JSE in hot water

It has been one year since the Competition Commission referred allegations of exclusionary conduct by the JSE to the Competition Tribunal.

Should the Tribunal find the JSE guilty, the company that runs Africa’s largest stock exchange could face a penalty of up to 10% of its South African turnover.

The Commission alleges that the JSE is dominant in its market and abuses that dominance through exclusionary conduct that has anti-competitive effects.

Now, it wants the Tribunal to declare these actions unlawful and require the JSE to change its rules and practices to remove post-trade barriers.

The JSE has denied these allegations, telling Daily Investor that the matter remains before the Tribunal, which has yet to make a ruling.

This dispute dates back to October 2022, when JSE challenger A2X brought a case to the Competition Commission. 

A2X was founded in 2017 to act as an alternative stock exchange for South African investors. Today, it has 167 securities with a market cap of R12.18 trillion.

Notably, A2X is not a stock exchange in the same way as the JSE. Instead, A2X is an exchange that provides a secondary listing and trading venue for companies listed on the JSE and other primary exchanges.

In 2022, A2X submitted a complaint to the Competition Commission alleging that the JSE had been engaging in exclusionary conduct.

Specifically, A2X accused the JSE of restricting a new entrant and competitor, A2X itself, from growing and competing effectively in the secondary equity trading market.

On Thursday, 15 October, A2X said in a press statement that the Competition Commission has referred this matter to the Competition Tribunal.

“The Commission concluded that our complaint has merit. It considers the JSE dominant and alleges that it has abused that dominance through exclusionary conduct since at least 2017,” A2X said.

“The Commission is asking the Tribunal to declare the JSE’s conduct unlawful, to require changes to the JSE’s rules and practices to remove these post-trade barriers, and to impose a penalty of up to 10% of the JSE’s South African turnover.”

The JSE’s response

The JSE told Daily Investor that it has noted A2X’s media statement but will not engage with it, as the matter remains before the Tribunal.

“For clarity, the Competition Commission’s referral of A2X’s complaint to the Competition Tribunal is an allegation, not a finding,” the firm said. 

“The Tribunal has not heard the matter, and no finding of fact or law has been made against the JSE.” 

“The JSE categorically denies the allegations referred to the Tribunal and has comprehensively set out its grounds of defence in its answering affidavit filed with the Tribunal.”

The JSE added that it remains committed to the lawful and orderly conduct of South Africa’s capital markets.

In its press statement, A2X CEO and founder Kevin Brady claimed that the barriers hindering his company from competing freely remain in place.

“Until they are removed, brokers and their clients carry costs that a competitive market would not impose,” he said. 

He explained that, for exchange competition to work, trading on A2X needs to be as seamless and practical for brokers as trading on the JSE. 

However, he claimed that this is not currently possible for three reasons.

Firstly, Brady said brokers can currently consolidate cross-market trades into a single contract note through the JSE’s matched principal trade process.

However, he claimed that the JSE has made the reverse-matched principal trade process for creating a single contract note on A2X unnecessarily complex and costly to use, rendering it unworkable in practice.

Secondly, he said brokers consolidate on-book and off-book trades executed on the JSE into a single contract note.

“But if the off-book trades were executed on A2X, they are precluded from a single contract note process,” he explained.

 Lastly, Brady said brokers are required to use the JSE-owned broker-dealer accounting (BDA) system.

“However, A2X is blocked from accessing critical position and status data recorded on the BDA, resulting in the risk management process having to be run without access to this information,” he said.

This, Brady claimed, results in duplicating the pull on brokers’ capital and creating an additional friction point for executing on A2X.

“Competition between exchanges lowers trading costs, improves liquidity and drives innovation,” he said. 

“With around R27 billion traded in South African equities daily, transaction costs have a real impact on investor returns and brokers’ cost structures.”

“Removing the remaining post-trade barriers will bring exchange competition in South Africa closer to a level playing field, allowing investors and brokers to realise more of the benefits.”