Quantifying impact of competition in SA securities market
Genesis was requested by the Financial Sector Conduct Authority (FSCA) to assess the impact of introducing competition in the cash equites market in South Africa. In particular, over the past two years, the FSCA licensed four new trading platforms that are starting to compete against the well-entrenched JSE.
To answer the FSCA’s question, Genesis developed a conceptual framework for the assessment of the benefits, costs and risks related to the introduction of competition into securities markets. This entailed identifying key indicators for consideration of the health and competitiveness of capital markets – which were broadly categorised into (i) the all-in cost of trading, (ii) innovation, and (iii) market soundness.
Genesis then used the conceptual framework and international case precedent to assess the impact of the introduction of competition in trading and post-trading services in South Africa. This exercise allowed us to quantify potential savings for the market on trading fees and trading volumes. In particular, we found:
- A reduction in trading, clearing and settlement fees of 15%-40%
- Total market volumes are likely to grow by 0.45%-5%, with additional growth depending on the extent of innovation.
While this was case dependent, we also found that the other costs in the market (such as implicit- and connectivity costs) were likely to increase in response to competition. A potential increase in connectivity costs of R30 to R90 million was estimated. Finally, we also identified the potential risks to market soundness, which was found not sufficient to limit competition, but rather required regulatory intervention to manage market outcomes.
Finally, Genesis made recommendations for regulation within what is now a dynamic market. In particular, our regulatory advice sought to provide guidance on the key interventions required by the FSCA to (i) facilitate effective competition and protect market integrity; (ii) take a measured approach in issuing additional licences (particularly as the regulator seeks to implement the necessary framework for regulation), and (iii) take more caution in terms of approving additional licences for exchanges that compete in post trading services.