What will South Africa’s second stock exchange do differently and who will it target?

Etienne Nel, co-founder and CEO of South Africa's soon-to-be second stock exchange, ZAR X.

Etienne Nel, co-founder and CEO of South Africa’s soon-to-be second stock exchange, ZAR X.

Last week Wednesday South African company ZAR X announced that it had been granted a conditional stock exchange licence by the Financial Service Board (FSB). The licence, which took around a year to attain, allows ZAR X to launch South Africa’s second independent stock exchange and provides both investors and companies an alternative to the well-entrenched Johannesburg Stock Exchange (JSE) – which has monopolised the market for decades.   

If all goes according to plan, trading on the ZAR X Stock Exchange will begin on 1 September.

According to one of the founders, Etienne Nel – a stockbroker who also set up the over-the-counter (OTC) trading platform Equity Express – there is a “dire need” for an alternative exchange, especially one that targets lower-income investors previously marginalised in the market.

One of the ways he believes ZAR X will do this is by offering zero custody fees to open and hold an account on the exchange.

On the JSE, for example, this custody fee is passed down to investors by brokers who execute trades on their behalf. “In many instances, that fee ranges between R50 and a R100 a month for your account,” explains Nel.

It might seem minimal, but for a small-time investor this can add up. For example, if someone can only invest R1,000 a month and is being charged a R85 monthly custody fee, by the end of the year that R12,000 investment actually works out to be under R11,000.

“Now for someone that is wealthy and has got a R10m portfolio, a 100 bucks is neither here nor there. But for someone starting out… that’s difficult. It has made it inaccessible to the man on the street,” he continues.

“With our model we don’t charge that custody fee, we only charge you when you transact… We are at the same level of the JSE in that respect, I need to emphasise that. Obviously this is a commercial enterprise… But you can do that without custody fees eroding your capital base whatsoever. And I think that will drive a culture of investing in South Africa, which has been a big part of the ZAR X licence application.”

Simple, low-cost and inclusive

ZAR X will also make use of technology to allow investors to undertake trading via their mobile phones and receive company updates across a variety of digital platforms.

“So, in our universe, it’s not just the stockbrokers who will be getting communicated to from the ZAR X Publishing Service… and we will be using SMSes, emails, and the web extensively. We have a few other tricks up our sleeves. I don’t want to spill all the beans now, but also from a reporting perspective – which will be revolutionary.”

The ZAR X model also allows for the execution of instant or same-day settlement of trades, which Nel believes will be another attraction for the exchange. He says on the JSE it can take up to five working days before a matched trade and settlement is cleared into an investor’s account.

In addition to reduced costs, company listing requirements on the exchange’s main board will be less rigid and more inclusive when compared to the traditional listing criteria. Furthermore, the exchange will have an investment products market, for the trading of structured products and preference shares, as well as a ‘restricted market’ – a major focus of ZAR X. This will offer a formalised version of the previous OTC platforms for trading Broad-Based Black Economic Empowerment (BBBEE) shares and other securities that can only be traded within a limited marketplace where issuers require some control over the liquidity in their shares.

Gaining market acceptance

“It is funny – when I sat in varsity I didn’t really think that one day I was going to start a stock exchange. Yet here I am. It is a bit surreal to be honest and the response from all stakeholders in the market has just been overwhelming– from issuers to the broking community to potential investors. It has just been phenomenal,” highlights Nel.

So far ZAR X has been funded by Nel and his two co-founders Geoff Cook and Graeme Wellsted, who are ex-Investec employees with compliance and legal backgrounds. But Nel says they are talking with potential investors.

“We are now in a much stronger position to negotiate with investors and we are quite far down the line [in talks] with a number of fairly significant investors – interestingly, local parties that are quite keen to embark on this journey with us. So they will then be providing the bulk of the capital to now set up all the big IT systems and the like that is required to run this operation.”

But possibly the new exchange’s biggest challenge will be gaining market acceptance, especially when it comes to introducing alternative ways of trading.

“For example, our methodology is that you need to prefund your account… With that sort of conception, I don’t know how receptive the market is going to be to that.”

However, Nel argues that competition will inevitably bring value to all stakeholders in the market.

“Free market economies work best with competition,” he emphasises.

“Firstly, competition effectively drives competitiveness in the market and reduces costs for all… Secondly it gives stakeholders and participants in that market a choice – which I think is important. And thirdly, it brings innovation – and some of our processes and settlement mechanisms are actually quite revolutionary.”