Sunday Times

Small stock ex­changes take on the JSE

Three new ex­changes launched this year, end­ing JSE mo­nop­oly

- By ROXANNE HEN­DER­SON hen­der­sonr@sun­day­ ●

For nearly six decades the JSE was the sole stock ex­change in South Africa, but its dom­i­nance was dealt three small blows this year when new­com­ers ZAR X, 4 Africa Ex­change and A2X be­gan trad­ing.

The most re­cent to go live, A2X, launched last week and has pit­ted it­self against the JSE, of­fer­ing sec­ondary list­ings to those al­ready listed on Africa’s old­est ex­change.

ZAR X, which be­gan trad­ing in Fe­bru­ary, will not be go­ing af­ter JSE-listed com­pa­nies but will open the mar­ket up to small- to medium-sized com­pa­nies want­ing to raise cap­i­tal.

“Mo­nop­o­lies tend to be­come very com­pla­cent and their ra­tio­nales very sel­dom get chal­lenged. What com­pe­ti­tion does, is it fo­cuses the JSE’s mind in terms of how it ser­vices its cus­tomers, how it prices go­ing for­ward and how to bet­ter its model,” said ZAR X di­rec­tor Ge­off Cook.

The JSE is a 130-year-old beast with 406 em­ploy­ees, in­ter­na­tion­ally recog­nised as be­ing at the cen­tre of what was for many years the world’s most im­por­tant gold min­ing re­gion.

Fol­low the money

The Kim­ber­ley Royal Stock Ex­change opened six years prior to the cre­ation of the JSE, but shut down when the gold rush to the Wit­wa­ter­srand eclipsed in­ter­est in di­a­monds.

An­other ex­change opened in Bar­ber­ton in the 1880s but closed when gold min­ing ac­tiv­i­ties in the re­gion waned.

A short-lived stock ex­change opened in Cape Town in 1901 in re­sponse to op­por­tu­ni­ties cre­ated by the An­glo-Boer war.

The Union Ex­change opened in 1933 but was dis­con­tin­ued by the gov­ern­ment in 1958. Its el­i­gi­ble listed com­pa­nies mi­grated to the JSE. Dur­ing its 25 years in op­er­a­tion the Union Ex­change and the JSE com­peted head on.

Now the JSE has again had to re­spond to com­pe­ti­tion in the do­mes­tic mar­ket. This time the com­pe­ti­tion, re­ly­ing on tech­nol­ogy and al­ter­na­tive busi­ness mod­els, is leaner and meaner than be­fore.

“We have the ben­e­fit of start­ing from scratch and there­fore are able to choose mod­ern tech­nol­ogy and put it to­gether in a best-of-breed way that is very ef­fi­cient. We don’t have a lot of that in­fra­struc­ture that any busi­ness of that size and age would have,” said A2X chair­man Ash­ley Men­de­lowitz, who has a back­ground in fi­nan­cial ser­vices soft­ware de­vel­op­ment.

Small and fast

He and CEO Kevin Brady, a for­mer di­rec­tor of In­vestec Se­cu­ri­ties, say they can run an ex­change with fewer than 30 em­ploy­ees.

The idea for A2X was con­ceived dur­ing the time Men­de­lowitz spent pro­vid­ing IT ser­vices to bro­kers and fund man­agers.

“We were quite for­tu­nate that we were able to see un­der the hood of what hap­pens in the JSE,” he said. “When you go un­der the hood you are able to see the in­ner work­ings, not just the good but also the in­ef­fi­cien­cies.”

All of the newly launched stock ex­changes are us­ing tech­nol­ogy to bring in­no­va­tions such as real-time set­tle­ments, as op­posed to the JSE’s T+3 — set­tle­ment three days af­ter a trade is done.

ZAR X has min­imised the time lag be­tween matched trade and set­tle­ment and clear­ing into the in­vestor’s ac­count, which sig­nif­i­cantly re­duces set­tle­ment risk, said in­de­pen­dent trader Simba Man­were. “Con­sumers in the fi­nan­cial mar­kets are set to ben­e­fit from these re­duced cy­cle times.”

The play­ers have also slashed the price of trans­act­ing, with A2X re­duc­ing the end-toend cost of trans­ac­tions by more than 40% for bro­kers.

A2X also plans to dis­rupt the cost of com­pany data once its mar­ket share has grown to the point where its data is mean­ing­ful, be­cause ex­pen­sive data dis­cour­ages new in­vestors, said Brady.

