JSE profits sparkle, robust systems handle Abil trading frenzy

JSE chief executive Nicky Newton-King is bucked at the comfort with which the exchange’s trading engine handled more than 30 intra-day auctions during hectic trade in Abil shares last week. She also answers the tough questions about Coronation’s dumping of 170m shares – and whether the JSE Surveillance team will be investigating insider trading. Perhaps the highlight of the results is how, from an operational perspective, the past week proves the value of the JSE’s  investment in a robust structure – and positions the exchange to counter growing competition as it looks ahead after a half year where profits rose 17%. – AH

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ALEC HOGG: The JSE’s financial results have just been released for the six months, to the end of June. Nicky Newton-King the CEO is with us, in the studio. Nicky, headline earnings per share up 17 percent. It’s a good performance, when you consider that turnovers on the JSE were under a bit of pressure this time.

NICKY NEWTON-KING: They were under pressure but I think it’s a reflection of the fact that we’ve worked very hard to diversify our operating base, so the operating revenue is reflecting that diversified base. A very good performance, as you can see there from our listings area, which is unusual. I’ve not seen that in many years.

ALEC HOGG: Does that mean new listings coming to the market?

NICKY NEWTON-KING: New listings and more than double capital raising, year-on-year, so that I think is a very good performance. Ten listings as opposed to four in the comparable period last year and very tightly controlled cost, and you produce that sort of headline growth.

ALEC HOGG: But you’re still a long way from boom times on new listings. Are you getting any feeling that you might be heading there?

NICKY NEWTON-KING: Not getting that feeling that we’re going to head there and, I think we’re, realistically an economy under stress. I think that is not going to be happening very shortly but that said, there is really a need for capital raising and we are one of those venues, so certainly as private equity exits, as people start to get businesses up and running, there are of a scale that needs public funding, were there.

ALEC HOGG: Good and bad news in the answer you’ve just given; good news in it that those who were worried about the level of the JSE indices need not because when things overheat then you get flooded with new listings.

NICKY NEWTON-KING: You get new listings in different times. Sometimes listings are flavours of the month. You’ve seen tech booms and biotech booms, etcetera, but what we really want to do is not sort of call the market, but be there for people who need to raise money and have appropriate standards, so issuers and investors can meet each other in an equitable manner.

ALEC HOGG: But it isn’t good, when you are run-off your feet with every man and his dog, wanting to come to the JSE. That tells you that the JSE is probably expensive- it isn’t there now.

NICKY NEWTON-KING: Well, I’m not going to comment on that, Alec. That’s your expertise.

ALEC HOGG: Okay but having a looking at some of the bad news now. This past week with Abil, on Wednesday they came out with a Profit Statement. The biggest shareholder dumped 170-million shares in the market over the next three days. At times that you had to stop trading, have an auction, stop trading, and have another auction. What was your thinking? Why did you decide to let Abil remain listed and not suspend the share?

NICKY NEWTON-KING: We run a market and a market responds to news and information. As soon as you are comfortable that there is sufficient information out there that there is nobody at an informational disadvantage. Then it is appropriate for us to step back and to let the investors decide whether they want to buy or sell. That changed on Sunday night, when we had the curatorship, and all of a sudden, you have a position where people in the Consortium have potentially, better information than other parties and at that stage, you have to say, “We need to hold the market.” We were quite comfortable about the decisions we took last week and in fact, the good news of that, is that the systems that we have in place performed without us even having to spend on the systems. The auctions, the volatility auctions that you mentioned, kicked in as normal.

There were 30-odd auctions on one day, in one stock, as the share price went off. We didn’t even have to worry about what the systems were doing. They functioned as normal. Settlement has happened faultlessly. I think this is actually a testament to the fact that the Exchange offers an environment that is pretty robust and provided that you take the right decisions, the right regulatory decisions, at the right time, which is all focused on ‘is there sufficient information out there’. Then you must let the investors make up their minds.

ALEC HOGG: It’s a good comment but you have the biggest shareholder, which owned 20 percent, with just a flooding of selling orders. It sold 170-million shares, from one-single source. One would have thought that the biggest shareholder, which had pumped an enormous amount of capital into the business, would have some kind of an inside track. Certainly, to the CEO, who then left immediately and clearly, they did the right thing by selling because those shares are now worthless.   Isn’t it worth looking into this?

