Why Stock Exchanges Think Too Small

Stock exchanges have spent years asking the wrong question. They ask how they can attract more IPOs when they should be asking how they can attract more investors.

The distinction matters. A successful IPO brings capital into a company at a particular point in time. A successful market creates an environment where capital continues to move through that company for years afterward. Too many exchanges, including smaller and frontier exchanges have focused too heavily on the first while paying far too little attention to the second.

For many exchanges, success is still measured by the number of listed companies, IPO proceeds raised and market capitalization. Those numbers matter, but they do not tell investors whether the market actually works. A market with 100 listed companies and limited trading is not necessarily healthier than one with 50 companies that attract consistent global investor interest.

This is where exchanges need to think bigger.

Capital Travels

Investor capital has become increasingly global. An institutional investor sitting in New York, London, Singapore or Dubai does not need to invest only in companies listed on their home exchanges. Capital travels easily. Attention does not.

That creates both a problem and an opportunity for smaller exchanges.

There are interesting companies trading in Mongolia, Kazakhstan, Croatia, Georgia, Romania and dozens of other markets. Many have attractive valuations, exposure to growing economies and businesses that would be difficult for investors to replicate elsewhere. Yet very few global investors wake up in the morning looking for companies on those exchanges.  And if they do, can they even invest?

That requires connectivity. It means building relationships with international brokers, market makers, research providers, investment banks, custodians, data platforms and other exchanges. It means making securities easier to discover, understand, trade and settle. In some cases, it can mean creating secondary trading opportunities in larger financial centers or making securities accessible through depositary receipts or other structures.

The objective should not necessarily be to move companies away from their domestic exchange. It should be to extend the reach of the domestic market.

An IPO Is an Event. A Market Is an Ecosystem.

Governments and exchanges understandably celebrate IPOs. They are visible demonstrations that capital markets are working. Companies raise money, politicians ring bells and exchanges announce another successful listing.

Then what?

The harder question is what happens six months or three years later. Who owns the shares? Who is researching the company? Who is making markets? Are international investors discovering it? Is there sufficient liquidity for an institution to establish a meaningful position? Can an investor enter and exit without dramatically moving the price?

Raising $50 million in an IPO is very different from creating a security capable of attracting global capital in the secondary market.

Primary capital formation is transactional. Secondary market development is continuous.

This is particularly important for frontier markets because international investors frequently worry more about the exit than the entry. An investor may like the company, valuation and country exposure but still decide against investing because the secondary market is too shallow.

Liquidity therefore becomes part of the investment proposition.

Institutional Investors Are Important, But Retail Matters Too

Smaller exchanges also tend to think too narrowly about what constitutes a desirable investor.

Institutional investors are understandably the prize. Pension funds, sovereign wealth funds, asset managers and hedge funds can deploy significant amounts of capital. Attracting them can improve credibility and potentially create more stable ownership.

But institutions have constraints. Minimum market capitalizations, liquidity requirements, custody arrangements, benchmark restrictions and position-size requirements can eliminate smaller companies before an investment manager even considers the fundamentals.

Global retail investors operate differently.

They increasingly have access to international securities, thematic investing, online research and sophisticated trading platforms. They may be willing to own smaller positions in companies and markets that would be impractical for a large institution.

That does not mean exchanges should choose retail over institutional investors. They should build infrastructure that reaches both.

A healthy market needs different types of capital with different investment horizons and motivations. The broader the investor network, the less dependent the market becomes on a small domestic investor base.

Smaller Exchanges Need to Stop Acting Small

The future of smaller and frontier exchanges will not be determined simply by how many companies they convince to list.

Their survival will depend on whether those companies remain relevant once they are listed.

That means exchanges need to think less like listing venues and more like distribution networks for capital. Their job increasingly includes connecting issuers with research, international investors, brokers, liquidity providers and global trading infrastructure.

It also means accepting that international connectivity does not weaken the domestic exchange. Done properly, it strengthens it.

A Mongolian, Georgian or Croatian company becoming easier to trade in New York or London does not make it less Mongolian, Georgian or Croatian. It potentially creates additional demand, improves price discovery and introduces the company and its home market to investors who might otherwise never encounter either.

The exchanges that understand this will stop defining their addressable investor base by geography.

That is ultimately the opportunity. Smaller exchanges cannot compete with New York or London on scale, and they should not try. They can compete by offering investors access to companies, sectors and economic growth they cannot easily find elsewhere.

But access alone is not enough. They need connectivity, visibility, research and liquidity.

Getting a company onto the exchange is only the beginning. The real measure of success is whether anyone wants to trade it once it gets there.