How are SA’s new stock exchanges doing?
South Africa’s new stock exchanges are reporting they are making great strides in their very short history, yet an argument still exists about whether they will enhance the market or just introduce greater volatility. However, Aspen’s recent decision to have a secondary listing on A2X suggests the markets are surprisingly – or perhaps unsurprisingly – finding a niche.
X marks the spot with the local incumbent stock exchanges. ZARX, A2X and 4AX, and the one “non-x” EESE, are all reporting taking great strides underpinned by advances in technology over the past few years and calls for less risky and cheaper ways to access capital markets.
After going a year or so, how are they doing? Turns out, to varying degrees, pretty well.
Of the four new competitors, ZARX, A2X and 4AX, and BEE-focused Equity Express Securities Exchange (EESE), 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. This is a significant development for South Africa 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.
“It is self-evident that 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 benefits the end consumer and grows markets,” says Kevin Brady, CEO of A2X. “The benefits of competition between exchanges are compelling and it has been well researched. Therefore, multiple competitive exchanges are so common internationally.”
A2x is the odd one out and is primarily a secondary market. Even though the 18-month-old organisation is still in its infancy, it landed its 18th secondary listing in Aspen Pharmacare, whose shares became available to trade on April 1.
“We are delighted to have South Africa’s largest pharmaceutical company on board. This latest listing comes at a time when trading activity levels are increasing sharply on A2X. We look forward to demonstrating the benefits of a secondary listing to Aspen, as our lower fees and narrower spreads attract increasing investor interest.”
Aspen’s listing will bring the number of companies available for trade on A2X to 18 with a combined market capitalisation of over R2.2-trillion. A2X boasts listings from many key sectors, including media, mining, banking, property, FMCG, financial services, insurance and telecommunications.
Brady says 2019 has already proved to be a stellar year for the exchange, after ending off 2018 with a bang by bringing AVI, Standard Bank and (right at the end of December) Naspers’ secondary listings to market.
“It created a great base for our product,” he says, “and our turnover was five times that in March 2019 compared with December 2018.”
Brady believes this momentum will continue. With credible names in the stable”, he says, we believe the adoption rate will accelerate and we could add another 20 companies to the list in 2019.” The company is focusing on the top-40 JSE listed entities, but Brady says it is having conversations with executives up the top 100.
A2X has taken a different approach from its two direct counterparts. 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 (MTF). MTFs are well-established and account for between 35% and 45% of market activity across the world.
Back home A2X only holds 1% of the market, but Brady says it is still early days, and as it develops the market, it is targeting a stronghold of closer to 20% in the next three to five years.
“It is not just about eating the JSE’s lunch,” he adds. “We are looking at growing the overall market.” A2X cutting-edge technology platform allows it to dramatically reduce the cost of trading and with improved prices come greater liquidity and narrower spreads. Brady uses the example of transfer duty levels and its impact on property sales.
“If transfer duties are lower, more people will buy houses.”
And the proof of the pudding is in the eating, with trading volumes doubling on the A2X platform from December 2018 to January 2019; doing the same from the latter to February and although not as huge a leap, showed significant growth to the end of March 2019 from there.
“If we reach our target of 20% of market share, we can save the market up to a billion rand a year,” he adds. That is upward of R4-million per day. These savings in the form of large fee reductions can be realised as A2X pass on efficiency gains from using the latest technology, which it licences from Aquis Exchange in the UK. The end-to-end cost of a trade on A2X is approximately 50% cheaper than current rates in South Africa.
“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, it will also reduce the cost of raising capital for corporate South Africa,” says Brady.
On the question whether expansion into markets beyond secondary equity market is in the pipeline, Brady says its focus on local secondary equity listings will remain its focus until it perfects the process of doing so and is comfortable with growth rates. He says the company will only start looking at Pan African opportunities, derivatives and inward listings when it reaches a 5% of total market share.
A2X did, however, get authorisation from the dual regulators – the Financial Sector Conduct Authority (FSCA) and the Prudential Authority within the SA Reserve Bank – to secondary list exchange-traded funds (ETFs) and exchange-traded notes (ETNs) on its platform from 4 February 2019.
