Equity Express: Leading the charge to disrupt JSE’s share-trading monopoly

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In May 2014, the Financial Services Board took a decision which has introduced massive disruption into South Africa’s previously complacent share trading sector. Acting on concerns about a mushrooming over-the-counter market, the FSB introduced new regulation requiring the OTC operators to apply for a full stock exchange licence or cease trading. The consequence, intended or not, sparked a wave of innovation by businesses like Easy Equities; and the promised creation of half a dozen new competitors for the previously monopolistic Johannesburg Stock Exchange. The market’s Goliath is being exposed to the disruptions to the status quo which always accompany rapidly developing technology. Among the licence applications is one from dominant OTC operator, Equity Express, whose former COO Etienne Nel started his own business now poised to become the first new stock exchange to open its doors. His former boss, CEO of Equity Express Anthony Wilmot, has an even bigger plan and explains here why his company decided on a two pronged response to the challenge. Should they choose, existing clients will be able to continue in much the same vein through a new OTC Bulletin Board. Companies who prepare to go the listing route will be spoilt for choice with up to half a dozen new exchanges targeting cost-conscious businesses – including those whose JSE listings have not delivered the expected exposure or investment interest. – Alec Hogg 

Anthony Wilmot is the founder and chief executive of Equity Express. Your over-the-counter market was targeted by the Financial Services Board a couple of years ago. What brought that to the fore?

I don’t really know other than there was an interpretation of the definition of an exchange according to the Financial Markets Act. Their belief was that when we originally got permission to provide these types of services their interpretation of that definition had changed so the services we were providing fell foul of the definition. It meant we then needed a stock exchange licence to conduct our activities and hence, the start of the process from the FSB that all OTC markets needed to be regulated. The definition of an exchange is in the Act and it basically consists of three simple points. An exchange means a person who constitutes, maintains, or provides an infrastructure (a) for bringing together buyers and sellers securities (b) matching bids and offers for securities of multiple buyers and sellers, and (c) where such a match bids an offer for securities constitutes a transaction. The FSB’s view prior to their change of interpretation of the law was if you were doing it for a single counter, then you did not need to apply for licence. That, in essence, was the process. What brought on the re-interpretation of the definition? I don’t really know.

Up until that point, how many counters were being traded on the Equity Express platform?

At that point, we had 10. We lost one client because of an unfortunate incident – everyone’s aware of what happened to African Bank. We were looking after their BEE share platform. After the FSB’s announcement we lost PSG’s BEE partner because they felt it was too onerous. We always said to our clients that we were an agent acting on their behalf so it was actually their trading platform. The FSB made it clear to us that we were not allowed to conduct the exchange. In other words, the whole concept of a marketplace for buyers and sellers to sell multiple times. We had to interact with their shareholders individually. That effectively meant that we had lost a few clients and then the FSB contacted every one of our customers because of the fact that we were acting as agents. They said to them, listen, chaps. You need to regularise your affairs. Effectively, our clients have all been in correspondence with the FSB on this issue.

Read also: FSB’s edict that OTC trading of BEE shares is illegal: don’t panic – yet

At some point in time, you must have thought of different routes perhaps, joining the Johannesburg Stock Exchange or merging with them?

What the FSB did, which was very fair and reasonable, is they said to all of our clients in a letter individually that essentially they had four choices. The choices were this: Cease your illegal activity, in other words, stop doing what you’re currently doing. Interestingly, apart from our PSG client, none of them chose to do that. The next one was, apply for stock exchange licenses for yourselves. We haven’t had any clients really go that route because you can imagine that applying for a stock exchange license is quite onerous. As a result of everything that happened, a previous employee of mine left and started a company called ZARX and they have been very close to receiving a formal license. I think they’ve been granted one – conditionally – at this point.

The third option was change the basis on which you conduct your affairs to fall outside of the definition and I’m pleased to report we’ve made some significant progress there. The last one was list on a recognised exchange and that’s obviously code for ‘go to the JSE’ and we’ve had a few clients do that. We’ve lost a few clients that way. The big one everybody is aware of is YeboYethu, which is Vodacom’s BEE scheme that’s now moving to the JSE. The other big one, which had some problems at the beginning, was MTN’s Zakhele. They are now trading on the JSE. Sasol Inzalo: their very first, non-debt funded one was listed on the JSE since the beginning; but the one that carried debt, we looked after with Computershare.They’ve now gone to the JSE.

Effectively, we’re left with Multichoice and Media24 of the big ones. Then we have smaller clients where the number of shareholders is less. Some of them are restricted shares (BEE-type counters) and some are just open share where there are no restrictions on them.

What have you done to comply with the regulations? 

