Boutique exchanges can afford the kind of personal interaction that provides the opportunity for innovative solutions, says Eileen V Muscat, CEO, Malta Stock Exchange.

Were boutique exchanges a direct result of the recent financial crisis or do they have a longer history?

Boutique exchanges have probably been around for even longer than the larger exchanges. Indeed, one can say that the exchange business started with boutique exchanges trading commodities such as coffee and gold. As the capital markets developed over the centuries, so has the nature of boutique exchanges changed – some continue to trade in specific commodities such as precious metals and others in specific financial instruments such as derivatives or energy products. Others, such as our market, provide a whole gamut of services and products, but retain the boutique status because of the size of the exchange itself, while catering for smaller issuers and other users. Another differentiating factor is the very personalised service environment.

The recent financial crisis, as we all know, has caused a shake-up in all financial services, and has forced the capital markets to redefine their business models, and, in some cases, move towards more specialised services. EU directives such as MIFID have also resulted in a plethora of new trading venues which focus on capturing liquidity and trading volumes – this has also led to more traditional exchanges restructuring their business into more specialised or boutique areas.

What role can boutique exchanges play in the local economy?

The main objective of any exchange is to provide the possibility for savings to be transformed into productive development. Boutique exchanges carry out the same function and in particular, exchanges such as ours, which can support smaller issuers which are the backbone of the economy, provide an alternative financing option for such companies in order for them to continue to grow and develop.

What are the main advantages of boutique exchanges?

I do not think it is correct to speak about the advantages or disadvantages of, for instance, very large capital markets as opposed to smaller, boutique exchanges. They have different business models, provide different services and have different roles. Most very large exchanges are all about volumes – providing liquidity on both the demand and supply side. Boutique exchanges that deal in particular commodities or financial instruments offer very specialised services geared to that particular business. Others, such as our exchange, do not focus on trading volumes but in being able to service smaller companies and the needs of investors and offer a whole range of services in a personalised and flexible manner, within the parameters of robust regulation.

Boutique exchanges depend on technology and a spirit of collaboration – what readiness does Malta enjoy in this regard?

Throughout the last 24 months, the Malta Stock Exchange has invested very heavily in technology, in both its trading and post-trading infrastructures. This, in order to ensure that it not only has technology that can support its current business requirements, but that it can also act as a business enabler to support its strategy to increase in services and provide connectivity in order to support the Malta Stock Exchange’s focus on increasing international business.

Indeed, the choice of technology was driven by strategic choices and focus. Furthermore, the Malta Stock Exchange has entered into agreements with international players to be able to provide more international business. Suffice to mention the Malta Stock Exchange’s link with Clearstream AG and the collaboration with the Irish Stock Exchange with regard to the formation of the European Securities Wholesale Market.

All this is supported by a very robust regulatory framework, world class financial sector practitioners and excellent telecommunications, among other things, all of which are necessary for an exchange to provide services professionally and function well locally and internationally.

All this is supported by a very robust regulatory framework, world class financial sector practitioners and excellent telecommunications

The particular circumstances of our exchange are shared by many of the smaller exchanges that operate particularly in the south of Europe, and even in the Mediterranean rim. All these markets are defined by SMEs, or even micro SMEs, low liquidity, and a resistance to seek financing through the capital markets by family-run businesses. We are currently seeking to address these issues through a project that we hope will see increased collaboration between exchanges which share these circumstances.

What regulatory backbone do boutique exchanges require?

Regulated markets, whatever their size or nature of business, as their name indicates, all operate within robust regulatory frameworks in line with, in the case of EU exchanges, the relevant directives and also other international standards and regulatory requirements.

Exchanges are subject to a licensing and authorisation regime and oversight by their respective competent authority, capital adequacy requirements, as well as a continual reporting and notification regime, both to the competent authority and also to the general public. All these requirements are intended to provide robust operating systems and procedures and transparency in order to protect the interests of all users of exchange services.

For small exchanges such as ours which provide a whole range of services that are often specifically tailor-made to the need of particular users, the robustness, but also the flexibility, of the regulatory regime is very important and can provide the competitive edge necessary to attract business.

What added nimbleness and diversification do boutique exchange give the local economy?

Boutique exchanges can offer services and products which perhaps would not be possible to provide in larger, volume oriented capital markets. Boutique exchanges such as ours have a different focus. The focus is on offering, where required, ad hoc services designed to the needs of a particular user. The personal interaction between exchange, intermediary, user and regulatory makes this possible and provides the opportunity for innovative solutions, which are cost-effective and at a relative short time to market. I like to say that we have a can-do attitude, which I think you would find that the larger exchanges will find difficult to adopt because of their heavier structure and large volumes.

This flexibility allows our exchange to respond to the needs of its particular market, say, for example, focusing on the needs of smaller issuers and intermediaries and other users, not only on the domestic front but attracting similar business from overseas. By focusing on such needs, the Exchange helps in the growth and development of such users but providing not only services and connectivity to external markets, but also provides an alternative source of financing to issuers, all of which supports and sustains the economy.

How are listing and trading on boutique exchanges best encouraged?

Listing is encouraged by providing prospective issuers with a service offering which is cost-effective, efficient, transparent, regulated and timely. Many small prospective issuers have concerns about the whole listing process, inherent costs, disclosure requirements and above all, loss of control of their company. Therefore, it is important that prospective issuers are made aware that while listing does indeed bring in new and perhaps more stringent regimes with regards to many aspects of its operations, there are many benefits accruing from listing and trading, not least the possibility to access funds directly from the public, fiscal benefits, marketability and valuation. Such issues are particularly important for companies that wish to continue to develop and expand their markets.

Within this context, what is the role of the Malta Stock Exchange?

The Malta Stock Exchange offers a whole range of services, covering the whole value chain of a transaction from admission and trading, to clearing and settlement, up to registration. In effect, the Malta Stock Exchange offers prospective issuers with all the services that it may require following listing. Issuers may not require all the services on offer and indeed, can define which services they require. However, being able to provide a series of linked services gives us the opportunity to offer an efficient and cost-effective proposition.

At the same time, however, the regulatory and operational structure is such that we are able to adopt a certain amount of flexibility that allows us to provide services that are tailor-made to the needs of the particular issuer. In providing a whole range of services within these parameters, the Malta Stock Exchange can respond to industry requirements and sustain its users in their future development and growth.