Are SA investors ready for market fragmentation?
Evidence suggests that a number of trading channels do not provide the expected benefits in emerging markets
GLOBALLY, economies thrive on the presence of robust and competitive business environments. Not only is healthy competition a key ingredient of vibrant and flourishing economies, but discerning investors in this era demand it. Despite the introduction of alternative markets, it is worthwhile exploring why investors still derive assurance from established channels.
The JSE has been central to bringing together buyers, sellers, issuers and investors for more than a 100 years. It is not only the largest stock exchange in Africa and the 19th-largest in the world, but one of the most trusted, stable and robust offerings.
The South African investment market has seen the birth of competitors to the JSE. These exchanges are appealing to a new investor segment and have presented an opportunity for the JSE to challenge itself to become a better and more agile trading environment, enhancing competitiveness in product, service and costs.
The JSE delivered on its commitment to reduce fees with the introduction of the equity-tiered billing model last year, through which we have seen a 12 percent fall in trading fees and improved market liquidity. Further success last year was the market collaboration and delivery of the Bond ETP project, with trading going live in July last year.
This year the JSE’s equity and foreign exchange derivatives markets migrated onto the MIT trading platform to bring improved latency, stability and, in turn, increased flow to these markets.
Advancements in stricter regulatory approaches to adjust to the emerging status quo and promote greater transparency have added complexity in light of increased market fragmentation. Although the case for market fragmentation has been compelling in larger markets, such as the US, in terms of the reduction of trading costs and improvement of market quality it has led to higher costs in order-routing and in efforts of defending best execution. It is important to note that in these developed markets only the largest and most liquid counters saw improvement in market quality, and in fact the opposite resulted in less liquid stocks. Given the drawbacks of fragmentation in such developed markets, there is no evidence to prove market fragmentation or its resultant success within a market the size of South Africa.
There are limited characteristics in our market that drive trading behaviour in comparison to larger markets, such as significant participation from retail and growing participation of passive activity. In that sense, looking towards markets in advanced economies to establish a benchmark is, at the least, potentially misleading. Without the technological tools that allow the brokerage industry to transact across different markets, market fragmentation in emerging markets has the ability to erode quality.
So what determines market quality? Cost remains a big factor, but so is the ease of trading – that is the ability of investors to fulfil the order to buy or sell without market impact – assurance of settlement, robustness of trading venue – and, not least, the strength or depth of the order book.
Notwithstanding the reduction of trading costs, making listing an attractive exercise, particularly for small and medium-sized enterprises (SMEs) has been on the JSE’s agenda for some time. Through AltX, SMEs have, since 2008, had the opportunity to raise capital, widen their investor base and trade their shares on a regulated market.
Taking a leaf from Maureen O’Hara and Mao Ye’s research into whether market fragmentation is harming market quality: “Traditionally, setting up exchanges or markets was extremely costly. Trading involved not only the expenses related to the trading platform but also to the ancillary services such as the monitoring and listing functions and the costs of clearing and settlement.” Hence, one cannot simply dismiss the inherent value attached to that cost.”
The JSE has set the benchmark that safeguards the interests of investors and shareholders and enabled competitor trading platforms the benefit of adopting the listing and regulatory requirements at no cost to themselves.