Birmingham stockbroker Arden Partners has confirmed it is in merger talks with London rival Cenkos Securities.
It said discussions "with a view to a possible combination of the two businesses" were at a preliminary stage and there was no certainty of a deal.
If there were it would be on an all-share basis based on the current price of the company with no "material premium".
Arden shares traded unchanged at 124.5p on Tuesday, valuing the business at £30.75 million.
Cenkos did not comment.
Arden is a research-led institutional stockbroker specialising in small and mid-cap businesses.
Based in Edgbaston, it has offices in the London and Bath and listed on the AIM market in July 2006.
Its core team are veterans of the old Albert E Sharp Securities and Old Mutual Securities in Birmingham.
Arden's underlying profits rose by 18 per cent to £5.5 million in the 12 months to the end of October last year.
Turnover from fees, commissions and retainers was 18 per cent higher at £16.8 million.
It acts as adviser or broker to companies with a combined market value of about £4.5 billion.
In 2007 it worked on deals with a total value of more than £450 million and raised more than £190 million in capital for its clients.
There was less positive news at the broker's annual meeting in April when it was revealed that corporate income for the first five months of the current year had fallen by 20 per cent because of difficult market conditions in its sector.
Chairman Sir David Rowe-Ham told the meeting, however, that Arden would be responding to the downturn by taking on more staff and by focusing on the lucrative Indian market.
City-based Cenkos is an independent institutional securities firm which recently acted as sole adviser and placing agent on an £82.3 million share issue for Thames River Hedge, a London listed "hedge fund of funds".