What a difference a year can make in the life of a stock exchange. In this column in September last year in reviewing our interim results I bemoaned the R72.6 million impairments that we had to take in renewing our back-office technology systems and the somewhat pedestrian trading volumes we were experiencing.
I commented that in my experience technology installations were like the construction industry – you’re never quite sure when a project is going to finish or how much it will cost in the end.
This year the volatile nature of the exchange in the first six months to the end of June has led to record trading levels and JSE Limited almost tripled our first-half profit to R293m compared with R101m last year. Headline earnings a share grew by 36 percent to R3.32 and operating revenue grew by 16 percent to R793.5m.
Since the JSE became a listed company in 2006 we have always tried to run the exchange as if we had a competitor next door. Therefore, most pleasing to me was that we lowered group operating expenditure by R16m and we were able to provide R60m in rebates to our equity market members.
The JSE has nine diversified revenue streams and although the equity market remains our biggest revenue generator, we also saw increased trading activity from financial derivatives, the interest rate and currency markets as well as from our post trade services and market data divisions. We did not declare an interim dividend as it has been the board’s policy of only paying a single annual dividend based on the full year’s results.
Michael Jordaan, due to retire as FNB chief executive at the end of this year, has been appointed to the board as a non-executive director with effect from January 1 next year.
Over the past few months the all share index has hit a number of new highs. Along with my friend David Shapiro, I often lament the demise of the trading floor and the open outcry system. I can imagine what excitement and camaraderie these highs would have engendered on the trading floor.
Unfortunately computers are unable to share the joy of a bull market and a drink in the pub after a good trading day. Neither can they provide empathy or a pat on the shoulder when the bear has his turn. However, I acknowledge that we would never have been able to handle the volumes we do at present without electronic trading.
Today it is information technology that is shaping the architecture of capital markets. To remain globally competitive, exchanges need to innovate continually to stay relevant to issuers and investors. Moreover, we have to constantly evolve new strategies to ensure that we remain on the radar screens of the world’s investment managers.
Since the advent of electronic markets, high frequency trading (HFT) has enabled investment firms to do hundreds of trades on several different markets faster than a blink of an eye.
Simply put, HFT is a form of algorithmic trading that uses extremely high speed algorithms and fast technology for decision making on each individual transaction without human direction. Currently about 65 percent of the JSE’s trading activity is transacted in this manner.
Here I would like to point out that July marked the first anniversary of the return of our equity market trading engine from London to Johannesburg. With execution speeds now 400 times faster, July 31 saw a record breaking 290 295 trades valued at R34.3 billion being executed. At present the JSE averages 140 000 trades daily. This compares favourably with our first year of electronic trading in 1996 when we averaged 158 000 trades a month.
Three technology projects that face us in the near future are T+3, co-location and the necessity to replace our derivatives trading and clearing systems. All three have been prioritised by the board.
T+3 is the equity settlement cycle the JSE is aiming to achieve in three phases. The first phase went live last month and timelines for phase two and three will be communicated to the market shortly.
The exchange currently works on a post-trade settlement of T+5 (trade plus five business days). This cycle was established in the paper scrip days – a laborious system that lasted for over a 100 years.
Lost scrip, stolen and forged share certificates, safe custody storage problems and slow delivery from overseas often meant we needed considerably more than five days to settle such trades.
The move to T+3 is a major step in aligning ourselves with global best practice and harmonisation across international markets. This should bring greater liquidity to the exchange due to the faster reinvestment of capital from the settlement process.
In the event of a default, a shorter settlement cycle will also reduce the value of unsettled trades at any point in time. The reduction of this value will reduce systemic risk and potential losses. Over the past year the JSE has prided itself on zero equity trading outages.
Co-location offers our clients the option of placing their computers adjacent to our own trading engine. This will provide them with 24 times faster access into the equity market.
Our co-location centre, which will be housed at the exchange, will provide 35 racks for our clients’ computers. This project , which should be completed in the first half of next year, offers a number of benefits for our market in terms of volumes and liquidity and will also open up a new revenue stream for the JSE.
We believe our equity derivatives platform is too slow at present and we should work towards an integrated trading platform to allow single access to all the markets. We intend starting this process in 2015.
I always take heed of the World Economic Forum’s annual Global Competitiveness Report. In this year’s report, South Africa Inc competes with 144 countries across a wide range of criteria. There is good and bad news in the latest report. Once again South Africa’s financial sector is one of the best in the world, while sections of our labour market efficiency are the worst.
For the fourth consecutive year South Africa, and by implication the JSE and the Financial Services Board, was placed first in terms of market regulation, second in the protection of minority shareholders’ interests and third in financing through the local equity market. In the soundness of our banks we remain second and in availability of financial services we also came in second (from seventh in 2010).
Our highly regarded accounting firms repeated their first place in strength of auditing and reporting standards and the efficacy of our corporate boards was also rated number one.
Congratulations are due to all concerned in the financial services arena, including the financial departments in the government. I’m proud of the high global standards we maintain.
However, growth in several areas in the economy, particularly the mining sector, is being held back by labour market inefficiency. We come last in the world in co-operation in labour/employer relations, second last in hiring and firing practices and fourth last in flexibility of wage determination. Why do so many of our wage negotiations always have to end up in a violent strike? Strong leadership and wise counsel have never been more needed to reverse this uncompetitive position.
Humphrey Borkum is the chairman of JSE Limited.