After more than half-a-century of being the only stock exchange in SA, the JSE suddenly finds itself facing not one but three new competitors.
Licences have been issued by the Financial Services Board (FSB) to all three new bourses: ZAR X, 4 Africa Exchange (4AX) and A2X.
It is coincidental that the new exchanges sound like model variations from one car marque – the start-ups are entirely independent of one another.
However, their X-factor branding is not helping confused market participants.
Not surprisingly given the complexity of stock markets, things have been off to a slow start. Only one of the exchanges, ZAR X, has gone live. 4AX hopes to be operational by the end of May and A2X is targeting October.
ZAR X has two shares listed – Senwes Limited and its holding company, Senwesbel. Liquidity thus far has been poor. Senwes traded once in March and Senwesbel has not traded since March 2.
But don’t be fooled by these modest beginnings: the new bourses have the potential to shake things up.
And there is considerable resolve to make these businesses work, as evidenced by the significant cash investments made by the financial backers of the start-ups.
ZAR X CEO Etienne Nel says the company has an extensive listings pipeline, from agribusiness and financial services to structured products and black economic empowerment (BEE) companies, the smallest of which has a market cap of R500m and the largest R12bn.
Obtaining licences from the FSB was not easy.
The JSE says it welcomes competition and has no beef with the new exchanges, but launched a legal challenge to the FSB’s granting of a licence to ZAR X.
The JSE says its attempts to shut down ZAR X before it got off the ground were all about ensuring a level playing field.
4AX, itself subject to a JSE appeal, also challenged the ZAR X listing. 4AX CEO Fariyal Mukaddam said certain checks and balances were absent in the ZAR X model, which gave cause for concern because of the potential to introduce systemic risk into the market.
Lofty as this sounds, it’s hard to see how the ZAR X business model could place the entire South African stock market industry at risk. ZAR X is indeed championing its low hurdle for new listings, but even if that were to result in a few small dodgy companies coming to market, it is not likely to threaten an equities collapse. 4AX lost its appeal against ZAR X, who were awarded full costs in settlement. ZAR X believes further legal review on the part of 4AX is merely a stalling tactic to delay settling the costs.
With the infighting mostly concluded and the exchange licences granted, private and institutional investors are keen to see what effect the new bourses will have.
All three exchanges hope to attract listings and investors by offering cost savings and efficiencies — or, as the ZAR X website puts it, disruptive fintech to create a more efficient market for all.
For ZAR X, this means quick settlement (T+0), zero safe custody fees and free market data, among other things.
T+0 means sellers get their cash on the same day.
By contrast, the JSE only recently moved from the T+5 to the T+3 model.
The ZAR X brokerage model is percentage-based with no minimum. For private investors doing small trades (R2,000, for example), ZAR X will represent significant cost savings.
ZAR X is well on its way to offering all the features investors have come to expect of a modern exchange, including regulatory notices (via ZAPS, the ZAR X Publishing Service, which is equivalent to the JSE’s Sens), live price feeds and easy online trading via a mobile app. But none of this counts for much if the exchange fails to attract listings that interest investors.
This is the principal challenge facing all the new exchanges – without issuers, there is no market. To attract listings, Nel says ZAR X will charge fees that are about 60% less than issuers will pay elsewhere and continuing fees will be 80% less. 4AX announced that they hoped to list their first securities by the end of April 2017. Six listings are in the pipeline. They envisage a two-phase process for attracting listings. Phase one will target, among others, BEE holdings companies, agricultural companies and inward-listed securities (companies not domiciled in SA).
They have also teamed up with the Gauteng government with a view to listing small and medium-sized businesses such as township entrepreneurs.
The exchange would focus on companies with a market capitalisation of between R100m and R8bn.
Although the most recent FSB applicant, A2X’s model is most likely to challenge the JSE’s monopoly. Unlike ZAR X and 4AX — which have their sights on (mainly) new listings of smaller businesses, at least in the shorter term — A2X plans to do the opposite: target the 50 to 65 largest JSE-listed counters via a secondary-listing model.
