MERLIN RAJAH: The quiet technology revolution in SA trading

Technology is often not the first thing that springs to mind when the international community thinks of Africa, but it is no longer possible to dismiss the entire continent on these grounds. One could certainly argue that though the country has the status of a developing economy, SA’s trading infrastructure is more comparable with its far more developed counterparts.  

Interest in SA from global hedge funds and asset managers has increased in the past 12 months as investment and trading flow has been redirected away from Russia’s sanctioned markets to other emerging markets such as SA. But even before this global shift in international politics SA was proving itself a market to watch. The country has taken advantage over the years of its position as a policy taker rather than policymaker, to look at what has worked globally and then select the parts that are most appropriate for its own conditions.  

In just one obvious example, the JSE has replicated much of what the LSE has done in London in terms of technology, to the point where it has implemented similar trading technologies. Quants and high-frequency traders have made their home in Johannesburg with co-location sites, levelling the playing field for market participants of all kinds. 

Over the past few years our global client base has been telling us that international investors are looking for electronic access to the markets throughout the continent. This again is something the SA ecosystem is ideally placed to provide.  

Kenya stands ready for electronic trading, largely because the Nairobi Securities Exchange operates on the same technology stack as the JSE, albeit a few versions behind. The trading system in Namibia is also hosted by the JSE, suggesting that the Namibia Stock Exchange is also an ideal venue for electronic trading if it can embrace direct market access and the benefits. SA is the gateway to a vast array of opportunities for savvy brokers, asset managers and investors.  

Expanding electronic trading through the continent certainly has its appeal. If we are to grow these and other African markets such as Ghana and Egypt we will need to encourage international investors to come to Africa. We also need to take these African markets overseas.  

The JSE already enjoys an underlying compatibility with European and UK electronic trading systems, and that is a vital part of this development. There’s a familiarity here — as well as time zone compatibility — that adds to SA’s appeal as a trading destination.  

What’s more, the landscape within SA itself is changing. Though the JSE has enjoyed a unique position in the SA ecosystem for many years, that is no longer the case. A directly competing second exchange, A2X, is already making waves. More than 100 instruments are listed on the exchange. It has a reputation for using the most sophisticated technology coupled with favourable pricing and has gained 5%-10% of total trading volumes across several highly liquid counters.  

This year looks set to become the year of the smart router in SA, as A2X beds in and offers a credible and cost-effective competition to the JSE. Direct market access into A2X and best execution overall will become features in SA, just as they are in more developed markets — as will enabling technologies needed for transaction cost analysis and handling clearing and settlement.  

That too puts a premium on high-quality technology. Brokerages and exchange members who have the algorithms and speed to satisfy international traders are likely to do well. Proximity is king, provided a broker or bank has the technology to support it. 

Here however, scalability is likely to be an issue. Not all firms in SA have a technology team of sufficient size or capability to develop the tools international players demand. While third parties may step into this gap, it is unlikely that they will have the level of local expertise and experience — or the necessary responsiveness to deliver new solutions in a timely fashion.  

Nonetheless, tools such as Absa’s own low latency switch, bespoke algorithms and smart order router are attracting positive attention and even admiration from top banks looking into SA’s markets. This is where international players will need to do their due diligence. The SA ecosystem is thriving, but some participants will struggle with the new technology demands and the changing needs of a multi-exchange environment.  

They will also need an insightful guide to the peculiarities of the SA system. Market fragmentation offers numerous benefits in terms of competition, but the country’s liquidity position is fragile and the JSE, having dominated for so long, needs to update both its market structure issues and its regulations to ensure new liquidity pools do not dry up — or cause existing issuers to turn back to New York, Frankfurt or London for their listing.  

In recent years the JSE has made the right noises about making the necessary changes and kicked off several initiatives to review legacy rules and regulations. We can only hope the arrival of new and sophisticated competition, and a recent spate of delistings from the JSE, will cause it to accelerate the pace of change and look again at how price formation, valuations, market making and growth in general have been hampered by legacy processes, cost structures and internal systems. 

• Rajah is head of equities electronic product at Absa Corporate & Investment Banking.