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Regional smaller Exchanges embrace electronic trading
January 11, 2010

ELECTRONIC trading, long established on the leading Western Stock Exchanges, is now the norm across much of the developing world. Although the leading African Exchanges, notably the Johannesburg Stock Exchange (JSE, South Africa), Cairo-Alexandria (Egypt), Casablanca (Morocco) and Nigerian Stock Exchange (NSE, in Lagos), made the switch about 10 years ago, most of the rest of Africa has been slow to catch up.

However, during the past two to three years, the gap between the trading technologies being used by developed, emerging and frontier markets has been contracting rapidly.

Africa's more peripheral stock exchanges have sought to modernise, largely in response to the greater interest exhibited in frontier markets by international investors during Africa's post-millennium growth spurt.

Twelve national and regional exchanges have now done so, and most of the remaining 20 bourses plan to follow. Since 2008, Zambia, Ghana and Uganda have introduced electronic trading systems, joining Mauritius, Botswana and Namibia, which made the move a few years earlier.

The Ivory Coast-based Bourse Regionale des Valeurs Mobilieres (BRVM), which serves the eight members of the West African Monetary Union and was the world's first regional stock exchange, is now entirely electronic.

During the 13th yearly conference of the African Stock Exchange Association in Nigeria in December, African stock exchanges identified Africa's generally positive growth prospects as an opportunity to attract increased foreign investment at a time when growth prospects remain negative or flat elsewhere.

Trade volumes and values on most African stock exchanges had been rising year-on-year for much of the decade prior to the Lehman Brothers collapse in September 2008. In the immediate aftermath of the financial crisis, most African equity markets dropped precipitately, down 50-70 per cent on some exchanges.

There have since been signs of a recovery, particularly in South Africa, Egypt and Morocco, although most other exchanges are still struggling.

However, African fundamentals remain largely intact. African assets and stocks are underpriced. If global recovery is sustained, African pre-crisis growth rates could return much faster than had earlier seemed likely, triggering renewed foreign investor interest in African frontier markets.

Growth among African bourses, with the exception of the big three--South Africa, Egypt and Morocco--has long been inhibited by the constraints imposed by their relatively small size, low liquidity levels, high risk perceptions and limited trading technologies. The proliferation of electronic trading systems has not eliminated these constraints but has helped significantly to mitigate their effects:

The introduction of electronic trading systems has invariably had a marked impact on trading volumes, not least because trades cease to be constrained by national boundaries.

Exchange productivity also increases, broker costs are reduced and transparency and accountability are boosted--either by greatly reducing the scope for rogue traders to operate or by augmenting the prospects of them being exposed through the electronic audit trail.

The high cost of executing trades has traditionally been a barrier to operating in African markets. Electronic trading transforms that equation.

Most of Africa's bourses are small, and are likely to remain so for many years, compared with stock exchanges elsewhere in the developing world. However, the arrival and spread of direct market access, which enables investors to buy and sell on a whim, greatly increases the attractiveness of African stocks to international investors.

While Africa was the last of the world's regions to make the switch from traditional to modern stock exchanges, that process has been gathering pace over the past five years. The economic downturn, far from slowing down that transition, has accelerated it, and African stock exchanges are now positioning themselves for an anticipated revival in investor appetite for frontier market stocks.

The Guardian Newspaper, Monday January 11, 2010.

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