The advantages of alternative stock exchanges

RYK VAN NIEKERK: A2X is one of several alternative exchanges in South Africa. It opened its doors in October 2017 and offers a platform to JSE-listed companies for secondary listings. Such a listing allows investors to trade in the shares of JSE-listed companies at significantly reduced fees. A2X started with three listings back in 2017, and virtually exactly five years later, there are 53 companies and 35 exchange-traded products listed on the exchange, with a combined market cap of around R5 trillion. These listings include heavyweights such as Naspers, Prosus, Sasol, Sanlam, Standard Bank, Exxaro, Discovery, Investec, Nedbank and Remgro. All in all, 17 of the Top 40 companies on the JSE are listed on A2X.

Kevin Brady is the CEO and one of the founders of A2X, and he is on the line. Kevin, thank you so much for joining me. A2X will have five candles on its birthday cake on October 5. There are currently 88 listings on the bourse. How does that compare with your original business plan?

KEVIN BRADY: First, thanks, Ryk, for having me on the show and yes, we are very excited to be turning five this week. And yes, obviously we are very happy with the progress from having three listed securities to now having 88. There’s no doubt that it was particularly difficult in the earlier days. I think there was a lot of education [needed]. I guess you had to build trust and understanding around the benefits of a secondary listing. But there’s no doubt that we are past the point of no return now and we’re actually finding it easier and we’ve a very healthy pipeline. So I think that will continue to grow.

It’s probably worth mentioning [that] one of the exciting developments in the last year is we’ve also been working with the Cape Town Stock Exchange, and included in that 88 we have two companies that have a primary listing on the Cape Town Stock Exchange, also with a secondary listing on A2X.

RYK VAN NIEKERK: How exactly does it work, especially from an investor’s perspective? Put differently, how different is it for an investor to invest in a share through A2X than through the JSE?

KEVIN BRADY: Look, really it’s your broker’s responsibility to get the best possible result for the client. They generally, in international terms, refer to it as ‘best execution’. So you go to your broker and you say, I want to buy 1 000 Sasol shares. What’s important is that your broker is looking both at the JSE and at A2X, and they’re buying [the shares] at the best possible price. I guess it’s akin to you’ve got to fly to Cape Town, and there are two planes flying at exactly the same time. One is at a better price than the other. Why wouldn’t you consider it? So it’s your broker’s responsibility to look across the two exchanges and make sure they get you the best possible deal. It may end up [with] buying 600 on one exchange and 400 on the other – it doesn’t matter. You’ve got to get that 1 000 shares at the best possible price.

RYK VAN NIEKERK: Why are there different prices on the two exchanges – because you are buying exactly the same share?

KEVIN BRADY: The prices can often be slightly different, but in a positive way. So what we have found, and this is absolutely consistent with the international experience, is that when you reduce friction costs – those are really the exchange fees charged to brokers to buy and sell shares in your market – when those come down, what happens is you start getting what they refer to as a ‘better quality market’. What happens is that your spread starts to narrow and your liquidity starts to increase.

The example I often give is you’re travelling offshore, you’ve got to buy £1 000 to go to London, [and] there’s only one bank in town. They quote you R20/pound to R20.50/pound. A new bank opens up, they are digital, they have lower overhead costs, and they may quote you R20.10 to R20.40. So why wouldn’t you buy every pound at R20.40 rather than R20.50 because that 10 cents stays in your pocket?

It’s absolutely the same on exchanges. If you can buy and sell something one cent better here and one cent better there, those numbers add up into proper numbers.

To give you a sense, if you could save one cent every time you buy and sell a share, the savings would be upwards of R1 billion a year for the industry just on the one cent saving. Then you’ve also got cost savings of R500-odd million. So these add up to R1.7 billion, so they’re proper numbers.

RYK VAN NIEKERK: How much cheaper is it to buy a share on A2X, as opposed to the JSE?

KEVIN BRADY: The exchange fees, which are generally kind of sunk into the cost of the brokerage an individual would pay, are around just over half or 50% cheaper than that of the JSE. When you go to transact, there are transaction fees, there are clearing fees, there are post-trade fees, there are real-time data fees. If you add all those up, the end-to-end cost of the trade on A2X is about 50%, 55% cheaper from an exchange-perspective cost.

But then what happens, if you’re buying a share that’s worth R10 and you can buy it one cent cheaper, say at R9.99, that one cent actually reflects 10 basis points. Now in the institutional world, people pay three to eight basis points, so they are saving more by one cent than they would in their fees.

Obviously for retail clients it’s a bit higher. They often pay 20/30 basis points, but a 10-basis-point saving is still material. So that’s why the price improvement is very, very important.

RYK VAN NIEKERK: What is the split between your retail investors versus institutional investors?

KEVIN BRADY: Look, we are predominantly institutional, or wholesale as we like to refer [to] it. Really it’s just the way clients are set up. Institutional clients always tend to have an own-name custody account, and so the way they transact and settle just makes it easier to access different exchanges. But I would say probably 98% of it is institutional. A small part is retail. It really depends on the structure the retail client is buying through. If they’re buying through [someone] like an intermediary, that intermediary may trade through a broker, and then that’s fine. So it’s quite complex in the back end there. They can access A2X, but generally we are finding it’s institutional business.

RYK VAN NIEKERK: And what are your trading volumes currently?

KEVIN BRADY: The trading volumes have picked up very, very nicely. We went through a bit of a dip earlier this year when we did an agreement with the JSE that allowed brokers to kind of move their positions between exchanges to make this whole process of buying 600 on one exchange, buying 400 on another, and then booking one note. So we’ve kind of simplified that process and I’m excited to say that September was a record month for us. We did about R4 billion in September and we’re running at around a 3% market share of our universe of securities. So of those 88 securities, if you measure what’s trading on A2X, [it’s] around 3%. But obviously in individual names it’d be quite a lot higher.

