Mighty JSE will adjust to rivals on its patch
MANY know the JSE as a stock exchange that determines the fortunes of the nation daily, but do not have a feel about its inner workings.
It is not generally grasped that this crucial institution is itself a company that is listed on its own exchange, with revenue approaching R2.3-billion and a market capitalisation this week of R13.6-billion. It is home to companies with a listed total market value of R14.7-trillion, ranking it 17th among bourses of the world, according to the World Federation of Exchanges.
The JSE is a monopoly but for the first time in decades it will face competition. New operator ZAR X has been given a conditional licence by the regulator, the Financial Services Board, and has indicated it will in time compete with the JSE in numerous areas. Other rivals are on the way, but more on this later.
The JSE is delivering results: over the past five years the return on investment has been a generous 21% a year, made up of a 17% rise in the share price and an average dividend yield of 4%.
This was due to rising profits emanating from an operating margin that has improved from 27% to 45% and operating profits reaching R1-billion. Return on equity also rose, from 19% to 30% now.
CEO Nicky Newton-King said: “We always try to balance the needs of our key stakeholders by offering a good return to our shareholders, offering low prices to our customers, and taking care of our employees.”
Notwithstanding many areas of weakness, South Africa is world class in global financial markets. It is ranked first in the world by the World Economic Forum for the strength of auditing and reporting standards and for financing through the local equity market. It comes in second in regulation of securities exchanges and third in the protection of minority shareholders. The JSE has played a role in many of these positions of excellence.
The JSE’s power arises from its being vertically integrated — it operates in all the major areas in which exchanges can operate. It is also horizontally integrated because, besides its equities business, it serves in many of the asset classes after acquiring exchanges that operated in bonds and derivatives. It books revenue in numerous areas.
The value chain starts in listings, where companies are quoted to raise capital for growth. Here, the JSE charges fees on new and currently listed companies, exchange traded products and bonds. Its revenue from this was R161-million in the year ended December 2015.
Newton-King said: “We always try to increase listings and act as a nursery for small companies to list and grow large. We think growth in this area of our business will be driven by listings of exchange traded products OUT WITH THE OLD: The JSE in the 1990s at Diagonal Street. It now has the latest technology that enables clients to do more trades et cetera, as passive investments gain momentum.”
The next revenue generator is trading listed securities such as cash equities, bonds and their derivative instruments. These trades are done by intermediaries such as stockbrokers and banks on behalf of investors — institutional and individual — seeking to create wealth.
Derivatives such as futures and options are used by investors to manage investment risk, through taking hedging positions — and the WFE ranked the JSE 17th in this field in February. The JSE made R831-million in revenue here. Newton-King said trading volumes, and thus revenue, were driven by technology that enabled clients to do more trades, and by higher volatility. She expects more trading in derivatives as they expand into new products and markets.
Once transacted, trades are cleared and settled by the JSE. Here, intermediaries ensure that investors who sell shares receive their money and those that buy get title to their shares. The JSE is pushing to ensure that equity trades are settled within three days of trading (T+3), from the current T+5. It made R318-million in revenue here.
Trading and clearing are technology-intensive and the JSE has been spending millions to ensure it has state-of-the-art systems. One key item of capital expenditure, costing R400-million over four years, is for one integrated system for trading and clearing in all asset classes.
“We are also driven by the fact that the back-office systems have become critically important since the financial crisis because there was a crisis in clearing trades then,” Newton-King said.
Finally, the JSE makes money from market information services. It also has other income. It generates daily troves of market data that it sells to information vendors such as Reuters, Bloomberg and index constructors such as Standard & Poor’s. Total revenue is R411-million here. “We will be pushing hard to grow our market data revenues in the short term,” Newton-King said. Other income includes a foreign exchange gain of R83-million.
Most of these revenue lines will come under pressure if new competitors can make a chink in the armour of the mighty JSE. According to reports, ZAR X intends to offer lower prices than the JSE to investors and to companies listed on its exchange. For now it will not compete directly with the JSE but the other licence applicants in the pipeline, such as A2X, do intend to, according to reports.
Newton-King said the JSE was ready to compete in all segments of the market based on its products, services, technology and pricing.
The biggest challenge facing new entrants will be to convince stockbrokers and investors to use their trading platforms and to get companies to list on their exchanges.
They will also need patient capital because reports indicate that such ventures overseas — in Canada and Australia — have taken three to five years to become profitable.
The JSE cannot be complacent. Around the world new entrants that arose out of alternative trading exchanges in the past decade or so have grabbed large swathes of market share from incumbents — some a 10%- to 20%-plus share.
They have brought in leadingedge technology to beat incumbents hobbled by unwieldy legacy systems and slower clearing houses.
Their websites indicate that global exchange groups, such as BATS and Chi-X in equities and Intercontinental Exchange in derivatives, have risen to challenge well-entrenched incumbents and now compete on the level of behemoths such the New York Stock Exchange and London Stock Exchange in equities and CME Group in derivatives. ICE acquired the NYSE a few years ago.
An area of opportunity for the JSE is to give local investors access to the African growth story. “The rest of the continent has 25 exchanges and the JSE is the largest operator,” Newton-King said. “We now have 19 African listed companies, such as retailer Choppies and oil operator Oando, and would like to get more. We share best practices with our counterparts, and assist in managing technology operations for the Namibia exchange.”
The irrepressible NewtonKing took the helm in January 2012. How does this avid cyclist function as a leader?
“We have talented people who are innovative and resilient and they know I can be hard and take tough decisions, but not before consulting them. We also value diversity and BEE and are doing our best to ensure we have black employees at the top echelons,” she said.
Lediga is a specialist strategy writer and a businessman
We act as a nursery for small companies to list and grow
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