The Alternative of Private Regulation: The London Stock Exchange's Alternative Investment Market as a Model

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Abstract

Most people assume that markets require a strong set of government rules and regulations to eliminate problems associated with transparency and fraud. Commonly overlooked is the fact that stock exchanges did, and to a large extent still do, provide a set of private rules and regulations. One modern stock exchange that relies heavily on private rather than government regulation is the London Stock Exchange's Alternative Investment Market (AIM). Founded in 1995, AIM is an exchange regulated market in which private regulators, called Nominated Advisors or Nomads, oversee individual firms and decide whether they can list their shares. This system of private regulation reduces regulatory barriers and has attracted many new firms. But rather than being ‘a race to the bottom’ in which anything goes, the private regulators work to put their stamp of approval only on firms that warrant trading. The market has attracted a lot of investment, and the survival rate of IPOs is in line with that of other more regulated markets.

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