The Irish Stock Exchange said yesterday that it hoped to have its planned new market for smaller companies up and running in the second half of the year.

The exchange plans to scrap its three markets for small and developing firms and replace them with a more lightly-regulated and lower-cost market, along the lines of London's Alternative Investment Market (AIM).

After a year when several smaller Irish companies bypassed the exchange in favour of AIM, it is hoping the new market may encourage some firms to opt for a dual listing in both London and Dublin.

In addition to new and emerging companies, the market may prove attractive to some of the smaller companies on the official list, as European Union regulations to be introduced in the summer add to the regulatory burden of listed companies.

"I think there is no doubt that the pace of regulatory change is such that it's raising the bar for companies on the main market, and cost-effectiveness is becoming a real issue," said Ms Deirdre Somers, the exchange's director of listing.

The exchange expects at least two companies to follow the example of Eircom and C&C by floating on the official list of the stock market this year.

Other initiatives planned for 2005 include the launch of an Exchange Traded Fund (ETF) and the creation of a central counterparty system. ETFs, listed baskets of stocks that represent a particular index, have proved popular with retail investors in particular since their launch in the US 10 years ago.

The exchange is currently seeking regulatory approval for the launch of such a fund based around the larger companies on the ISEQ, and is hoping to launch it by the end of the first quarter.

It also plans to set up a central counterparty system at a cost of more than €2 million in a bid to boost liquidity and efficiency, and provide greater anonymity in the system. In addition, the exchange is working on removing paper, such as share certificates, from trading and settlement.

The exchange's CEO, Mr Tom Healy, said 2004 had been a good year, with profit before tax, investment income and exceptional items of €6.9 million compared to €4.9 million the previous year. Listing investment funds and asset-backed securities accounted for around two-thirds of the exchange's income.

The Irish Stock Exchange is now the world leader in the listing of investment funds, with more than 4,000 funds listed, an 18 per cent increase on 2003.

The number of bonds listed was more than 6,000, or €48 trillion in value.