Obviously, from a business point of view, ceasing is not a solution for anybody so we didn’t really pursue that one. The second option was to go to the JSE. We couldn’t do that. So we were really left with two choices. Our biggest clients are the Naspers counters. We were really just wanting to know what they wanted to do. Once we were satisfied they believed there was a future in staying in an OTC-type market, we decided that it made sense for us to apply for a stock exchange licence. We put that license application in at the end of March and we’re waiting to hear from the FSB on that.

At the same time, we were also aware that our customers might want to remain unlisted. Listing has benefits but it also has disadvantages and OTC is not illegal in this country. We also contacted our lawyers (Edward Nathan) and we’ve worked extensively with them on coming up with a model that is outside of the definition of an exchange. We’ve also met with the FSB on that. We’ve shown them our model and they’ve concurred with our interpretation that what we’ve now come up with is outside of the definition of an exchange so we’re going to be offering those services. Singular Systems has put in a stock market licence application. We have six different shareholders in that process and so we’re complying with the FMA that says nobody may own more than 15 percent of an exchange.

Read also: Singular Systems: Changing SA’s investment landscape one BEE share deal at a time

That organisation is completely independent of Singular to the extent that any of our clients want to list on that exchange, will offer the services as a stockbroker on that exchange. What is good for us is obviously our technology, which we’re very proud of. It will continue to be used by the exchange in conjunction with Equity Express. If our clients don’t want to be listed, we can offer them a similar service to what we’re currently offering, an OTC-type service.

So you have two options, in other words. You could adopt the same route that Etienne Nel went with ZARX….

Correct. It’s something similar to what they’ve done. It’s not quite the same, but similar.

Read also: SA grants first stock exchange licence in 100yrs – ZARX to compete with JSE

Otherwise, clients can carry on pretty much as before on an OTC in a refined form.

Yes. The only problem is that it’s not nearly as efficient. Guidance from the FSB was that there were two key factors. There must be no matching, so our new offering does not do any matching. Buyers and sellers effectively advertise their intention on a website and then contact each other. In mechanical terms, in our new model they will phone each other to negotiate and once they’ve negotiated it, will come to us with their negotiated deal and we’ll process the transaction from there on forward.

That sounds like a long and involved process, Anthony.

It’s the only thing that’s allowed in terms of OTC. The hallmark of OTC is negotiation between the parties and they have to know each other. The moment you let a computer system match them, you’re in the world of exchanges and you need a license. That’s going to be the distinction.

How would what you are talking about, differ, say, to eBay?

Quite simply, eBay is literally an advertisement – and the moment you’ve advertised the parties talk. Everything that happens thereafter has to be done between the parties. With trading stocks, the big is as a buyer, how do I know I’m going to get my shares? As a seller, how do I know I’m going to get my money? Effectively what we’ve offering is a solution after they’ve negotiated. That can be quite quick. It’s literally a telephone call. Once they’ve negotiated and agreed on price and the number of shares, they have the ability to come onto the platform and load their confirmed deal. At that point, we make sure that’s all in place. Obviously, a seller can’t sell shares that are not in the register we’re controlling and neither can the buyer place the confirmed trade on the website without having cash available. The hallmark of what we’re currently doing, which is a cash-backed share-trading platform, will now change to being a cash-backed share-advertising platform.

The picking/matching of the participants is not done by us. They choose each other and the conclusion of the negotiation is also completely between them. If someone advertises on the platform they want 10 000 shares and they only do a deal for 2 000 shares, that’s fine. The point is when they come back to the platform to say we’ve negotiated then both parties have to confirm the transaction. The moment the second party has confirmed what the first party has loaded, we can deliver the script to the buyer and the seller will get his cash.

How different is it to eBay?

Completely different because with eBay you are literally advertising your intention. The seller has to contact whomever looks after the register and say, please transfer the shares and the buyer has to get the money to the seller. In between those two things, all sorts of things can go wrong. You could have a situation where the buyer pays the seller, thinking the seller’s got the shares. He then discovers the seller never transferred the shares. Now the buyer has to try get the cash back. That’s the problem. It’s the actual transfer of the cash to the seller and buyer knowing he’s going to get the script. That’s what Strate does – it ensures that for every delivery we transfer, there is settlement and proceeds for the shares exists.

Does the guy who’s buying have to put up any guarantees to make sure that he’s got cash?

Yes. He has to put money into the account and so he’s got to be good for cash. On our platform, he does not advertise a price. We’re only allowed to show quantities. That’s what we’ve agreed makes the most sense because the view was that if you’re advertising price and quantity, it’s too close to getting the whole match thing done. The feeling was that we needed to advertise quantities only and price is negotiated directly between the customers.

Should you get your new license and you start operating, why would anybody use the bulletin board option?

Remember, it’s unregulated Alec, so there are no listing rules. The issuers on an OTC can provide services to their clients on conditions that make sense to them.

So anybody, even small businesses, could list their shares with you?

