ZAR X, the first exchange to be granted a trading license in South Africa in more than 100 years, considers its role as fundamental to furthering the aims of financial inclusion and transforming the country's anaemic savings and investment culture. This is according to CEO and co-founder Etienne Nel, who addressed a recent Gordon Institute of Business Science (GIBS) forum.
Financial inclusion and the need for a new exchange
Nel said the ZAR X platform aims to "open equity market participation to all" with its zero custody fee and is a "revolutionary concept" which slashes trading costs and enables settlement within a day. "Creating a culture of investing and savings in South Africa is the core ethos of ZAR X, and the level of financial inclusion this model drives is significant," Nel said. He explained that globally, unequal distribution of wealth and the concentration of capital in the hands of a few simply isn't tenable. While financial services providers had gone a long way to give more South Africans access to transactional bank accounts, the country's citizens remain among the worst savers and investors in the world. Barriers to investment include a lack of financial education and understanding of basic investing concepts.
About ZAR X
The ZAR X platform gives businesses a flexible, transparent and affordable way to list their restricted or limited share offerings so that ordinary South Africans can take advantage of them. The exchange's use of a nominee account, which pools investor money and only allows for trading to take place once the money has cleared, means T+0, or instant settlement, can be achieved. The T+0 abbreviation refers to the settlement dates of security transactions: The T represents the transaction date, while the numbers 1, 2 or 3 indicate how many days after the transaction date the transfer of money and security ownership takes place.
ZAR X's use of a nominee account means liquidity is significantly faster and money can be settled in real time. "T+0 reduces systemic risk in the South African capital market context," Nel explained. The exchange was adopting a "back to basics" approach, Nel said. This meant ZAR X would not permit derivatives trading, short selling (as buyers have to pre-fund their purchases) or high-frequency trading. It also won't engage with market makers, rather focusing on "vanilla equities."
"We have structured everything around an investing market, rather than a trading and speculative market, which is important for financial stability." The ZAR X platform would not be a competitor to the Johannesburg Stock Exchange, but rather an independent and alternative exchange platform for listing and trade execution, Nel said. ZAR X would only trade products listed on its exchange and will not offer dual listing between itself and the JSE. The platform is "an incubator for companies looking to create liquidity" Nel said, and will target medium-sized companies with an annual profit of R20 million for listing.
Senwes, an agri-business currently trading over the counter, and parent Senwesbel will migrate their over-the-counter shares to the new exchange on September 30 so as to ensure that the share trading is regulated in terms of the new Financial Markets Act of 2012. The Act requires all self-regulated trading platforms to apply for a license to trade as an exchange, or migrate to a licensed exchange.
While ZAR X's T+0 allows for a fast liquidity turn around and assists in the reduction of systemic risk, Nel pointed out that there was "always an element of risk in the very nature of share trading."
"We have never purported to be a risk-free exchange. We are in the business of transacting in shares, which is by definition risky." He suggested that investors manage their risk through portfolio diversification. Any new issuer of shares on ZAR X will have to comply with its listing requirements, as the exchange is a self-regulating organisation: "A well-thought through listing regime is key, and as a small exchange, we cannot afford any suspensions," Nel said.
He explained ZAR X had three separate boards to review potential listings as an attempt to remove as much risk as possible and drive investor protection. Nel said he envisaged offering a similar type of product to exchange traded funds, like those offered on the JSE and other international exchanges, "once listings reach critical mass."