Can SA sustain five stock exchanges?

Last week the Financial Services Board (FSB) granted the fourth new stock exchange licence issued in the past two years. The licence was awarded to Equity Express Securities Exchange (EESE), and follows those given to ZAR X, 4 Africa Exchange (4AX) and A2X.

EESE has emerged from the Equity Express business that was started a number of years ago primarily to provide a trading platform for large BEE schemes, such as Sasol Inzalo and Multichoice’s Phuthuma Nathi.

“We provided electronic matching, but did not give the shareholders of one scheme the ability to trade in any of the others,” explains one of the founders, Anthony Wilmot. “It was only a single-counter exchange environment, where shareholders of a specific scheme could buy and sell shares between themselves.”

That was all they were allowed to do without an exchange licence, and at first the FSB gave permission for them to do it. However, in early 2014 the regulator issued a proposed directive indicating that it intended to clamp down on unlicensed exchanges and over-the-counter (OTC) platforms.

Equity Express’s activities were included in the remit of what the FSB wanted to regulate. The company therefore had to modify its business model.

“We did two things,” Wilmot explains. “We came out with a product called OTC Express, which effectively falls outside of the definition of an exchange as it only allows shareholders to negotiate with each other. They have to know who they are. They cannot place a bid and have it matched, as you cannot do that without an exchange licence.

“And secondly we applied for our own licence to list clients who wanted to stay with the services we were providing in a listed environment,” he adds. “And that has now been approved.”

The EESE model

Due to the nature of BEE schemes, Equity Express was always designed to ensure that the rules of the BEE schemes could be enforced. This covered issues such as who was eligible to be a shareholder, how many shares any individual could own, and for how long those shares had to be held.

As it comes from this background, EESE will follow a similar model.

“The way we see ourselves in terms of our listing rules is that we give issuers a number of choices,” explains Wilmot. “Issuers can decide for example what percentage of their shares can be owned by a shareholder, or who may own their shares. So it fulfills a niche for clients that are currently privately-owned companies that want liquidity in their shares and want the ability to trade their shares with matching, but still maintain rules about their shareholding.”

Is there place for another exchange?

Given that certain testing still has to take place, Wilmot says that the earliest EESE could see its first trade would be December this year. That means that of the four newly-licensed exchanges, ZAR X is currently the only one that has begun operating. A2X and 4AX are yet to announce any listings.

Given that South Africa is a fairly small economy, this naturally raises questions about whether there is room for all of these exchanges, and if they can all survive.

EESE is unique in that its licence only allows it to list restricted shares – in other words companies who have rules about who may be shareholders. The JSE, ZAR X and 4AX may list restricted shares, but can list others as well.

ZAR X also differentiates itself by having principles-based listing requirements, which allow it to accommodate non-standard structures.

A2X, for its part, is looking to add choice and extra liquidity to the market by offering an environment for secondary listings, primarily for companies already listed on the JSE. The 4AX model is aimed at smaller companies with a market cap of under R8 billion.

“If you look at each one separately, they are all slightly different and are all trying to meet a slightly different need,” says Wilmot. “But whether the South African market place can accommodate all of them, I’m not entirely sure.”

Director at ZAR X, Geoff Cook, suggests that National Treasury should have perhaps addressed this question before the regulator was given the go-ahead to issue new licences.

“We don’t have any objection to people applying for licences, but it is a question of how many is enough,” Cook says. “Does having five different exchanges enhance or detract from capital markets in terms of growth? Does the country as a whole benefit?”

There is an argument to be made that Treasury should have identified how many exchanges it would make sense to have, and how they could complement each other. There is however another argument that market forces should be allowed to make that determination.

“One thing I do believe that markets do, particularly when there are many competitors, is that they force some sort of creativity,” Wilmot says. “And, in time, not everyone will necessarily survive. I’m not sure who will or won’t, but I’m certainly of the opinion that it will be tough to survive in this market if one can’t get a number of reasonably substantial companies to list so that you create an environment that brokers actually want to become a part of.”

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