“From an in­vest­ment per­spec­tive we are a high-cost des­ti­na­tion,” he said. “The new breed of in­vestors and fund man­agers, which trade glob­ally and make up a big­ger part of cap­i­tal flows, are quite frank: they say, ‘If you re­duce the cost of do­ing busi­ness we would be do­ing a lot more busi­ness in South Africa.’ We want to bring that busi­ness into South Africa.”

JSE not both­ered

For is­su­ing com­pa­nies the new ex­changes could help im­prove liq­uid­ity in shares, and at­tract new in­vestors.

But the JSE is well pre­pared for the on­slaught by new play­ers.

“We have al­ways com­peted in global cap­i­tal mar­kets for both list­ings and trade flows: the dif­fer­ence now is that we are com­pet­ing in the lo­cal mar­ket as well,” said Donna Ne­mer, the JSE’s di­rec­tor of cap­i­tal mar­kets.

The JSE has also re­duced trad­ing fees across most mar­kets and in­tro­duced new tech­nolo­gies and prod­ucts for in­vestors and mem­bers.

“This is a new dy­namic fo­cus lo­cally and the in­dus­try needs to col­lab­o­rate to en­sure that we main­tain mar­ket in­tegrity for South Africa’s cap­i­tal mar­kets,” Ne­mer said.

But is South Africa’s mar­ket large enough to sup­port fierce com­pe­ti­tion, with Eq­uity Ex­press also ex­pected to launch an ex­change in the near fu­ture, tak­ing the tally of ex­changes to five?

“It is in­ter­est­ing to note that the Fi­nan­cial Ser­vices Board has re­cently is­sued a re­quest for pro­pos­als for ad­vice around the im­pact of mul­ti­ple ex­changes in a mar­ket of South Africa’s size,” Ne­mer said.

Re­search on the im­pact of com­pe­ti­tion in the Euro­pean mar­ket by the TABB Group, be­tween 2007 and 2008, showed that the bid­of­fer spread on the FTSE100 nar­rowed sig­nif­i­cantly, mak­ing the mar­ket more ef­fi­cient. Safe bet? The chief econ­o­mist at the South African InJSE’s sti­tute of Race Re­la­tions, Ian Cruick­shanks, said the mere fact that new ex­changes could now open was a pos­i­tive step.

It is dif­fi­cult and ex­pen­sive to open a stock ex­change and if you've got an ef­fi­cient mar­ket struc­ture in place, which we have in the JSE, there is a hur­dle to over­come.”

Cruick­shanks said, how­ever, that the com­peti­tors were fo­cus­ing on grow­ing the mar­ket and draw­ing in smaller com­pa­nies, which meant that it may take time for a sig­nif­i­cantly com­pet­i­tive mar­ket­place to be set up. He added that while new play­ers were sure to shake things up, this would still have to be un­der­taken pru­dently, as com­pa­nies would not sign up to an ex­change not seen to be safe.

Re­spon­si­ble sav­ing

“It’s not only about rais­ing money and see­ing who is the big­gest and fastest and [can] take the win­nings,” he said.

“It’s also got to be a place where re­spon­si­ble sav­ing can be en­cour­aged and the funds be­long­ing to the wid­ows and or­phans can also be man­aged.

“Their cap­i­tal ac­cu­mu­lated into glob­u­lar sums can make a sig­nif­i­cant dif­fer­ence to cap­i­tal for the de­vel­op­ment of the econ­omy.”

We want to bring that busi­ness into South Africa Kevin Brady CEO of A2X

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 ?? Pic­ture: Robert Botha ?? Prices are man­u­ally writ­ten on gi­ant black­boards on the old JSE trad­ing floor in Di­ag­o­nal Street, Jo­han­nes­burg, in 1987.
Pic­ture: Robert Botha Prices are man­u­ally writ­ten on gi­ant black­boards on the old JSE trad­ing floor in Di­ag­o­nal Street, Jo­han­nes­burg, in 1987.
 ??  ?? Kevin Brady, left, CEO of A2X, and Ash­ley Men­de­lowitz, its chair­man, say their ex­change has state-of-the-art tech­nol­ogy.
Kevin Brady, left, CEO of A2X, and Ash­ley Men­de­lowitz, its chair­man, say their ex­change has state-of-the-art tech­nol­ogy.

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