A totally electronic share transaction system for the Johannesburg Stock Exchange

Abstract

Share markets around the world have been characterised by big changes over the past few years, among which an increase in the volume of shares under management. Together with this a shift in focus has taken place to the inherent risks attached to the share markets and the trading of shares. The latter led to an international trend to do away with physical share certificates and to make use of electronic technology instead. South Africa's return to the international political and economic arena places the country in the sector for developing markets in which the competition for investment is very severe. The little change and development that had characterised the South African share market since the sixties, put South Africa in a poor competitive position against other emerging markets. In order to bring the Johannesburg Stock Exchange up to standard, the STRATE (Share TRAnsactions Totally Electronic) committee was founded by the Johannesburg Stock Exchange to investigate firstly the possible institution of a totally electronic transaction system for the Exchange, and secondly its effect on the share market. As a result of the "developing market etiquette" of South Africa, it is important to establish in the first place whether the South African share market is an operationally effective market. This means in short that all the role-players on the market have equal opportunities to make a profit through the buying and selling of shares. The effectiveness of the Johannesburg Stock Exchange can be measured on the basis of the Effective Market Hypothesis (EMH). The EMH tests the effectiveness on the grounds of the ready availability of information at any given moment. The EMH is based on the assumption that the share market automatically strives to perfect competition. Share prices will then reflect all available information as a result of the competition existing between all the role-players in the market. All the role-players will dispose of more or less the same information, therefore no individual role-player can excessively influence the market. All available information is immediately absorbed by all the role-players, which reduces the possibility of one role-player extracting continuous and excessive profits from the market. At the moment some role-players have access to information long before other role-players and can therefore gain extraordinary profits from the market. The Effective Market Hypothesis (EMH) studies and divides markets into classes on the basis of their effectiveness. According to this classification there are markets with a weak, semi-strong or strong effectiveness, where the effectiveness is determined by the availability of information. Further investigation shows that the focus of the EMH should fall on the degree of effectiveness, rather than the form of effectiveness. Various studies in this regard have indicated that the Johannesburg Stock Exchange is an operationally effective market. The question arises of whether the operation of the Johannesburg Stock Exchange can be improved. The Group of Thirty, an independent group that investigates the operation of financial systems, had made nine recommendations to improve the functioning, of share markets. The implementation of the recommendations will make the markets more effective and drastically reduce the accompanying risks. The STRATE committee has to investigate a possible electronic transaction system that would bring South Africa in line with international markets. The STRATE committee used the nine recommendations of the Group of Thirty as point of departure. Important factors of such a possible electronic transaction system will include the following: - continuous trading, - trading on transaction for transaction basis so that transactions would not be cancelled against oneanother, - the concept of a central deposit house, - contractual trading with simultaneous payment. The STRATE committee focuses on the capital market and all the role-players in the market will be affected by the implementation. The first step in the implementation process will be characterised by the withdrawal of physical share certificates from the market, and the simultaneous placement of the certificates in a central deposit house. The deposit house will keep electronic record of the certificates and their legal owners. If a certificate is sold, an electronic transfer will take place in the name of the new owner as soon as the funds have been paid over. The certificate system is to be linked to the payment system in order to comply with the recommendation of simultaneous payment. The electronic system will facilitate the processing in that instructions are entered by means of a S.W.I.F.T. (Society for World-wide Interbank Telecommunication) system, the transaction is executed with simultaneous payment which in tum activates a message to the sender to confirm the successful trading. Risks are minimised by the process. Various changes will have to be effected to the current system to provide for, among other things, the withdrawal of physical share certificates, its placement in a central share deposit house and contractual trading with simultaneous payment. The implementation of STRATE together with the operational effectiveness of the Johannesburg Stock Exchange will be a great plus for South Africa in the competition for funds of international investors. The South African market needs the change to be more effective in its entirety.