Picture this scene. A dusty circus tent in Margate where clowns juggle lit torches near leaking propane tanks. The ringmaster assures concerned parents this is perfectly normal entertainment. Now replace the tent with the London Stock Exchange’s junior market, the torches with unchecked speculation, and the clowns with Instagram gurus peddling stock tips. Congratulations, you’ve grasped the essence of the Alternative Investment Market (Aim) over the past decade.

The LSE’s sudden concern about bulletin board pump and dump schemes would be admirable were it not so laughably late. Like banning cigarettes on the Titanic’s sun deck after hitting the iceberg, this ‘crackdown’ arrives years after Instagram influencers realized how easily they could exploit small cap stocks. Their ‘abuse’ as the exchange delicately phrases it, follows predictable patterns. An influencer with 100k followers and zero financial credentials hypes a moribund Aim listed shell. Trading volumes spike 500% in days. Then comes the inevitable crash when reality reasserts itself. The only winners are those who got in early enough to sell before gravity returns.

Here’s what fascinates me about this belated regulatory awakening. The LSE’s social media epiphany coincides suspiciously with Aim’s slow motion crisis. The junior market has lost nearly 40% of its listed companies since 2007, with liquidity drying up faster than a puddle in the Sahara. Research by Peel Hunt shows average daily trading volumes for Aim stocks fell 22% between 2021 and 2023. Desperation makes strange bedfellows, and it seems the exchange now finds influencer culture embarrassing only when it threatens the remaining shreds of Aim’s credibility.

Let’s not pretend this is purely about protecting retail investors. If that were true, we’d have seen enforcement years ago when the Financial Conduct Authority flagged suspicious small cap promotions back in 2018. One suspects the real catalyst was institutional clients complaining their Aim holdings kept getting caught in social media induced volatility storms. Nothing focuses regulatory minds faster than hedge funds losing money on positions disrupted by TikTok traders.

The human cost of this regulatory inertia deserves more attention. While financial influencers treat stocks like casino chips, real businesses and employees suffer collateral damage. I spoke last month with the CFO of an Aim listed biotech firm whose share price became unmoored from reality after a viral YouTube ‘analysis’. When your scientists are fielding panicked calls from Aunt Mabel about whether their research grants are being cancelled because some teenager on Reddit claims they’re insolvent, actual business gets sidelined. The psychological toll on management teams navigating meme stock mania would make a fascinating case study in corporate resilience.

Another angle largely ignored in this discussion is the global context. London isn’t battling some unique British scourge. The American SEC recently charged eight social media influencers with securities fraud for their role in a $100m pump and dump scheme. Australian regulators implemented strict social media disclosure rules in 2022 after ‘finfluencer’ led trading surged during lockdowns. What distinguishes London’s approach has been its tolerance of behaviours considered outright fraudulent elsewhere. The FCA’s slap on the wrist fines rarely exceed the profits made from sketchy promotions. One notorious British finfluencer paid a £50k penalty after allegedly making £2m from pump and dump activities. Some might call that a cost of business rather than a deterrent.

Which brings us to the great unspoken truth of small cap markets everywhere. Like street magicians relying on misdirection, promoters know regulators focus on large cap stability while turning a blind eye to small cap chaos. Research from the University of Chicago found that securities violations in small cap companies take 50% longer to detect than those in large caps. The paper’s title said it all, ‘Inattentional Blindness in Financial Supervision’. London’s regulatory spotlight swings towards Aim misbehaviour only when it grows too brazen to ignore. Otherwise, a certain amount of chaos has always been tolerated as part of junior market culture.

Lurking beneath all this lies perhaps the most troubling question. Why does anyone still take Aim listings seriously as investment vehicles when many behave like penny stock casinos dressed in Savile Row tailoring? The market’s original purpose as a fundraising platform for promising young companies has been undermined by serial offenders printing money through reverse takeovers and dodgy promotions. Data from Wealth Club shows only 38% of Aim IPOs raised more than £10m last year, down from 62% in 2015. No wonder serious startups now prefer direct listings or staying private.

None of this means the LSE’s intervention is unwelcome. Watching them polish Aim’s tarnished image through belated enforcement actions just has the whiff of closing the pub doors after last orders finished two hours earlier. Small investors should understand that market reforms often arrive only once institutions feel pain. Whether trimming sails now will save the listing ship remains doubtful. Aim’s reputation took decades to degrade. Its recovery timelines look equally formidable.

As for the influencer army, they’ll adapt as grifters always do. Telegram channels replace Instagram. Offshore accounts obfuscate ownership. The newsletter subscription business model gains traction. The underlying market dynamic remains unchanged: Attention has become the ultimate currency, and financial entertainment drives engagement better than boring old fundamentals ever did. At least until the next crash reveals who’s swimming naked.

Final thought. If we want healthy public markets, perhaps we should spend less time sanitizing the disorder and more asking why serious companies avoid listing in the first place. The LSE’s latest cleanup might soothe institutional nerves temporarily. But until Britain addresses its capital markets’ fundamental competitiveness issues, Aim will remain what it’s become: A cautionary tale about regulatory complacency and speculative excess.