Small stock exchanges take on the JSE
Three new exchanges launched this year, ending JSE monopoly
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.
“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