A2X chairman Ashley Mendelowitz says at least 90% of JSE liquidity comes from proprietary trading and institutional investors who trade predominantly in the heavyweight stocks. That’s where the action is; that’s the market we’re going after, says Mendelowitz. Initial public offerings and primary listings are not part of the launch plan, but will follow.
A2X will use technology developed by the UK’s Acquis Technologies, a division of Aquis Exchange, which includes proven deal matching and surveillance systems and a clearing platform custom-built for A2X.
Stockbrokers will be able to connect their existing platforms to A2X and will then be able to choose where to execute deals – via A2X or the JSE (or a combination of the two).
Smart routers will send orders to both systems and will optionally select the best execution alternative for the broker, factoring in price, volume and cost.
There will be no reason for JSE-listed companies not to secondary-list on A2X. By supporting A2X, they are likely to help improve liquidity in the local market and bring down costs
Mendelowitz says secondary listings on A2X will be free, with no initial or monthly fees.
Although there are no direct short-term benefits for issuers in the A2X model, there are medium-to long-term benefits in terms of improved liquidity, market quality and downstream cost reductions.
There will be no reason for JSE-listed companies not to secondary-list on A2X. By supporting A2X, they are likely to help improve liquidity in the local market and bring down costs. And, of course, they would play a meaningful role in bringing real competition to the exchange space in SA, says Mendelowitz. Broker membership on A2X will also be free.
It is no secret that the JSE is regarded as an expensive exchange by local participants (although the JSE disputes this). Part of the problem is the JSE’s BDA (broker deal accounting) system. It is compulsory for JSE members to use BDA.
But there is no compelling reason for deal-matching and clearing systems to be tied to one bookkeeping system. And this was not always the case — there was a time when stockbrokers were free to use other accounting systems.
When the JSE made BDA compulsory in 1991, the exchange sent at least one independent business to the wall. Clients of that business bemoaned its passing, arguing it was cheaper and more efficient than BDA.
A2X has no plans to replicate BDA, which presents an opportunity for software firms able to provide cost-effective post-trade broker-client solutions.
Competition among software vendors will show up the bloated and inefficient BDA system for what many participants believe it to be and will hopefully, over time, return SA to a system that allows stockbrokers to choose how to manage their client records.
Having brokers using a number of post-trade systems will also reduce single point of failure risk by moving away from the BDA concentration risk. Right now, if BDA is down, everyone is down.
Stockbrokers echo these sentiments. Sanlam iTrade’s Gerhard Lampen says JSE costs are onerous and he welcomes the competition and hopes it will drive down costs.
The new exchanges are unlikely to change things much for private investors in the short term. A2X is targeting institutions and the other two exchanges are unlikely to displace or effect JSE listings.
Lampen believes ZAR X and 4AX will remain niche markets for the foreseeable future and will probably be of limited interest to their clients.
He says Sanlam iTrade hasn’t seen any investor demand yet, but it will provide access, where possible, once the investor interest is there.
For brokers, A2X intends to offer direct savings of some 30% on current trading and clearing charges, increasing to 40%-50% when indirect savings on BDA, membership and data fees are factored in.
At least some of these savings are likely to be passed on and for asset managers trading hundreds of millions a day, this represents a significant saving.
The new exchange will also offer free real-time data for at least two years and discounted data (compared to JSE costs) thereafter. The effect of this cannot be over-emphasised.
Once A2X has sufficient liquidity — and given the effects of arbitrage across the two exchanges — listed companies, traders, asset managers and data vendors will be able to use A2X prices for valuations, websites, datafeeds and client reporting.
As Mendelowitz says, market data should be a catalyst for volume; restricted access to data should not stand in the way of market liquidity.
Not surprisingly, A2X has been well received by stockbrokers and institutions. They expect to have a significant number of the largest brokers connected on go-live.
• Oldert is a financial markets data consultant and former MD of Profile Media. This article was originally published by Profile Media
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