A2X takes the fight to the JSE

A2X is bringing serious competition to the JSE. Its growing market share is putting pressure on Africa’s largest stock exchange to lower prices and keep up with international trends.

A2X was founded by CEO Kevin Brady, Sean Melnick, and Ashley Mendelowitz to create a new South African exchange to compete with the incumbent JSE. 

They aimed to create a more efficient exchange than the JSE with lower fees for investors to trade on. 

A2X was awarded a licence to operate an exchange by the Financial Sector Conduct Authority on 6 April 2017. 

Today, the exchange has over 180 securities with a combined market cap of R9.42 trillion. These include well-known companies like Pepkor, Absa, Discovery, Investec, Naspers, Nedbank, Prosus, Sasol, Standard Bank, and Vodacom.

The company has grown its trade value from R657 million in 2017 to over R8.33 billion in August 2024.

“The highlight of the last year has been the unlock that has come on the back of five years of hard work,” Brady told Daily Investor in November 2023. 

“The company has been growing, but the acceleration of the last 12 months has been wonderful.” 

Brady said this is due, in part, to a critical mass being reached in the company’s brand and the number of companies listed, as well as a tweaked approach to include a sponsor. 

“On the trading side, the market share and the growth have been strong, even when things have been tough. This is because there is a clear benefit to saving money and accessing additional liquidity in these times,” he explained.

He said the company’s ultimate target is to have 20% to 30% of the market in 3 to 5 years’ time. 

A2X would also like to have all 40 of the JSE Top 40 companies listed on the exchange – a goal it is close to achieving with 31 of the 40 companies already trading on the exchange.

African Rainbow Capital Investments (ARC), which has a 20% stake in A2X, revealed in its recent results presentation that the stock exchange is progressing well towards building its market share despite some challenges.

One of these challenges is that the company needs to adjust its systems every time a new broker wants to connect to A2X, which has proven expensive.

ARC executive director Johan van der Merwe said it took A2X longer to do this than anticipated, but now six to seven of the country’s top ten brokers have connected their systems to the stock exchange.

He said A2X has had a notable effect on the JSE, forcing the larger stock exchange to adjust its prices to the increased competition.

“The JSE has adjusted its prices much closer to ours in the areas that we play in, and if we didn’t have A2X, they would have never adjusted their prices downwards,” he said.

However, he added that while the JSE decreased prices where A2X competes, it increased prices in areas without competition.

Van der Merwe believes A2X plays an important role in the trading ecosystem and has—to some extent—broken the JSE’s monopoly over this space.

He called on the market and traders to support A2X, saying, “If you want to break a monopoly, you need support.”

“We would like to have the market support us more by telling the brokers to utilise A2X more,” Van der Merwe said.

ARC executive director Johan van Zyl clarified that the company is not looking to overtake the JSE but rather provide more options and ensure South Africa has an efficient financial services ecosystem where no one party dominates.

“If we can get to 15% market share, we will do extremely well,” he said, comparing their goal to European nations where a second stock exchange has broken through and provided competition to an incumbent dominating stock exchange.

However, he reminded investors that A2X is up against a fierce opponent that has existed for well over a century and has been in a monopoly position for much of that time.

That said, he stated that A2X is making steady headway and is now closer to a position where it can compete effectively and “start getting the numbers up”.

Despite its challenges, A2X’s impressive growth has put pressure on the JSE to ensure it remains competitive and attractive for new listings.

Aside from increased competition, the JSE has faced another challenge – delistings.

Africa’s largest stock exchange has been plagued by a delisting crisis over the past few decades, with the number of listed companies dropping from 850 in the 1990s to less than 300 in 2024. 

This has largely been attributed to overregulation, unfavourable market conditions, and the rise of private capital markets. 

Many South African companies have also gone overseas to search for more liquidity and greater pools of capital to fund their expansion. 

The JSE has been aware of these challenges for some time and has worked to simplify its listing requirements and reduce its regulatory burden on companies. This is part of its multi-phase Simplification Project. 

As a part of the project, the JSE announced last year that the FSCA had approved amendments to the JSE Listings Requirements regarding financial reporting disclosures.

Earlier this month, the JSE announced that it had received approval from the FSCA to segment its market into the Prime and General segments.  

The General Segment allows issuers on the Main Board to apply certain provisions of the listing requirements differently. 

Issuers seeking to apply for the General Segment can submit an application to the JSE from 23 September 2024. 

This segment aims to give companies meaningful regulatory relief whilst maintaining transparency and disclosure.

Some of the benefits include significant cost savings, more efficient and cost-effective financial reporting, greater flexibility for boards, and more enabling capital-raising requirements.

“We believe it will create a flexible and enabling environment for certain companies listed on the Main Board to raise capital and undertake corporate actions within an appropriate and relevant regulatory framework,” said Andre Visser, the director of Issuer Regulation at the JSE.

Aside from steps the JSE is taking to encourage more listings, CEO Leila Fourie said an extra boost may come from green shoots in South Africa’s economy.

Fourie told PSG in a recent Think Big series that the company has already seen green shoots in the economy this year that could translate into more listings.

“When we see a demand for investment, this translates into a demand for companies to raise new capital,” she explained.

“So, the healthier the economy, the healthier the demand for capital and, therefore, the need by companies to seek listings to raise capital.”

As much as A2X is competing with the JSE for market share, it needs the stock exchange to survive, creating an interesting dynamic between the two companies.

AmaranthCX director Paul Miller told Kaya Biz last year that the declining number of listings on the JSE poses a serious threat to South Africa’s markets and the economy.

He explained that the problem is not that the JSE will eventually no longer have any listed companies if this trend continues.

The top 100 companies will always be there, but the country is on a trajectory that will see only 100 companies listed on the JSE.

This means that, in the next ten years, South Africa will go from a market that had 800 companies 30 years ago to a market with only 100 companies.

This not only limits South African investors’ options but also affects the country’s pension funds.

Miller said that – despite its incredible growth – A2X is only licensed to take secondary listings from the two primary stock exchanges, i.e. the JSE and the Cape Town Stock Exchange. 

A2X also explicitly does not do primary capital raisings. 

“So, it doesn’t help us solve the problem of new listings in the sense of new companies coming to market,” he said. “All it does is allow secondary listings of companies that are listed on other stock exchanges.”

While this is a good business strategy and helps improve the efficiency and costs in the market, it does not address the root of the problem.

“What nobody has cracked is how do we go back to a situation where an entrepreneur or a group of entrepreneurs can raise primary capital in the public markets to build something new, not spin off a company or create a portfolio of properties,” he said. 

“Where’s the funding for growing entrepreneurs? It’s certainly not coming from our public markets.” 

He said South Africa has a public capital market that “punches above the weight” of the country’s underlying economy.

“We’ve got the 20th largest public market and the 40th largest economy. So here we have a real gem, a real material advantage for the development of our country,” he said. 

“And I believe our policymakers don’t understand the problem, and they’re allowing it to wither away.”