South Africa’s new exchange, ZAR X, good for retail investors

The JSE’s days as the only securities exchange in South Africa are numbered, four new competitors are expected to go online between this year and the next, each with its own targets and unique selling points. One I am interested in, which you should have on your watchlist as well, is ZAR X which is set to open its doors in just a few days -the 1st of September (if all goes according to plan).

Monopolies rarely innovate

According to one of the founders of ZAR X, Etienne Nel, there is a “dire need” for an alternative exchange, especially one that targets lower-income investors previously marginalised in the market. The time it takes to settle a transaction is important, take the JSE for example, it takes five working days for your transaction to be settled and cleared. ZAR X plans to simplify trading through same-day transactions and will not charge custody fees to open and hold an account on the exchange, this, increasing its appeal to its targeted clients.

“Our market which we are offering is a real market. There is no additional activity over and above standard trades. We have no derivatives or short-selling.”

ZAR X describes itself as “a low-cost, simple and convenient trading platform that empowers ordinary South Africans with shareholdership opportunities” this holds true if you consider the custody fees of the JSE; this fee is passed down to investors by their brokers, this fee ranges between R50 and R100 a month for your account. This may not seem like much but it adds up if you’re one with a smaller account on the Johannesburg exchange. “Now for someone that is wealthy and has got a R10 million portfolio, a 100 bucks is either here nor there, but for someone starting out; that’s difficult. It has made it inaccessible to the man on the street” Nel said.

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.

Tech companies are interested in listing on the exchange and eight have committed.

Retail investors

ZAR X has a good chance of attracting retail investors; a large sum of them. I don’t think this exchange will create the same influx of the quality of gambling retail investors as in China but, one of two things will happen here:

It’s either very few investors will jump on the new train because sceptics would rather see how a system plays out especially during the first year or, the exchange can experience good volume from investors wanting to be the first to experience the exchange and maybe realise shares at discounted prices. South African investors are more sophisticated, or let’s say, more knowledgeable than the average Chinese retail investor thus, I don’t see the South African government having to intervene in order ‘protect’ investors through circuit breaks which keep share prices floating artificially.

Not allowing the shorting of a stock generally means that it takes longer for ‘price discovery’ to happen, ‘mathbabe’ Cathy O’Neil provides an excellent example of this with the housing market; sort of like the way the housing market takes a long time to go down. People who bought a house at 400K simply don’t want to sell it for less, so they put it on the market for 400K even when the market has gone down and is likely to sell for about 350K. The result is that fewer people buy and the market stagnates.

Conversely though (in argument), even though this market could be at 350K, short sellers could drive it down to 50K and, small companies are usually susceptible to attacks from the bears. So, I see where ZAR X is going with this ban on shorting, it encourages more companies to list on the exchange, knowing that no one can bet on their failure.

Sounds good to me.