Q&A interview: Kevin Brady has big plans for alternative exchange A2X
He eyes building scale in SA's equities market and moving into primary listings space.
For many years, South Africa’s financial market has amounted to one behemoth name: the Johannesburg Stock Exchange (JSE). Over the past two years, the JSE has faced more competition, with a number of licence applications for new stock exchanges being approved by the financial regulator.
It was a big step for lessening the dominance of the JSE, bring more competition in the market and giving equity investors more choice when it comes to exchanges of their choice. One of the new exchanges is A2X, whose platform was launched in October 2017. Its launch was not intended to replace the JSE as its intention is to offer companies that are primarily listed on the exchange a secondary listing on A2X.
A2X CEO Kevin Brady (pictured) says the exchange’s main drawcard is that it lowers the cost and barriers of trading for brokers, and listing requirements for companies are simplified.
So far it has received overwhelming support as 21 companies have listed on the A2X platform. These include, among others, Standard Bank, Naspers, Aspen Pharmacare, Sanlam, Coronation Fund Managers, and Nepi Rockcastle. The combined market capitalisation of companies listed on A2X now exceeds R2.3 trillion, many times the size of its rivals ZAR X and 4 Africa Exchange. However, A2X’s market capitalisation is still a fraction of the JSE’s all share index, with a market capitalisation of more than R12 trillion.
In an interview with M&A Africa, Kevin discusses the exchange’s pipeline of listings and the support it has received from blue-chip companies. He also reflects on A2X’s ambitions to offer companies primary listings and diversifying its platform beyond trade in equities to possibly include derivatives, fixed income, and foreign exchange.
M&A Africa: A2X has attracted about one listing a month since it launched nearly two years ago. Why do you think A2X has received such overwhelming support from the market?
Kevin Brady: The support comes on the back of our value proposition. When we launched in October 2017, brokers, asset managers and vendors knew us, but corporate South Africa didn’t. Our starting point was to get out there and educate corporate South Africa about what it means to have more than one exchange and the benefits that this brings not only to them but to capital markets as a whole. My sense is that we have got a lot of traction from blue-chip companies on the back of the value proposition we are putting forward.
M&A Africa: What is A2X’s pipeline of secondary listings?
Kevin: We would like to add one listing per month. We have six months to go before year-end, so we want to add another six. We set a target of 14 listings for the year and we are closer to the target.
M&A Africa: is it a hard sell to get companies to list on A2X or are education efforts still ongoing?
Kevin: The education efforts are still ongoing. We have the track record given that we have a number of quality companies listed on A2X. We are able to demonstrate to people that the A2X platform works and there are real benefits. From that point of view, it helps tremendously. There is no doubt that we are finding corporate South Africa a lot more responsive to A2X’s approaches and the suggestion of a secondary listing. My sense is that the pace of adoption is accelerating. We are finding that the turnaround time from when we meet with companies and them actually agreeing to embark on a secondary listing is shortening.
M&A Africa: And the idea of A2X is not to replace the JSE?
Kevin: The idea would be to have any company that is listed on the JSE to have a secondary listing on us. And all we are doing is giving shareholders more choice to transact. It’s a complimentary listing, and for companies, A2X offers an opportunity to expand the choice of venue that their shares are available for trade.
M&A Africa: What does the introduction of alternative exchanges in South Africa say about monopolies and the benefits of having more competition in the market?
Kevin: There’s no doubt that in whatever industry you look at, competition brings many benefits. If you look at developed markets such as Europe and the US, the specific reasons why regulators have opened markets for more competition is to bring benefits of efficiency, cost savings and responsiveness. Their goal is to say that the more active and efficient our capital markets are, the lower the cost of raising capital.
What we find is that if you reduce the cost of doing business, it improves the quality of business being conducted. For example, on A2X, brokers can pay 50 percent less to transact but your spreads start to narrow, and liquidity starts to improve as you bring in more participants in the market. We often say we are looking to eat a little bit of the JSE’s lunch, but this is about growing South Africa’s market overall and we can play our role in that by creating efficiencies that benefit all.
M&A Africa: And what is the cost saving opportunity that A2X offers?
Kevin: The JSE has a connection fee, transaction fee, clearing fee, broker deal accounting fee, and real-time price data fee. There are five pricing points. Those costs normally come out between 1.3 and 5 basis points for a broker. We have two fees: a transaction fee and a clearing fee. The rest we don’t charge. We estimate that we offer a 50 percent fee reduction compared with JSE trading costs. In order for us to do this, we needed the latest technology, strong value proposition on price and we needed to be customer-centric.
M&A Africa: A2X has 21 companies on its platform. How are trading volumes?
Kevin: We have had a great year. We have increased trading activity every month. In May, trading volumes were up more than 14 times the previous month. We are getting fantastic traction. In the big picture, we are still small. But what is exciting for us is that we have gone from nothing to having days when we exceed a percent in total activity in the shares that are listed on our platform. The hardest thing about running a new exchange is going from zero to two or three percent. Once you get to two or three percent, people cannot afford to not be accessing your market because you are accessing liquidity pools. For us, it’s about maintaining that level of growth. Sometime next year, we should be hitting those critical numbers like two percent. From two percent, it then becomes a lot easier to hit five or ten percent. We are seeing this with international experience.
M&A Africa: Are you open to diversifying the A2X platform to trade in derivatives, fixed income, foreign exchange, and other asset classes?
Kevin: Our core focus is on equities for now. We want to have 20 percent [of total activity in South Africa’s equities market] in the next five years. We anticipate that to be our end game. We want to leverage the platform into other asset classes. We think there are real opportunities there. We are looking at other opportunities such as primary listings. But for now, we are only focusing on building scale in our equities business.
M&A Africa: How big and where does A2X have to be first before branching into those opportunities?
Kevin: We need to be comfortable with our primary equities focus and that we have a critical mass basis before we distract ourselves with anything else. I guess we will consider other opportunities when we are over five percent market share [of total activity in South Africa’s equities market]. But for now, we are sticking to our knitting.
M&A Africa: On focusing on primary listings, how would this work?
Kevin: We are targeting companies that are frustrated with their primary listing and want to migrate it. We are also targeting that want to come to the market through an initial public offering. We appreciate that a primary listing is an important part of growing markets and we will get there. But in getting there, we will need a clear value proposition and offering that is better than anywhere else. When we start getting the demand from companies wanting a primary listing on A2X, that’s when we will look at that opportunity. For companies to migrate from the JSE to A2X, it’s a big ask. Until we have the trust and market share in our current market, then you will get people wanting to have the primary listing discussion.