AIM is “the most successful growth market in the world” declares the LSE website. “It is now firmly established as the world’s pre-eminent stock market for young, growing companies,” says Head of AIM, Martin Graham.

What’s AIM all about? It’s the London Stock Exchange’s international stockmarket for smaller firms ranging from young, venture capital-backed start-ups to well-established, mature organisations looking to expand, says the LSE, and apparently “has been specifically designed with smaller companies in mind.” We repeatedly hear about “the success of AIM,” how companies “continue to flourish” and how it is “hugely popular with investors”.

I think it’s time for a little dose of reality.

Let’s start by looking at a long-term chart – the FTSE AIM All-share index since 1997.

It’s hardly what you’d call a ‘success’. I don’t see companies continuing ‘to flourish’. Shockingly, the index is lower than 11 years ago, despite the fact that there has been plenty of consumer price inflation in between. My crude technical analysis says that now key support around 1000 has been broken, we are on course to retest the 2003 lows below 600, with maybe some resistance en route at 800.

Let’s zoom in and look at a more recent chart.

It’s horrible. The trend is down, down, down – even with all those oil, gas and mining stocks. How can AIM be ‘hugely popular with investors’? Are all investors on the short side – i.e. they aren’t buying this stuff, they’re selling it with the intention of buying back lower down and making their profits that way? There are a few notable exceptions of course but in general, the charts show that if your firm is listed on AIM, the price of your shares is falling.

AIM’s success

So what’s the LSE so happy about? The real success of AIM has been to get a lot of companies to launch their shares on the exchange in an IPO (Initial Public Offering). There are some 1700 or so companies now listed. And it is in the listing (which comes with endless fees) that exchange, the brokers and the advisers earn their money.

Or did earn their money. Today that source of easy money looks to have dried up – new listings have plunged. Look at the Daily Telegraph chart below:

The LSE will no doubt blame this collapse on the credit crunch. And there’s no doubt these are difficult markets, particularly for small caps. But much of the blame also belongs to the market itself.

Stock exchange operators want to companies to list and there’s nothing wrong with that. The problem is with happens next. Once a company has ‘floated’, the exchange, the brokers, the advisers and so on have all made their money. While they might like to see companies thrive, financially it doesn’t matter to them whether the company sinks or swims.

As Charles Breese, founder of Armshare.com, says, the LSE is too intent on simply recruiting new Aim entrants and is not doing enough to stimulate the secondary market, where existing holders are able to sell out and new investors can get involved.

On the exchanges in Canada, if you want to sell a stock, you offer it at a set price. That offer is placed on the exchange and if somebody wants to buy, they can at that level. In short, this is a direct, transparent market. AIM has seen fit to use a different method, the market maker system, with no such transparency. It’s a consequence of this system – and the market makers operating it – that liquidity on the exchange has all but dried up.

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Source: What’s Wrong With AIM?