No Pain, No Gain: Minor stock market Ofex could be a major winner

Shares in Plus Markets have experienced the type of volatility normally reserved for some of the more wayward residents of the fringe Ofex share market it runs. Since arriving on the rival Alternative Investment Market (AIM) in April, 2003, they have fluttered between 4.5p and 40p.

Last year, Plus looked so minus that it had to embark on an old-fashioned rescue cash call. It raised £3.1m at 5p a share. Today, Ofex, the City's third-tier share market, is looking decidedly robust and displaying ambitions that could make it a powerful rival to AIM, the home of Plus's own shares.

Plus is intent on expanding its operations and has raised a further £2.5m (again at 5p) to develop a new share trading platform, operating alongside Ofex.

Initially it is aiming to offer a market for shares of smaller companies currently enjoying a full (and relatively expensive) Stock Exchange presence. Most observers expect that the new market will go on to attract AIM shares. It should be up and running in the next few months.

Plus seems an unlikely challenger to Stock Exchange supremacy, but its expansion is well timed. After all, the remorseless growth of AIM appears to be creating problems within the still highly conservative Stock Exchange.

The Stock Exchange created AIM 10 years ago as a lightly regulated junior share market for smaller companies. It was, in essence, cheap and cheerful. Many of the restrictions imposed on companies seeking and enjoying full listings were dropped.

Like many innovations, it took time to get going. But I suspect its success in the past few years has astonished the powers at the Stock Exchange. It now embraces more than 1,300 companies with a combined capitalisation approaching £50bn. And its progress is producing difficulties that, I believe, are causing anxiety. Already there are worries that AIM is acquiring a Wild West image. Consequently, membership is becoming more burdensome and, possibly, expensive.

Predictably, the Government is casting envious glances because it perceives a tax shortfall. It is not, as far as I am aware, planning changes to the capital gains and inheritance tax advantages AIM investors enjoy, but expressing displeasure at the tax treatment accorded bigger AIM companies. The implication is they should suffer the same taxes as fully quoted firms.

The Stock Exchange has to keep a grip on AIM without stifling the freer atmosphere that has prompted its popularity. The junior market's runaway success must not become counterproductive. Yet, with so many overseas companies joining, it could become difficult to police. Restrictions imposed on cash shells are a clear reaction to the possible image problem.

With AIM getting more rules-conscious, there is discontent among private client traders, powerful AIM influences but often overlooked by City hierarchy. Many are furious that the Stock Exchange has delegated trading in some AIM stocks to its electronic order book to their disadvantage. They expect the order book, which they say is unsuitable for often lightly traded stocks, to increase its AIM involvement. Such a groundswell must augur well for the Plus initiative.

The move against small cash shells produced the first sign that Plus felt strong enough to expand. Soon after the Stock Exchange pronouncement, Ofex let it be known it had no objection to such creations. But it was such a minor ripple that few appreciated Plus had the Stock Exchange, and AIM in particular, in its sights.

The fringe market, born shortly after AIM, is well equipped to mount its challenge. Besides its restructuring, which has produced a leaner, fitter organisation, it is now run by Simon Brickles, once head honcho at AIM. And the more aggressive approach coincides with a revival in Ofex fortunes. Today it has 145 constituents, capitalised at £1.7bn. There is still a yawning gap from its halcyon days when its companies were worth about £2.7bn. But around half that valuation was accounted for by Weetabix and National Car Parks, both since taken over.

For the first time for a long period, Ofex is growing, with newcomers outnumbering departures (usually to AIM). Its new financial strength and promising ambitions are reflected in its shares. They have more than trebled this year to around 17p and have attracted supporters such as internet tipster t1ps.com.

Still, when Plus shares were comfortably around 40p, investors were enchanted by similar expansion possibilities. But it all went wrong. The company ran out of cash and was at the mercy of cheapskate predators. I don't think there is much danger of a repeat performance.

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