Speaking at the Johannesburg Stock Exchange (JSE) South Africa (SA) Trade Connect 2023 conference, panellists were unanimous in their belief that South Africa is on the cusp of major change.
Historically the market has been dominated by one primary venue, the JSE, and alternative MTF A2X, while others have tried and failed to make a dent in this market. But regulators and participants predict this could be about to change.
The prediction has sparked debate around whether South Africa has the liquidity or regulatory framework to support multiple venues, what potential fragmentation and competition will do to markets, and most importantly, how regulators and institutions alike should define and achieve best execution.
“We’ll likely align with EU regulators, the question is where. We need a single rule to apply to the market across exchanges that is consistent. It’s not only about price, but also about outcome,” said Astrid Ludin, deputy commissioner at the Financial Sector Conduct Authority (FSCA).
Other panellists agreed best execution is not just about price but also about getting the best outcome for clients by finding liquidity and minimising cost of execution.
“We currently sell best execution,” said Alexis Van Zyl, electronic trading at Investec. “It’s about taking a simplistic view and doing as best as possible to reduce implementation costs as far as possible.”
Fragmentation
Best execution relies on options to be compared and contrasted with one another, and the discussion around defining and applying best execution signals an appetite from institutions and regulators for a new venue in the region.
The question is whether the market currently has capacity or the regulatory set-up for a new primary exchange and what new competition could do to liquidity? Others have tried and failed in recent years to make waves in this market, namely stock exchange ZAR X, which had its exchange licence suspended in 2021 by the FSCA over liquidity and capital adequacy concerns.
“The JSE as the only primary venue is currently somewhat self-regulating because of the set-up,” Van Zyl told The TRADE. “They have done a great job of facilitating the market.”
But change is on the horizon and the FSCA is currently undergoing an ambitious two-fold regulatory agenda through the Financial Markets Act and Conduct of Financial Institutions Bill covering clearing, dark pool and high frequency trading and regulatory architecture.
“Whether or not South Africa is big enough for another venue, I don’t know, but questions are increasing not only around that but also around block finding and matching capabilities,” added Van Zyl. “Who knows what the market will look like in three years.”
Panellists agreed if done correctly, fragmentation in South Africa would be a positive addition to the market.
“Competition reduces the cost of trading. It could also see different participants entering the market,” said Citi’s EMEA head of platform sales, Joseph Sidibe.
“It’s important to ensure there is enough transparency but price formation fragmentation if done in the right way would be beneficial. Look at the US and retail, front-to-back efficiency allows retail to take part in the markets.”
Lessons learned from Europe
Those representing the European front on the JSE SA Trade Connect panel erred on the side of caution: highlighting the significant fragmentation that the bloc now suffers from amid daily volumes that haven’t really changed in the last five to six years.
In contrast to the market in South Africa, the European markets now play host to a plethora of primary venues across its 27 member states and alternative MTFs, including Cboe, Turquoise and Aquis, that compete with them for the somewhat stagnant flow.
“We now have a good system in Europe where you can trace best execution to the micro and mili-second despite the fragmented structure,” said big xyt’s head of client engagement, Richard Hills. “That process is being imported to South Africa already, as a Mifid broker has the same obligation trading anywhere.”
Mifid regulation was designed to push more volumes onto the continuous lit markets but has instead seen average daily turnover continue to decline in recent years. The growth of the passive segment has intensified this by encouraging volumes into the Closing Auction, a global trend that has become most pronounced in Europe.
“South Africa has to leverage and learn lessons from Europe and capitalise off the back of it,” concluded Sidibe.