Yes. If you come onto the stock market you are listed and the exchange is governed by the FSB and all the investment protections are there. It is a direct competitor to the JSE with investor protection. The OTC has no investor protection. Well, that will continue with our OTC service – it is not regulated and the companies that would allow their shareholders to trade between themselves are not giving any guarantees on anything, other than here’s a share. You can decide who you want to buy and sell the shares to and the prices that you conduct the transactions at, but we provide no form of investor protection. OTC has always had that. I can remember Magnus Heystek saying, “Never buy an unlisted share because you never know if you can sell it again.” The fact is demand for OTC does exist.

We’ve got clients that are interested in the OTC service offering. Their argument is what we’ve been doing all along is OTC. We’re not sure we want to list on the stock market. Listing is very formal and listing also means you’re subject to public scrutiny – much more than if you’re unlisted. That’s the subtle distinction but it’s quite a big distinction. The one is formally governed and the other is not.

What’s the difference for a company that is going to list on your proposed new stock market and the bulletin board?

Very simply, the one that wants to be listed might want institutions buying its shares – if they’re unrestricted – or any other participants in the market. There are certain people who only invest in shares if they’re listed. These issuers want to open up their shares to a wider market. They might also want the publicity of being listed. Remember, being listed means they’ve now got to disclose all their financial information and conduct themselves as a listed company with all the rules – similar to the kind of protection the JSE gives. Those are the types of people that are going to want to list so it’s really widening their investment ambit for their shareholders.

The people who want to go OTC are the ones where there are typically between 100 and maybe 1000 shareholders, where they currently have a company secretary managing the trading of their shares – and it’s just become too onerous for the in-house staff. These companies are just saying, “I don’t want to do it myself anymore. I just don’t want the administration and would like an environment where it’s more controlled than I currently have.  Once again, take as a simple scenario; shareholder A comes to the company secretary. The company secretary knows shareholder B wants to buy. He puts the two in contact. After that somebody has to hold their hands with the transfer of the cash and shares. It’s a lot of admin. For us, our OTC clients will be the clients interested in helping ensure the administration is done correctly behind the event. We’re providing security to both the buyer and the seller in the OTC environment. Once they’ve agreed to the price, the buyer will get his shares and the seller will get his cash. For a lot of people, that’s worth a lot.

The advantage that you did offer on your OTC was BEE. You verify whether a buyer is in fact, BEE so that it retains the BEE credentials of the company.

Yes. That won’t change. That service offering will be provided in both scenarios. If a restricted company were to list on our trading platform in the listed environment, they would appoint a company to provide the services for BEE verification. In an OTC environment, the same thing would happen – we can apply any restriction. We have some clients where the deal is that the company decides which shareholders can buy. The company vets the shareholder prior to any sale. One of our clients has those rules. Restrictions on the shares can be implemented in either scenario. That’s where we feel we’ve specialised in terms of the service we’ve provided.

Read also: SA’s flourishing BEE share exchange considers branching into other parts of Africa

In a way, you’ve actually got two bites at the cherry now and potentially, an expanded market?

Absolutely, because we’re not forcing our clients to choose. I don’t want to go to every OTC client and say, “You have to be listed.” I can now say to them, “These are the benefits of listing. If you want to be more public, you want a wider investment base, and you want to be listed with all the benefits of listing or if you don’t want to be listed but you still want to provide a service to your shareholders in a manner where the company secretary is not the one doing all the work; here’s a way for you to have that done.” Because the technology on both platforms is going to be extremely simple – particularly the controlling of the cash/pre-funded nature of the market – it will give our clients that are OTC the ability to migrate into a listed environment later should they so wish.

They could also go the other way around. If they are listed and they’re finding the cost too high and they want to keep offering services but not leave the market completely, they can go back to being OTC. We love it because it gives us the ability to offer both sides of the coin to our clients.

When are you likely to hear from the Financial Services Board on your stock exchange application?

That’s the Million-Dollar question. If I just look at ZARX’s experience, they published their rules sometime during July/August of last year and submitted their licence application in March. We’re now coming up to July. We haven’t had any formal notification from the FSB on how our licence application is going, but I’m of the opinion that it’s progressing well. If it’s the same sort of timeline, we’re likely to be publishing our listing rules and appointing stockbrokers, etc during the course of July/August – maybe even in September. ZARX were given their provisional license in March so for them, it was exactly a year’s process. I can’t imagine it would be any slower for us.

How are your rules likely to differ from what the Johannesburg Stock Exchange applies?

Well, ZARX’s rules were quite a lot lighter and I think our rules may be as light as theirs, if not lighter. Essentially, the huge difference between our application and the JSE: we’re giving the issuers the ability to make a few key decisions. The first one: An issuer will be able to decide which stockbrokers or which broking communities may trade their shares. Secondly, the issuers can also, from an electronic perspective, set down restrictions.

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