The times they are exchanging
T he launch, for the first time in more than 80 years, of three new stock exchanges in SA — Zar X, 4 Africa Exchange (4AX) and A2X — has been met with equal measures of excitement and scepticism.
“What are they going to sell and who are they going to sell to?” asks an exasperated David Shapiro. Shapiro, who joined the stock market in 1972 and is deputy chairman at Sasfin Securities, says he is worried about the future of the mighty JSE — never mind that of new exchanges. The JSE is “not what is used to be”, he says, in terms of the quality of companies listing, their prospects and the underlying economy.
In an age when technology companies boast some of the biggest market values, the JSE’s largest counters, bar Naspers, remain largely old-world businesses, Shapiro says. “We’re running out of ideas here.”
Many have welcomed the competition, saying it will lower barriers to entry for issuers and investors alike.
But market watchers are unsure of whether the new exchanges will be able to attract the listings and investing activity required for a thriving, liquid exchange.
New exchanges will struggle to survive in a market where even the JSE has experienced a drop in trading volumes, says Greg Davies, head of wealth at Cratos Capital.
The daily value of shares trading hands on the JSE has dropped from about R22bn to R16bn over the past few months, Davies says.
New stock exchanges “need a spread of various shares and liquidity”, he says. Zar X’s strategy to list agricultural co-operatives is a smart one, but is unlikely to attract significant interest from stockbrokers, he adds. “What would appeal to brokers is if Zar X lists products the JSE doesn’t offer.”
Focusing on smaller stocks, restricted shares and “exotics”, such as structured products, could lend appeal to the new exchanges, agrees Simon Brown, founder of Just One Lap. The JSE does list some of these products, but they are lost in the bourse’s 400-odd counters, he says. He can imagine a future with the JSE and “one other exchange”, but says he can’t see SA managing four exchanges.
So, what are these fledgling exchanges planning exactly?
Etienne Nel, Zar X CEO, says: “Restricted share offerings, new-wave passive investment structures, venture capital, tax-efficient structures, and a fully transparent fixed income market are all intriguing areas.”
Zar X will remain an equities-focused exchange for now, but Nel says it will look at listing other instruments, such as debt, if it identifies a need.
4AX, which hopes to begin trading this month, will list a range of asset classes, says CEO, Fay Mukaddam, including equities, debt and special purpose vehicles.
The third new exchange, A2X, will provide a secondary listings platform for JSE-listed companies, targeting the 50 to 65 largest and most liquid stocks on the bourse. It plans its end-to-end transacting costs to be about 40% lower than JSE costs. A2X chairman Ashley Mendelowitz says the exchange will compete directly with the JSE.
He and A2X nonexecutive director Sean Melnick are part of the founding team of Peregrine Holdings, with Melnick now nonexecutive chairman of the financial services group. Peregrine Equities is one of the country’s largest stockbrokers, while Peregrine Securities sends trade worth billions of rand through the JSE every month. It is undoubtedly paying
The exchanges also want to make it easier for small businesses to gain access to capital markets
the exchange high fees to do so. It remains to be seen what will happen when it has access to some of the same securities on a secondary exchange at a fraction of the cost.
At the time of writing, only Zar X had begun trading. On February 20 it matched, settled and cleared its first trade — a buy order for 100 shares in agricultural group Senwes at R10.50 a share — in 10 seconds.
Between February and early May, the stock had traded on about 10 days (mostly small trades, barring one trade for 100,000 shares on March 29 and another for 15,000 on April 5) with the price range-bound between R10.40 and R10.50.
Notably, Zar X’s real-time settlement is a first in SA. The JSE operates on a T+3 (trade plus three days) settlement cycle, meaning it takes four days to settle a trade.
Real-time settlement is particularly beneficial for retail clients, as they can obtain their money immediately rather than having to wait days for trades to clear, says Ridwaan Moolla, Absa Stockbrokers head of digital & education.
