their limit price or better) or “market to limit orders” (i.e., market orders including the condition that if the entire order is not immediately executed at market price, the remainder of the order will be re-submitted as a limit order with the limit price set to the price at which the original order was executed). In all cases, orders are matched on a price-time priority basis.
Whilst under both systems the volume of the order should be stated, under the “Fixing Market” system, market members are allowed to file “iceberg orders” (i.e., orders where the trader only displays a fraction of the total quantity to be bought or sold), a practice that is particularly useful to avoid price distortion when disposing or acquiring large amounts of stock.
The choice between one or other trading system would depend on a variety of factors including the fees charged by each SICAV for redeeming the shares through the “Liquidation Value” system and, in particular, the liquidity of the securities.
In both cases, liquidation and settlement is made trough Iberclear (the Spanish clearing house) in standard terms and conditions (i.e. generally, D+3).
SICAVs are only required to disclose to the market:
- the information necessary under the NUCIL for all mutual funds (i.e., prospectus, prospectus summary, annual report, semi-annual report, quarterly report),
- material facts (hechos relevantes),
- acquisitions and sales of significant holdings (participaciones significativas); and
- daily liquidation value of the SICAV for redemption purposes (valor liquidativo).
The MAB has adopted the “single counter” approach and requires the same information as CNMV. In all cases, the information can be provided in writing or electronically for dissemination through the Internet.
The cost of listing in the MAB has been calculated to amount to over 50% of the cost of trading in a Spanish Stock Exchange and, in any event, is capped at an initial fee of €15,000 and a fixed annual fee of €650.
Furthermore, by trading in the MAB, participants benefit from a 50% reduction if compared to the cost of trading in a Stock Exchange using the traditional “outcry” system.
The MAB was road showed with unusually high expectations: by year end, when the small cap segment of the market is implemented, 90% of all Spanish SICAVs will be listed in the MAB. Whereas the 10% threshold reached thus far is a much more modest achievement, it is much more realistic and, definitively, a very positive start.
In any event, to date the SICAVs have been the traditional Spanish investment vehicle for high net-worth individuals. As a result, the MAB, rather than portraying the image of a deep and liquid trading platform for investment pooling, may well become the stock market facilities for some, fortunate private banking clients.
Nonetheless, the move towards an MAB has been a wise one. Through the regulatory advantages associated with listing securities in the MAB, the tight ownership of the SICAVs and the sophistication of their stakeholders, MAB has secured a swift, plush inauguration, providing the good-will and operational know-how over which a truly sound and efficient market for small caps will be built, just in time to affront the approaching cycle of rising interest rates.