Breaking of JSE’s monopoly drives progress and reduces costs
Due to local competition the primary bourse has already cut transaction fees
In the past 20 months four new stock exchanges have opened for business. This is a significant development for SA, as for almost 130 years the JSE has been the only player.
While still in the early stages, this dilution of the JSE’s status as the sole service provider is a positive move and has been broadly welcomed by the financial industry.
Monopolies simply do not have the same incentive to drive progress as companies operating in a competitive environment. There isn’t the necessity to focus on innovation, service excellence and economic efficiencies. It is these drivers in a competitive environment that benefit the end consumer, grow markets and assist in a country’s overall economic growth.
The benefits of competition between exchanges are compelling and have been well researched. This is why multiple competitive exchanges are so common internationally.
Johan van der Merwe, joint CEO at African Rainbow Capital, captured this in a recent article when he said: “For the country to go forward, economic growth must remain the holy grail for all South Africans. Of the many tools SA has at its disposal, the workings of its capital markets, and in particular the country’s stock exchanges, should feature strongly.”
Due to local competition, the JSE has already made adjustments. In July, it cut transaction fees, with an anticipated annual saving to the industry of about R50m.
SA’s regulatory environment is somewhat behind international best practice. While it has opened the door for competition, it remains heavily weighted in favour of the incumbent.
Of the four new competitors, three have adopted a stand-alone exchange model and target a previously untapped issuer market. This will help grow the breadth of investment options as new listings come to market.
A2X has taken a different approach. Like most of the successful first competitors to long-standing monopolies internationally, it has styled itself as an alternative trading platform and competes directly with the JSE in the secondary share market. In Europe, these platforms are referred to as multilateral trading facilities. They are well established and account for 35%- 45% of market activity.
Based on a typical day’s trading activity of R20bn in local equities and using international experience as a benchmark, we conservatively estimate that efficiency savings available in a competitive environment are upward of R4m a day, or R1bn a year.
These savings in the form of large fee reductions can be realised as new exchanges, A2X in particular, pass on efficiency gains from using the latest technology. Lower friction costs improve market quality (price formation and liquidity), which in turn lead to substantial savings for a company’s shareholders. It also lowers the hurdle for potential new investors and, in time as capital markets deepen, will also reduce the cost of raising capital for corporate SA.
However, the development of competition in SA is not without its challenges. A2X and other competitors still have a mammoth task ahead. It took 23 attempts in the UK before a successful competitor to the London Stock Exchange, Chi-X Europe, was eventually launched in 2007. The key hurdles facing the new exchanges in SA are regulatory, educational, structural and behavioural.
SA’s regulatory environment is somewhat behind international best practice. While it has opened the door for competition, it remains heavily weighted in favour of the incumbent. As an example, authorities in many other countries separate the function of primary regulation from that of the secondary market. This allows new exchanges to unilaterally list the shares of companies that have a primary listing in the same jurisdiction. In SA, this is not the case and a new exchange must obtain the permission of each company before it can list the shares for trade.
The biggest challenge is altering behaviour. We are all resistant to Everyone resists change, including and that includes traders, asset managers, settlement officers, sponsors and companies. Enthusiasts, supporters and early adopters will demonstrate the benefits that change will bring.
Another important challenge is the education of issuers. In a market where most listed companies have only ever known one exchange, there is a huge learning curve for corporate SA to fully understand multiple listings and the benefits.
One of the common misconceptions is that adding a secondary listing could compromise a primary listing or come at a cost. This is not the case. Six of the top 10 listings on the JSE are secondary listings. A secondary listing on A2X has no impact on a company’s primary listing, nor are there any cost, risk or additional compliance requirements. In fact, a secondary listing complements a company’s primary listing as it provides investors with a choice of venues on which to transact, and in A2X’s case, a cheaper venue.
Legacy systems and broker infrastructure have proved to be a barrier to market transformation. The infrastructure of most brokers is designed for a single exchange. As a result, neither their front-end trading systems nor post-trade operations execute and settle across multiple venues. Although there is enormous support, it will take time and considerable resources to implement the necessary changes.
The biggest challenge is altering behaviour. Everyone resists change, including traders, asset managers, settlement officers, sponsors and companies. Enthusiasts, supporters and early adopters will demonstrate the benefits that change will bring.
Despite all these challenges, A2X has received an incredible amount of support. In 10 months we have attracted 10 secondary listings with a combined market capitalisation of almost R300bn and signed up nine of the leading brokers accounting for almost 50% of all market activity.
The move towards greater competition in SA’s capital markets is irreversible. However, the new exchanges are merely catalysts for change and can’t progress the industry in isolation. If the financial community wants the many benefits, efficiencies and innovation that competition brings, it’s important to support these initiatives. Reverting to a single service provider isn’t in anyone’s best interest.
• Brady is A2X CEO.