NICKY NEWTON-KING: We never comment on what investigations we are doing but provided people sell ones’ public, information…once information is made public and the big announcement was on Wednesday morning. Then everybody is at a similar position but whether or not we’re investigating any particular movements, in relation to Abil, I would never comment on that because we never comment on investigations undergoing. However, what I can absolutely assure you is that to the extent that we see any unusual movement, whether that’s movement in share price or unusual movement in volumes, whether that’s from an insider or anybody else – we’re on that.

ALEC HOGG: The biggest shareholder has got to be the ultimate insider but I guess you can’t say too much more on that. We will see, as the investigations, if there are any,  come through in time. Getting back to the results though, you do talk in your commentary to the results, about competitive threats. What are those in the South African environment?

NICKY NEWTON-KING: There are a number of competitive threats and we happen to be the only licensed Exchange in SA at the moment but of the top 40 stocks round about 60 to 70 percent trade on other venues internationally.So we’re competing, for instance, for a share of Anglo American’s trade. Every day we compete for them. In fact, interestingly enough, we were looking at stats today. We have as much a percentage of Anglo American’s trade, as the London Stock Exchange does, so we are competing well for that trade. It may not be an Exchange licensed here. It doesn’t stop us having to fight for that flow, so that is one source of competition. Then things like opportunities, where you’ve got clearing opportunities, post trade risk opportunities, where we offer services that other people might potentially like to offer. That is something that we think is, sort of a competitive opportunity, rather than necessarily a threat.

We think this landscape is changing dramatically, very fast, both locally and internationally. Our job is to make the investments in the right places in our business. To make sure we’re robust enough to withstand anything and that we are properly positioned, given that we are the only one in the country, therefore people rely on us to be there, every day, and faultlessly working. You therefore have to make investments that are both positioned to keep you there, robust, and position you to grow, so that when the competitive landscape does change around us, we are in the best position to flourish in that landscape that we possibly can be.

ALEC HOGG: You clearly have been looking at the potential for disruption in all areas, including in this area. We saw the FSB encouraging the BEE Exchanges to get themselves a listing or get out of the market. How are you reading that whole thing?

NICKY NEWTON-KING: I think that if you have a rule about people who provide Exchange Services, then we must all comply with the same requirements. I feel very strongly that it would be wrong to, for instance, require only an Exchange like the JSE, because it happens to exist, to meet certain regulatory standards, and then to say to others, “Well, you’re a newcomer, so you won’t have to licence as an Exchange, even if you operate as an Exchange.” Firstly, the rules must apply to everybody.

ALEC HOGG: So you don’t like this exemption that MTN Zakhele has been given and is applying for as well?

NICKY NEWTON-KING: We don’t think that legally an exemption is in fact possible, when you have a regulatory environment. That said, Exchanges that do different things may get different types of standards applied to them, criteria that they have to meet, etcetera, but you still have to be licensed. With licensing, comes Regulatory Standards. I worry, for instance that we spend a lot of money making sure there’s no insider trading, market manipulation etcetera, is as far as possible, detected and action taken against it. That our systems are robust and don’t fall down for months on end. Well, I think this is the type of standard that any investor should have to be able to rely on, even if you happen to be a small investor in a small BEE scheme, as an example.

ALEC HOGG: But what about, say Mauritius. They’re in the SADC region and they decide to open up their Exchange to South African CFDs. Would that not be a very big risk, given that there’s no real Exchange control issues there, and they could, presumably operate without having to do all of the investments that you have to do, in regulation etcetera?

NICKY NEWTON-KING: That is exactly the competitive landscape in which we are actually functioning. Anglo American, as an example, doesn’t just trade on the London Stock Exchange. It trades on over-the-counter platforms in Europe, Turquoise and various other platforms. None of which meet the same standards as we do, but if you are going to operate in this country, the rules of this country are that you need to be a licensed Exchange, so we set ourselves up for competition, recognising that in a virtual market, which is what a financial market really is.   The competition doesn’t have to be in town, it can be there in the ether, and provided people can move the funds at the click of a mouse, which is going to happen sooner, rather than later and it is already there, to a large extent.

