The LSE says a new study shows the market for smaller stocks has benefited from the choice of order book trading alongside existing marketmaker provision introduced by SETSmm and that trading volumes have increased while the cost of trading has decreased.

The exchange says the AIM 50 securities transferred to SETSmm in December 2005 are showing a particularly marked improvement.

At the time many marketmakers opposed the LSE's extension of SETSmm to AIM stocks and claimed the system's tighter spreads lowered incentives for specialists to deal in smaller company shares.

But the LSE says the greater choice and transparency of SETSmm has enabled more institutional investment in the small cap, mid cap and AIM markets.

The exchange estimates that the value traded in the AIM 50 by institutional investors has increased by around 26% since the move to SETSmm in December, while the value traded by institutions in the small cap index has increased by around two thirds since June 2005, the index's last full month of trading on an exclusively quote-driven system.

Tighter spreads on SETSmm have resulted in a marked reduction in trading costs. A transaction cost analysis shows that SETSmm has reduced the cost of trading small cap securities by between 16% and 30%, depending on the size of the trade, with an even bigger reduction for those small caps securities which have been on SETSmm since July. The AIM 50 saw a reduction in transaction costs of between 16% and 42%.

Last month Plus Markets, the quote-driven alternative to the London Stock Exchange's SETSmm platform, reported solid progress in its first two months of operation.