Better technology helps JSE to break exciting new ground
September 19, 2013
By Humphrey Borkum, Chairman of JSE Limited
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 IT 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 June has led to record
trading levels and we almost tripled our first half profit to R293 million
compared with R101 million last year. Headline earnings per share grew by 36% to
332c from 245.5c the previous year and operating revenue grew 16% to R793,5
Since the JSE became a listed company in 2006 we have always
tried to run the exchange as if we have a competitor next door. Therefore most
pleasing to me was that we lowered group operating expenditure by R16 million
and we were able to provide R60 million 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 CEO at the end of this year, has been appointed to the board as
non-executive director with effect from January 1 next year.
past few months the FTSE/JSE All Share Index has hit a number of new highs.
Along with my friend David Shapiro I also often lament the demise of the trading
floor and the open outcry system. I can imagine that excitement and camaraderie
these highs would have engendered on the 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.
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 alike. Moreover we have to constantly evolve
new strategies to ensure that we remain on the radar screens of the world’s fund
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% 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 per month.
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 in August 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 script days - a
laborious system which lasted for over a 100 years.
Lost script, 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
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
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 client’s computers. This
project , which should be completed in the first half of 2014, 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 that 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 within a universe of a 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, number two in the protection of
minority shareholders’ interests and third in financing through local equity
market. In the soundness of our banks we remain at number two and in
availability of financial services we also came in at number two (from seventh
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
government. I’m proud of the high global standards we maintain.
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
non-competitive position our country finds itself in.
first appeared in Business Report