Then we must be prepared to and be able to compete in that space. But if we have rules about Exchanges in this country, then we must all meet those.

ALEC HOGG: Well, no doubt and something, which is probably keeping you and your team awake at night. Just explain that R1.5bn that you are putting into something called JSE Clear. What’s all that about?

NICKY NEWTON-KING: We, in the derivatives market, trade contracts and then you have to risk manage them and we have a Clearing House, which is a central counterparty. It’s called a Central Counterparty in Exchange terminology, and that Clearing House manages the risk. We actually, our people are running that Clearing House, and they manage the risk and part of getting licensed and globally recognised, like that Clearing House is, you do need different levels of what we call waterfalls of defence. The one-point-five billion Rand is not our own capital. It is money that we have secured from the various banks, essentially lines of credit that we’ve secured from the various banks and that we then, essentially wrap in the pricing of that back to the users of the market.

ALEC HOGG: So if something goes wrong you can pull in the capital quickly?

NICKY NEWTON-KING: We can pull in the capital quickly.

ALEC HOGG: All right, then looking to the second half of the Financial Year, you did come off a high base last year, so you’ve managed to put 17 percent growth in the first six months of this year. Are those 505 people that you employ here, at the JSE, likely be able to keep that going?

NICKY NEWTON-KING: Well actually, given what we’ve got to do, there may be different requirements we have for people. We would probably need a couple of more people. Not huge armies,  but a couple of more people, to do what we need to do. That said, the second half of the year is completely dependent on what happens to values and, as we indicate in the commentary. Our clients are indicating that values are likely to be under pressure. We never forecast that because we have to, sort of be there, whether or not there is R1 worth of trade or R100bn worth of trade, but if values are under pressure that is difficult for us.

ALEC HOGG: Because you get a percentage of the value?

NICKY NEWTON-KING: Our pricing is related in some of our products. It is related to value, but that’s the reason we build this diversified business model because if you’re only dependent on value, when value tanks then you’re in trouble. We have a very diversified model, for instance, in the listings,   in data, which doesn’t make us completely dependent on value and put us in a robust position to survive a negative value cycle.

ALEC HOGG: But in a volatile world, if values do fall, perhaps the volatility or the turbulence that you have, the turnover will make up for that.

NICKY NEWTON-KING: For sure. Volatility is a friend of our business model. It is not necessarily one that we encourage. It is good for markets to have a level of volatility because that allows people to be on, or decide which side of a trade they want to be. You can’t have a flat market because they don’t reward anyone but from our side yes, provided there’s sufficient activity, then when the value toggles up and down that’s good for our business model.

ALEC HOGG: Just to close off with. You’ve got a project called Co-Location. Now I know there are quite a few people who are interested in this. How exactly does somebody who trades a lot Co-Locate?

NICKY NEWTON-KING: Co-Location is just fancy IT-speak for a very big, state of the art data centre, somewhat below where we are currently talking where we have our trading engine and where our clients Co-Locate. They locate their trading applications next to our trading engine, so that is just a very closely proximate location of their trading.

ALEC HOGG: So it’s milliseconds?

NICKY NEWTON-KING: Oh, fractions of. It’s the fastest possible time you can get to our trading engine, and we charge people who want to be in our data centre. You don’t have to be in the data centre but if you want to be in the data centre, we charge you, essentially, rental for the space that your particular trading server is using. Very highly controlled, extremely expensive to establish that data centre and the clients that are in that data centre, are really showing in their market stats how beneficial it is for them. We are very happy with how that is enabling, essentially democratising access to our market, because what it means is that you don’t have to have a building next door to us, in order to be the fastest to market. You have to be in our data centre. If speed isn’t important for you then you don’t have to be in the data centre but if speed is important then you will probably want to be in the data centre, and we’d then make far more… It’s far more possible for more people to be close to us, than just the couple of buildings around us.

ALEC HOGG: Nicky Newton-King is the CEO at the JSE.