In a panel at the JSE SA Trade Connect 2024 conference in Cape Town, South Africa, panellists explored the ways in which fragmentation is impacting the trading of dual listed equities in the South African market.
The dominant exchange within South Africa is the Johannesburg Stock Exchange (JSE), which historically focused on equities but has now grown to cover equities, equity derivatives, foreign exchange, bonds and ETFs.
JSE’s main competitor, A2X, went live in October 2017, offering an alternative trading venue for the secondary listing and trading of shares. Elsewhere, the Cape Town Stock Exchange (CTSE) caters to small to medium -sized businesses, licensed to issue both equity and debt.
Several speakers highlighted benefits associated with increased fragmentation, particularly if a business operates globally with various trading desks located in various geographical locations.
“With Ninety One being quite global – with trading desks in Hong Kong, New York and London – we get the benefits of fragmentation and optionality when it comes to trading venues,” highlighted Yanela Songca, head of trading for South Africa at Ninety One.
“But for our clients here in South Africa, in particular, where liquidity is, that’s where we go. Sometimes we find that the pool of assets that we manage for our clients, you can’t easily tap into that liquidity and be satisfied in the local market. Referring to the process, you could only get so far in the local market, the big question is why that is?’
Songca continued to emphasise that from a buy-side perspective, a firm has to be venue agnostic in this context. He did, however, note that there are also negatives associated with this move.
“Fragmentation is great when it’s suitable and there is activity. However, being in an EM market, EM has not been favourable and we find that liquidity and liquidity providers prefer to be centred around the markets that are more developed,” he said.
“This brings about a challenge for the players that are more specific to local markets. And even worse, it brings about a big challenge for those players on the sell-side that don’t have the technology to access those markets.
“We find ourselves in a situation where we applaud a path, but on the other side, we are cautious because it’s eating away from some of the liquidity in SA.”
Panellists noted that a lot of activity exists in South African names between foreign counterparties, which doesn’t necessarily touch the JSE lit market at all.
As a result, it is essential to think about ways that some of that liquidity can be brought back to South Africa in a way that South African buy-sides can also interact with it.
“As a broker, I want to be able to access all of the liquidity that’s available,” argued Andries Potgieter, head of electronic trading at Investec Markets. “There needs to be [an even] playing field where everybody can do it. But at the same time, some of this liquidity is not necessarily always going to be available to everybody.”
In certain instances, panellists also noted that if you’re putting flow onto a central order book, there are predatory strategies that will still try to take advantage.
Fragmentation was something that was presented by the panel as inevitable – developing as a result of market rigs that have been seen elsewhere in the world.
“It’s also a case of different ways of trading, it’s more suitable to different investor objectives. There are the higher frequency market making strategies and players in that space, people who just want to get the VWAP on the exchange, but then there are the other players who have large blocks that they need to move,” added Potgieter.
“What’s important here is that the regulatory framework, the exchanges, the buy-side, brokers, and even technologically suppliers, work together to ensure that we have a functioning ecosystem where people can access the liquidity and get the best outcomes for the clients. The world is constantly changing and evolving but we’re never going to move away from that,” he concluded.