Bottom Line: Building on Backwater

TWO nicknames for the Stock Exchange's Rule 535(2) dealing facility amply summarise the risk profile investors can expect. The trading facility is colloquially known as the Backwater.

There are about 250 companies listed under Rule 535(2) with a combined market capitalisation of pounds 2bn. Its ranks will soon be swelled by merchandising concern Just Group, which revealed plans to join yesterday. Several other additions are in the offing.

Interest in the facility is growing partly because the bull market environment is conducive to the promotion of tiny but ambitious companies, and partly because of the imminent demise of the Unlisted Securities Market.

To its credit, Rule 535(2) is flexible enough to accommodate a range of companies of different trading records. It can also handle dealing in shares where the company may not want a full public listing.

The problem is regulation. How much should be required or can reasonably be expected?

Interest in the Backwater demonstrates demand for a junior market. If the exchange does decide to develop a successor to the USM, it should consider using Rule 535(2) as a building block.