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Breaking the JSE monopoly

By Isabelle Coetzee

South Africa’s most recent stock exchange, A2X, announced it had successfully cleared and settled all the trades from its launch on 6 October.

According to Brett Kotze, head of post trade services at A2X, “The successful launch of A2X underpins the willingness of participants to accept and support competition in the South African market.”

In the last year, four new stock exchanges have entered the South African market to challenge the current monopoly of the Johannesburg Stock Exchange (JSE).

Emerging in 1887, the JSE is merely the oldest surviving stock exchange in South Africa. Over the last two centuries, several other stock exchanges, including the Kimberly Royal Stock Exchange and the Union Exchange, appeared and disappeared alongside the JSE. 

Since 1958, the JSE has been the sole remaining stock exchange in South Africa. But with the introduction of the Financial Market Act (FMA) in 2012, which encourages domestic competition, new stock exchanges recognised a gap in the market.

This, along with the new guidelines implemented by the Financial Services Board (FSB) in 2014, encouraged ZAR X, 4 Africa Exchange (4AX), A2X, and EESE to enter the market.

“It isn’t unusual for a country to have more than one stock exchange. This has arisen, among other reasons, because of the need for differentiation in what is offered,” said Sean Gaskell, group managing director of the Geneva Management Group.

“It is beneficial for companies to have more options available to them to access capital. The barriers to entry in order for a company to access funds via a listing are lowered when there is more than one stock exchange,” he explained.

Gaskell pointed out that the main differentiator of the A2X, is its cost structure. It aims to attract companies already listed on the main South African exchange for secondary listings. 

“Using the latest and most sophisticated technology available, it is able to offer the usual transacting services at 40% less than the JSE, and this is a positive spin-off for investors and pension funds,” he added. 

Gaskell also explained that ZAR X offers differentiation in the time it takes to finalise settlement of a trade. The focus of this exchange on the settlement process allows it to settle trades in real time, rather than the 4-day settlement time offered by the JSE.

In other words, the competing stock exchanges that have become active in the market offer alternatives to the traditional JSE listings, in terms of their transaction costs, and their lag time.

“As competition always does, it has already caused the JSE to rethink its operating model and give more consideration to its costs and revenue streams,” said Etienne Nel, CEO ZAR X.

“In the long term, the JSE will inevitably lose some of its listings to the other exchanges. But it will take time. After having had to operate in monopolistic circumstances for 58 years, the market has been taken by surprise by the new exchange options,” explained Nel.

He believes companies who have avoided the JSE now have an opportunity to approach new exchanges that bring exciting prospects for raising capital in the equity markets.

“That said, they need to ensure that their balance sheets and operations are transparent enough to encourage people to take equity in the business. That process will take time to percolate through to actual listings,” he added.

In contrast to Nel, Gaskell believes it’s unlikely that large corporates will leave the JSE.

However, he does believe that, “Many of them will probably be multi-listed, giving them access to a wider source of capital. To some extent, this could negatively impact the future revenue of the JSE.”

So far ZAR X and A2X are active in the South African stock market, with EESE and 4AX on their way.

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