War of the exchanges

In the early 1990s, then junior stockbroker Etienne Nel would have had little idea that he would, some two decades later, lead a legal stand-off against Africa’s largest bourse – the JSE. 

Nel would have found it even less probable that he would soundly emerge the legal victor in each of the JSE’s four attempts to contest the licensing of his self-conceptualised private stock exchange. 

Regardless of his apparent lack of soothsaying abilities, this has indeed become the case, after the investment specialist was in August last year awarded an exchange licence from the Financial Services Board (FSB) for ZAR X, becoming South Africa’s first additional stock exchange in almost 60 years. 

“I didn’t wake up one morning 20 years ago and decide I wanted to open my own exchange,” he tells finweek. “It wasn’t even possible at the time, as the exchange was a closed boys’ club. 

“It came over a 10-year period of this growing realisation that the capital market space really needs more competition and that there was a massive need for an alternative trading platform and capital-raising mechanism to the JSE.” 

On 10 February, the FSB Appeal Board dismissed the appeal of the JSE against the FSB’s granting of an exchange licence to ZAR X. 

The judgment, which awarded full costs to ZAR X, followed the final hearing in a series of four JSE appeals against the licence, beginning in 2015.  

“The judgment vindicates our belief that the...appeals have been vexatious, aimed at preventing us from entering the market and, ultimately, eliminating us as a competitor,” advances ZAR X director and co-founder Geoff Cook. “At our request, the Competition Commission has launched an investigation into whether the JSE’s appeals amount to an abuse of dominance.” 

ZAR X’s triumph over the exchange behemoth has unquestionably ushered in a new era in domestic share trading – a development that clearly has the JSE somewhat jittery. 

And if Nel’s claims about ZAR X are founded, perhaps the nerves are warranted. 

Market disruptor

Dubbing ZAR X a technology-based market disruptor, he says the offering opens up an “entirely new investment market” in which inclusiveness will broaden South Africans’ capacity for wealth creation and accelerate the entrenchment of a savings culture across all levels of society.     

“By basing its operating model on the latest technology, ZAR X has an agility and flexibility older stock exchanges do not necessarily enjoy. This enables it to remain relevant in a financial services sector that is being profoundly disrupted by digital, mobile, and social technologies,” he comments. 

It further places the traditional world of high finance at the disposal of ordinary South Africans and organisations for whom the cost and administration of owning shares has historically been out of reach, Nel explains. 

Through ZAR X, South Africans are able to access the stock market at a lower cost and with limited barriers to entry, encouraging a savings and investment culture, he says. 

By allowing for zero safe-custody fees, he adds that the exchange gives people in the unbanked sector an opportunity to grow their investment base with relatively small investments, only paying fees when they transact.

Additionally, the company’s website provides free real-time share trading data on the companies listed on the exchange – a service that investors on the JSE have to pay for. 

“We created ZAR X as a growth catalyst, broadening the market and increasing access to it at the same time.” 

With a focus on creating longer-term investment value, ZAR X does not permit high-frequency trading, derivatives, or naked short-selling.  

Restricted trading

On the issuance side, Nel believes the exchange’s introduction of a novel principles-based listing regime reduces the complexities associated with listing, giving companies that would otherwise not consider listing an opportunity to do so. 

If a company – and its senior staff – is registered with the appropriate regulator or industry body, ZAR X does not vet it over and above this, unlike the JSE. 

“This is performing the role of regulator of the regulator. We just don’t think that’s practical – all it does is take time and it is costly,” he says. 

When pressed on whether the softer listings criteria open the exchange up to possible governance abuse, Nel maintains that existing South African legislation is enough of a deterrent. 

“We believe the Companies Act of 2008 is a superb piece of legislation and that the Independent Regulatory Board for Auditors is a proper regulator of an auditor, and so on and so forth. Who are we to second-guess those regulators and those pieces of legislation?” he advances. 

Expanding on the exchange’s strategy, Nel outlines that ZAR X will drive its own listings on a primary board, while a secondary investment entities market will offer trade in exchange-traded funds, exchange-traded notes, structured products and preference shares. 

ZAR X will also offer what it calls a “revolutionary” restricted market, in which it will pioneer a concept called “controlled liquidity”. 

“In this market, the issuer has rules as to who can buy a share, typically evidenced in black economic empowerment (BEE) structures. For example, only black South Africans may buy and sell these shares. 

“This offers corporate SA BEE in perpetuity. It’s basically a game-changer. Who says you can’t have an exchange where only black people can trade?” he mulls. 

Leveraging its technology platform, ZAR X will also be able to pre-approve potential shareholders based on additional parameters, such as gender, occupation and religion. 

“For example, we were recently approached by a BEE structure that is women-owned, and don’t want to dilute its empowerment equity by allowing men to buy shares. 

“Another example could be a Shari’ah fund in which only Muslims could invest,” he explains. 

Nel downplays the potential of opposition to these parameters on the basis of possible unconstitutionality, arguing that this regime will, in fact, enhance greater financial inclusion. 

He adds that there has never been a mechanism by which an individual with a low to average income could increase his or her investment portfolio via a stock exchange. 

“Not only have the cost barriers to entry been too onerous, but the processes have been incredibly complex and convoluted. We are very passionate about financial inclusion. We want to support radical economic transformation by giving black South Africans the ability to transact their BEE shares. 

“There has been a blinkered approach to BEE. It was with interest that I’ve read some comments in the media about how BEE needs to be relooked at. Trevor Manuel has said it, Thuli Madonsela has said it and the Black Management Forum has said it,” he argues. 

Big players

Following the FSB’s judgment in its favour, ZAR X officially launched its operations with the listing of SA integrated agri-business Senwes and its holding company, Senwesbel, on 20 February. 

The group is also currently in talks with several companies interested in listing – the smallest of which has a market capitalisation of R6bn. 

“ZAR X is acutely aware of the fact that we only have one reputation. We would not do anything to jeopardise that by bringing a questionable listing onto the market, so we’d rather err on the side of caution and conservatism and bring fewer companies but more robust balance sheets onto the market and build credibility that way,” he tells finweek. 

Nel describes Senwes as an apt blueprint for the caliber of companies the exchange is hoping to attract, adding that he would be “very happy” if the exchange had R50bn worth of listings on board by the end of 2017. 

“We already have R2.7bn through Senwes – so I only have another R47.3bn to go,” he quips. 

This article originally appeared in the 16 March edition of finweek. Buy and download the magazine here.