First the bustling trading floors went. Gone are the traders with their boisterous shouting and arm waving. Major stock exchanges, including Africa’s largest and second oldest bourse, the Johannesburg Stock Exchange (JSE), have long replaced the noisy open outcry system with quiet electronic trading.
Now, technology is about to transform the industry once again. Online stock exchanges are challenging their established bricks-and-mortar counterparts by offering faster, simpler and lower-cost transactions. The big spin-off for Africa could be financial inclusion, as ‘the person in the street’ will be able to invest in shares.
In 2017 alone, four such new-generation ‘disruptor’ stock exchanges started to operate in South Africa. For years, there’s also been talk of a black-owned ‘township exchange’, which is still waiting to be licensed by the Financial Services Board (FSB) and set to serve the lower end of the market by listing SMEs and start-ups.
The steady emergence of ZAR X, 4AfricaExchange (4AX), A2X Markets (A2X) and Equity Express Securities Exchange (EESE) has ended six decades of JSE monopoly.
These tech-based, FSB-licensed newcomers are still very small, and they serve niche markets, but they may grow into serious rivals to the JSE, according to Prof Jannie Rossouw, head of Wits University’s School of Economic and Business Sciences. ‘The market forces will decide whether these exchanges can all survive,’ he says, pointing out that stock-exchange rivalry already exists in various economies, including Germany and the US, and in emerging economies such as Brazil and Chile.
‘More than one stock exchange in a country offers investors choice, and rivalry puts a limit on the ability of a monopoly stock exchange to charge inflated prices for trading and settlement services,’ says Rossouw. ‘We shall, however, only be able to establish clear trends in this regard once an increasing number of companies obtain multiple listings – in other words, listings on more than one of these stock exchanges.’
In Africa, there’s a ‘significant disparity’ between the development, size and liquidity of the exchanges, says RisCura, an investment advisory and financial analytics firm. ‘However, African stock exchanges as a whole continue to develop at a rapid rate.’
One example is the Nairobi Stock Exchange in Kenya, which in January 2018 became a full member (and the sixth African one) joining the World Federation of Exchanges. Membership means having a say in decision-making forums on policy and regulatory issues that affect international capital markets.
How to trade
Closer to home, the four new fintech trading platforms want to shake up ‘old-school’ processes of buying and trading shares by making them simpler and more affordable. ‘Do you have to be rich to invest?’ is a frequently asked question at ZAR X, South Africa’s first alternative bourse, which announced its first listing in February 2017. ‘No,’ is the answer. ‘You can start your investment portfolio with as little as R1 000.’ Anybody can open a ZAR X investment account – it’s free – and has been likened to a ‘Gmail account for investors’.
Fees are only applicable for transactions, not for having an account – which, by the way, requires your FICA (Financial Intelligence Centre Act) info. In SA, you need to go via a broker specifically authorised to transact on a particular stock exchange. Consult the exchange website for a list of brokers and stocks.
At ZAR X, you can place your order by phoning the broker, or via the website or smartphone app. The exchange trades in real time, which means transactions happen within seconds. This is a first for Africa, where the standard settlement cycle allows up to three working days (known as ‘trade date plus three days’ or T+3).
Newcomer 4AX addresses small retail investors, such as ZAR X, but has also positioned itself to attract institutional investors. 4AX targets listings from companies with a market capitalisation from R100 million up to R8 billion. Meanwhile, EESE (evolved from an over-the-counter trading platform) targets listings of BBBEE entities and small companies.
Unlike SA’s other new exchanges, A2X competes directly with the JSE by focusing on companies that are already listed on another exchange. This type of secondary or dual listing is common practice. Kevin Brady, CEO of A2X, says that seven of the 10 largest JSE-listed companies are secondary listings, with their primary listing offshore.
A2X offers savings ‘upward of 40% on the end-to-end cost of transacting in shares’, he writes in Business Day. ‘By passing on efficiencies through lower fees, A2X can help increase liquidity in existing listed shares and thus help grow the overall market.’
However, one barrier to the uptake of the new tech-based bourses is investor mindset, says Rob Starkey, senior analyst at Cinnabar Investments. ‘After a 60-year monopoly, investors, brokers and companies require a mind shift to understand that trading does not only have to happen on the JSE, even if some professional investors may still be concerned about technical details.’ Once this mindset changes, Africa’s capital markets will be ready to transform.