Pisces has the potential to flourish – if the FCA plays its cards right
New Pisces markets could begin trading before the end of this year, in what the government hopes will be a boost for fast-growing companies in search of a stepping stone before reaching IPO.
The framework, known as the Private Intermittent Securities and Capital Exchange System, will allow the creation of a new type of private stock market, regulated by the Financial Conduct Authority (FCA), with a much leaner regulatory burden compared to firms on public stock exchanges.
In the FCA’s own words: “Pisces will give investors more opportunities to buy stakes in growing companies. And private companies can tap into a broader range of investors and asset managers, leading to greater support for future fundraising.”
LSEG boss David Schwimmer has expressed excitement about the new framework, adding that investor interest “is not just from the UK — it’s global.”
A statutory instrument setting out the regulations was put before Parliament on Thursday, while the FCA says it will set out the final rules on the scheme “within the coming weeks.” Industry sources who spoke to Morning Wire suggest the regulator has some work to do to ensure the scheme’s framework fits with market expectations.
A key point of contention is a requirement that Pisces shares be traded intermittently, which the rules define as “occasional, not frequent, and of limited duration.” That would put it at odds with public stock markets, which allow for continuous daily trading between fixed hours.
A likely outcome is that shares will only be traded at specific dates, such as at regular monthly auctions. But this would make trading much more cumbersome.
Mike McCudden, CEO of liquidity venue JP Jenkins, which hopes to operate its own Pisces exchange later this year, said he was “surprised” that intermittent trading was the starting point for Pisces.
Dozens of private companies have had their shares admitted for trading to the firm’s platform, worth a combined £2bn. The vast majority elect for the shares to be continuously traded when given the option, McCudden says.
For its part, the FCA has interpreted the rule to be somewhere in between. Auctions could be one approach, but continuous trading may also be permissible, provided this is on occasional set days rather than Monday to Friday.
The precise form that trading could take could also determine which investors get involved. The FCA tells Morning Wire the use of a central securities depository or CSD (known as Crest in the UK) will be optional for Pisces market operators. Those who elect not to use the system, which facilitates the electronic settlement of share trades, could exclude certain types of funds from participating who require CSD functionality. That would mean some Pisces markets end up with quite different sets of investors, and levels of liquidity, than others.
Making Pisces work
Another area of concern is on share buybacks. While the manoeuvre is common on the London Stock Exchange, it is thought that the Treasury regards it as a waste of capital resources, so has banned its use on Pisces markets, which are designed to encourage investment into innovation. But there are concerns that the ban could be another dampener on liquidity, which could stunt the market’s growth.
“Whilst there are legitimate concerns here in terms of constraining growth potential – something that we believe sits at the heart of Pisces – [the use of buybacks] also affords a flexible capital reorganising mechanism that may be vital especially if a company is looking towards a full IPO,” McCudden says.
There are hopes these issues and others could be cleared up under a five-year regulatory sandbox, which will allow the FCA to test the design before finalising a permanent regime in 2030. The sandbox environment is designed to enable the FCA to check everything is working as well as it could be and allow the regulator to make refinements more quickly.
The regulatory sandbox system is one that has attracted international praise for its flexibility in the past. But there is no guarantee that regulators will see eye-to-eye with everyone in the industry.
McCudden said he was desperate for the sandbox to be used constructively to ensure the outcome addresses real challenges within the London market – ones which could ultimately prove fatal. “Otherwise it risks looking like little more than a case of rearranging deck chairs on the Titanic,” he said.