JSE aims for greater sophistication. No more sitting on the margins:
THE JAMAICA Stock Exchange, JSE, expects to introduce exchange traded funds, or ETFs, before year end, and is determined to facilitate short selling and margin trading shortly thereafter – signs that the market is growing in sophistication.
Asset manager Charles Ross is cautioning, however, that specifically for ETFs, an illiquid market may act as a constraint on their performance.
An ETF is a marketable security that tracks an index, a commodity or a basket of assets. Like shares, ETFs trades on a stock exchange, however, shareholders do not directly own the underlying investments in the fund.
“There is no impediment for ETFs in general. In particular, it would depend on the composition of such funds,” said JSE Managing Director Marlene Street Forrest.
“We must test the actual appetite of the market,” she said regarding receptiveness to the product. “However, it is the market that is calling for new investment types, products, so we anticipate success.”
Efforts at comment from the group representing securities dealers on the ETF initiative, and which among them would be bringing products to the market, were unsuccessful.
Ross considers ETFs a welcome addition to market offerings, saying that smaller investors would have an added opportunity to invest in the broad market index at a lower cost, other than by way of a mutual fund or unit trust. “There would, however, be some practical issues that would have to be resolved by the JSE in order to facilitate these instruments,” he noted after the Financial Gleaner reached out to him for comment. “One of them is the high cost of supplemental listings when companies issue new shares. If this cost is not reduced, then the whole exercise becomes uneconomic,” he added.
“Another issue relates to the fact that our market is relatively illiquid. This would make it difficult for the managers of the ETFs to acquire shares in a timely manner and in proportion to the index that the ETF is tracking.”
Notwithstanding, he concluded, the introduction of ETFs would be “a step forward” in the development of the stock market and capital market.
Street Forrest said all hurdles had been cleared for the introduction of ETFs, and that all that’s left is for brokers to bring their products to market.
In the JSE Group’s latest annual report, Street Forrest also telegraphed
other pending initiatives.
“We intend to capitalise on new technologies to improve the marketplace. We have started and will continue to explore blockchain technology and identify the opportunities that it affords. We will also implement measures in the form of short selling, margin trading and market making in order to increase liquidity in our market and by extension, market participation,” she reported to shareholders.
However, Ross says margin trading is already being offered by some brokers to their clients.
Essentially, margin trading allows a client to borrow funds from a broker to trade a security. The security itself usually becomes the collateral for the loan.
Short selling allows an investor to trade a stock they do not own, by ‘borrowing’ it from their broker. The stock is typically sold at market price on the assumption the price will fall, at which point the client repurchases the stock at the lower price and returns it to the broker.
Street Forrest says the JSE is serious about the new products, but some of the exchange’s past plans have been known to be held back by regulatory constraints, notably the moribund attempt at launching a Jamaica depository receipt, or JDR, market.
JDR products would be denominated in foreign currency. However, the Bank of Jamaica, the overseer of the forex market, has been wary of new investment types that might sway demand for US currency.
“In the balance, it would have assisted in expanding the range of investment options and had the potential to create positive inflows in US and other hard currency,” Street Forrest said of the JDRs.
But: “The ultimate decision is not ours,” she said, while chafing at the status quo and the constraints it places on the JSE.
“The question is, when will the exchange be given that space to operate like a true global securities exchange, where we can incrementally grow within an ecosystem that is designed to balance growth and stability. I look forward to such a time in the near future,” Street Forrest said.