Brady says the management team is in discussions with issuers in this regard and will announce developments in this space in the near future.
Fellow exchange ZARX has embraced a much wider scope from its induction three years ago this past March. It currently hosts the primary security listings for Senwes and TWK Investments, and CEO and co-founder Etienne Nel says they have interesting companies in the pipeline looking to come to market in the food, property and renewable energy space. The company is also in talks with the banks in bringing asset-backed securities into play.
He does, however, concede that corporate SA is taking a “wait and see approach” before entering the capital market, in the wake of the upcoming elections. But while companies are being conservative and cautious in their approach Nel and his executive team have been focusing on developing internal capacity to better serve their existing clients.
The exchange unveiled its new mobile app at the beginning of the year. “We are signing up 500 users a week,” he says, “and we have noticed a direct correlation between the sign-up and improved liquidity for our issuers.”
“What further plugs into that value proposition is that we better cater for our retail investors. Any interested trader can trade cost-effectively and easily on the platform. We don’t exclude anybody. We also only charge fees when trades are executed, and provide the custodian service for free,” he says. “For these purposes, the app has worked well,” he adds.
Nel also alludes to the online onboarding project they are working on now. He says it will be an electronic portal for issuers – a “listings in a box” feature, which will make it easier for issuers to come to market. “We don’t want to impose any additional requirements other than what the Companies Act prescribes,” he says. “We want to improve the user experience and ease the burden of listing and raising capital. The company will make an announcement in this regard in the next month or so.
Nel says that they are also in talks to develop and list some structured products but cannot disclose any more than that. ZARX has been brought many unique and new products to market in the last 12 months, including restricted shares, exchange-traded products, incubation listings, a Section 12 J offering and recently got into the Real Estate Investment Trust (Reit) space.
“We want to expand the man on the street’s reach, and also connect more product to available capital,” he adds.
The 4 Africa Exchange (4AX), that currently has five listings, including NWK Limited and NWK Holdings, CA Sales Holdings Limited, Heartwood Properties Limited and Assupol Holdings Limited which amounts to just under R7-billion market capital, is facing similar challenges in the timing of listings coming to market. Fay Mukaddam, CEO of the exchange, confirmed via email that it has a pipeline of commitments of nine more listings, but the realisation is dependent on extraneous factors including the state of the economy, the compilation of the listing documentation and preparing the company in order to ensure a successful listing.
“The current pipeline of commitments are predominantly primary listings that vary in asset classes, where the 4AX exchange licence enables the platform to list a range of asset classes, including equities, debt, special-purpose vehicles and real estate investment trusts,” she says.
Like the other alternative exchanges, the end goal for 4AX is to run a stock exchange that will become a vehicle for diversity and real economic inclusion – and ultimately drive transformative growth and development of South Africa, and Africa as their business grows and offerings grow, she says.
And like ZARX, by leveraging off its technically savvy technology the company was able to move to a T+0 settlement cycle recently. To put it into context, the JSE’s legacy systems have restricted it to remaining at T+3, which means it takes three days for it to settle a trade. Some of the benefits of moving to a shorter investment cycle include: the mitigation of settlement risk and investors having immediate access to their funds
“Investing in technology and the ability to continuously innovate to meet the market’s needs is therefore very important and critical to the 4AX business model. The ability to design an exchange infrastructure without legacy and using the latest technology is a definite competitive advantage,” Mukaddam adds.
4AX also acquired RainFin’s corporate debt marketplace last year, which enabled it to expand its debt offerings with technology-led debt products and services. For instance, it is now able to offer all entities – from mid-sized companies to global conglomerates – the ability to utilise the 4AX online debt book building platform, whereby they can source debt directly from a combination of retail and institutional investors in one seamless and integrated offering.
The alternative exchanges are bringing savings, ease and accessibility to the playing field, but most importantly diversification.
“Concentration risk of the JSE is costing us confidence in the market,” says Nel. “Alternatives are offering more listings, more choice, and a wider spread. It is the best way to way to diversify down the risk.” DM