RYK VAN NIEKERK: The average trading volume on the JSE is around R20 billion a day. So in the greater scheme of things, A2X is still very, very small. I’ve read that the secondary exchanges, for example in Europe, have market shares of close to 20%. So there’s a lot of room to grow.

KEVIN BRADY: There is a lot of room to grow. That’s a very good question. One of the challenges we have in South Africa is our regulatory framework. The regulatory frameworks in Europe and Australia and the US – and in fact in many emerging markets – have been advanced to the stage where they level the playing field.

What do I mean by that? Basically, the first thing is, if I was in Europe, I wouldn’t need to get a company’s permission to make their shares available for trade. In South Africa I have to get the authority. I’ve got to knock on 300 doors and persuade them of the merits, where in Europe I could wake up tomorrow and say all those shares are available for trade. So that’s the first thing that would make a ginormous difference.

The second thing is South African regulation never contemplated an environment where you would have listings across exchanges and you would need to have interoperability at the clearing space, which also makes it tricky. That comes down to the point I made earlier, kind of like two exchanges and one broker’s note, which we’re advancing. So I think we need to put SA in perspective. We are kind of fighting with one arm behind our back. We are working with the regulators to bring it in line with best international practice and to level the playing field. But I think in light of those constraints we’ve done very well.

The second point is do we have room to grow? Of course, you know, we are targeting 20/25% of total activity.

RYK VAN NIEKERK: Why is the regulatory environment in South Africa so significantly different from that in Europe?

KEVIN BRADY: Well look, there’s no doubt it would make a huge difference for competition in South Africa. Competition is good. As South Africans we know we don’t like sole providers of anything. So you’re right, it would unlock and unleash the potential of the competition benefits it brings immensely.

Why are we behind? Well the last Financial Markets Act of 2012 was promulgated in 2013. Although we’ve seen this evolve elsewhere, that was written in such a way that it still kind of enabled the incumbent rather than [any] competition. Now they are working on it, they have certain timelines; they’re talking about another two years before they have what they call ‘market conduct standards’ for exchanges in place, and that should start opening it up. I think they’ve really been distracted with Twin Peaks. But yes, it is very frustrating that we are lagging the rest of the world by probably 15 years.

RYK VAN NIEKERK: What is the status of your relationship with the JSE? When the first applications were made for alternative exchanges – and I’m not talking only about A2X, there were several others as well – the JSE went to court, it fought it tooth and nail, and it was evident that it was not pleased with having competition in the country. Has the relationship changed since then?

KEVIN BRADY: Look, I think we are competitors and I think the JSE not surprisingly will always do whatever it can to maintain its dominant position. I think where the relationship works a lot better is on the regulatory side, where we all agree you need a good regulatory environment, a trusted regulatory environment in terms of market functioning, transparency, etc. So we work together quite well on that side for the greater good of the market.

Look, we do engage with them. Obviously we bump heads from time to time, but we understand we are the competitor and they’re trying to keep us out.

RYK VAN NIEKERK: I said earlier that there are 17 of the top 40 companies listed on A2X, but it also means 23 of the top 40 are not listed on A2X. What has been the reaction or reservations of those 23 companies to list on A2X?

KEVIN BRADY: Well, I think the first one is just perceptions. As soon as you ring them up to say A2X is an exchange, they go, ugh, we don’t want to talk to you. Exchanges come with costs and regulation.

Now obviously our model is not that; we really are an alternative trading venue. That’s the first thing. Once you get through, you’ve got to persuade the management team of the merits of a secondary listing, and then they tend to take it to their board for approval. So it’s just really a slow process.

In terms of the 23 that are not, I think it’s really that they want to see what everyone else does. But now that we’re close to halfway through the Top 40, I think hopefully the second half should come quicker and easier, because they’ll see the benefits and, as importantly, I think their shareholders will ask them for it.

RYK VAN NIEKERK: You’re also attracting the listings of several collective investments schemes, such as exchange-traded funds. The JSE is seeing a similar trend. Is that a key focus area for you, and what would the benefits be for investors? Just lower fees?

KEVIN BRADY: Well, look, I think ETFs have been a big growth area globally, and we’ve seen it follow through to South Africa. So it’s an important part of the growing market and to target them from an A2X perspective is important. And I think it’s exactly the same thing. If you can buy the same ETF in a different market, and you can buy it at a slightly better price, and you’ve got lower fees, why wouldn’t you? So it’s absolutely consistent with company shares in terms of why you would do it.

RYK VAN NIEKERK: Is the exchange profitable?

KEVIN BRADY: We’re not profitable yet, but our projection suggests we will be profitable before the end of next year, given our current growth projections and the foresight that we have – barring any major criticism, changes or surprises.

RYK VAN NIEKERK: Are you limited to the listing of JSE-listed companies, or is it in any way possible for you to allow secondary listings of big international companies like Alphabet, Amazon and Tesla?

KEVIN BRADY: A very good question, and we’d love to be able to do that. I think the regulatory environment in South Africa doesn’t really enable the inward listing in an unsponsored way of large companies like that. However, this is something that South Africa needs to get right. South Africa’s struggling in terms of de-listings, in terms of money going offshore, and the regulatory environment does need to evolve to enable this environment to grow. That’s one area that would definitely open up opportunities in South Africa.

And yes, do we represent our thinking and findings to the regulator? Yes we do, but I know as an industry as a whole we are trying to push it that way.

RYK VAN NIEKERK: Thanks Kevin, we’ll have to leave it there. That was Kevin Brady, one of the founders of A2X and he’s also the CEO.