A sustained decline in the trading of equities and a sharp rise in costs as the Johannesburg Stock Exchange recruited more skills and bought new technologies to become competitive, caused South Africa's main bourse's profits to plunge 23% in 2019.
The stock exchange was also hit by the decline in new equity market listings from 12 in 2018 to five last year, causing a 5% decrease in listings revenue to R147 million. The equities division was further burnt by the JSE's decision to reduce trading fees by 12% to remain competitive as secondary stock exchanges like A2X have been taking trading volumes market share away from the main exchange.
"Had it not been for the trading fees reduction, the one-off costs and the large-scale system changes that increased our costs, we would have been flat," said JSE CEO Dr Leila Fourie, who spoke to Fin24 in an interview.
Fourie said both the decline in trading of equities and new listings were cyclical bumps which the JSE managed to offset because of its diversified offering. The stock exchange also offers listing and trading of bonds and derivatives - the financial instruments backed by assets such as a commodities, foreign currency and other securities. For instance, the number of bond listings increased from 539 to 710 during the year and revenue grew 21% in the bond and interest rate market to R68 million.
Declines in equities trading persist
Equities, and equities trading in particular, remain the most important part of the JSE's operations. The stock exchange generates about 60% of its revenues from equities trading. A stagnant economy and company de-listings during the year were not supportive of equity trading in 2019, as witnessed by announcements from several companies that they are closing their trading desks in South Africa.
For the JSE, trading volumes increased by 10% in the 2019 financial year. However, the value of equities traded was almost flat, increasing by just 2%. This, together with the reduction in trading fees caused the JSE to generate 13% less revenue from equity trading activity to R433 million. Fourie said the JSE was still satisfied with its performance on this front, given how stock exchanges around the world performed in 2019.
"What we are seeing is that we are not decreasing as much as the rest of the world. Order book trades decreased by 7% in South Africa whereas globally it decreased by 16%. So, we do believe that the reduction in pricing does enhance trading values," said Fourie.
The reducing number of JSE listings
The number of companies listed on the JSE has decreased to 353 said Fourie. Data from research firm, CEIC show that listings reached a record high of 485 in September 2002. The decrease is attributable to both de-listings and the decline in new companies listing on the exchange, which Fourie passed as "a function of the cycle".
"The big de-listings have come from the small and medium cap market. What we see in a downturn is that the small and medium cap companies - because they are less liquid - tend to get hit the worst. We saw a similar trend in 2008 and we see this every time the market slides down," she said.