Trades have to be pre-funded with real-time settlement, which removes the risk that a trade won’t clear because there are insufficient funds or shares.
On a T+3 cycle, stockbrokers need very large balance sheets, have banks stand surety for their trades before they make them or face higher margining fees (effectively an insurance levy) from the JSE.
Real-time settlement reduces capital adequacy requirements for brokers and frees up investor capital.
Still, brokers don’t appear to be rushing to become accredited members of the new exchanges. But it’s early days. Zar X has only two listings (Senwes and its holding company, Senwesbel, which has virtually no free float) so there is not much to trade.
Senwes has a market capitalisation of R1.9bn and just more than a quarter of its shares in free float. The group supplies equipment, seed, storage facilities and financial services to the agricultural sector. Its 60 silo complexes store 25% of SA’s grain output.
Nel is thrilled that Zar X has attracted such an impressive first listing, but even he admits: “One listing is not a sustainable exchange. Sustainability is a function of the value traded.”
And herein lies the clincher for Zar X, 4AX and A2X: can they attract enough issuers and investors to generate the volume and value of trades to be sustainable? Time will tell.
If A2X can significantly reduce the secondary listing costs for JSE-listed companies, while promising enhanced liquidity, it may attract the sizeable issuers it is after, particularly if a stockbroker as large as Peregrine sends trades through the exchange.
It also has the backing of Patrice Motsepe’s African Rainbow Capital (ARC), which owns a 20% stake in the exchange, with an option to increase this to 25%. ARC co-CEO and former Sanlam chief Johan van Zyl has previously said that ARC’s industry relationships will unlock significant opportu- nities for A2X.
Zar X has a healthy pipeline of interested issuers, including a company with a market capitalisation of R15bn, says Nel. Since SA’s sovereign credit downgrade, Zar X has been approached by banks looking to list preference shares and structured products to reduce the capital they have to hold on balance sheet, he says. Banks’ cost of capital is expected to rise following the downgrades.
4AX will focus on companies with a market capitalisation of R100m-R8bn. It has teamed up with the Gauteng provincial government to look at listing small and mediumsized businesses, such as township entrepreneurs.
The JSE, meanwhile, is working on a similar idea. CEO Nicky Newton-King describes it as a “sub-AltX” retail market to help small entrepreneurs, such as spaza shops, to raise capital and attract more investors.
Both Zar X and 4AX will go after issuers that have security trading restrictions, such as over-the-counter (OTC) and broad-based black economic empowerment schemes.
Nel estimates that between 30 and 50 companies are doing some form of OTC trad- ing in their shares, with about half of these having listing potential. “We are talking to a lot of them,” says Nel, who cofounded OTC trading platform Equity Express.
The exchanges also want to open up stock market investing to the broader public and make it easier for small businesses to gain access to capital markets.
But demand from large institutional investors will drive volumes. The reason why stockbrokers aren’t rushing to join the new markets may be that their institutional clients haven’t yet asked them to.
Nel says that Zar X will generate most of its revenue from trading fees and selling data. It is offering a lot of data free via its stock exchange news service equivalent, Zaps.
It plans to charge for “valueadded analytics”, such as directors’ dealings announcements for a specific sector over a specific time period, or the data behind every matched trade.
The JSE relies heavily on post-trade and information services, which includes the clearing of trades and market data, to generate revenue.
While Zar X’s trading fees, at 1.5% of the value of each trade, make it much cheaper to do smaller trades, investors could pay more than they would on the JSE if they make very large trades, says Moolla.
4AX is targeting annual trading volumes of R2bn to recoup amortised costs. “4AX believes it will become fully profitable in its first year of trading,” says Mukaddam.
While zero legacy technology and legacy market issues give new exchanges a dramatic competitive advantage, they will need more than that to be sustainable. Says Nandini Sukumar, CEO of the World Federation of Exchanges: “An exchange is successful when it has and offers liquidity, and wins and maintains the trust of investors and issuers.”
Etienne Nel Picture: BUSINESS DAY