Goodbye Scrip, Hello Chip: African Stock Market Reform

A quiet revolution is sweeping South Africa's bourse, jolting the antiquated Johannesburg Stock Exchange into the 20th century and beyond.

Wall Street did it 20 years ago and London a decade ago. Now the JSE is having its own Big Bang, replacing open-outcry floor trading with automatic computerized methods. The moves, to be finalized today, aim to improve the openness and competitiveness of what is Africa's dominant stock exchange and the largest "emerging" stock market.

"The beauty of the new system is that automated trading is more efficient and more transparent than open outcry," says Roy Andersen, executive president of the JSE, in an interview. "It's creating more institutional investor interest. That's why trading volumes are up by 30 percent."

The changes on the world's 12th largest stock market have been gradually under way over the past year. By liberalizing a long-closed financial system and bringing it closer to international standards, Andersen hopes to draw in more foreign money.

Foreign investment on the JSE has already been helped by the burying of apartheid and international sanctions, curiosity about Africa's richest country, and expectations that the reforms were coming. Foreign trades now account for 51 percent of exchange volume, versus 40 percent in 1994. Net foreign investment this year has been 3.1 billion rand ($721 million) through the end of May, compared with 4.8 billion rand for all of 1995.

Capitalization, the value of all stock listed on the exchange, has risen also - to 1.135 trillion rand in February from 809 billion rand a year earlier.

The centerpiece of the reforms, which follow careful study of other countries, is getting rid of pieces of paper called scrips and the trading floor and installing instead a web of computers. Other changes include tightening disclosure requirements, allowing foreign institutions and South African banks to buy seats on the exchange, allowing negotiated commissions on large trades, and the introduction of marketmakers (firms that regularly buy or sell shares of specific stocks to help supply meet demand).

The automated system was supplied by the Chicago Stock Exchange, the capital requirements are based on the European Union's, and the disclosure regulations are modeled on the London Stock Exchange.

Analysts say the market won't really take off until the government removes stringent foreign-exchange controls, which make it hard to take money out of the country. This has hurt the exchange's "liquidity" - the value of shares actually traded as a percentage of market capitalization. Liquidity has improved from 6 to 10 percent over the past two months, but this is still far below international averages and falls far short of the JSE's goal of 35 to 70 percent.

Trading volume has benefited from a government decision to cut the transaction tax for local residents from 1 to 0.5 percent and from the exchange's listing on an emerging-market index.

But the rand has fallen in value by about 20 percent since mid-February - a mixed blessing for the exchange. The drop has made investing on the stock exchange attractive for foreign speculators looking for quick and bigger returns on their investment. But the interest-rate hikes that followed the rand's decline have caused others, local investors especially, to put more money in interest-bearing accounts.

"One group of foreign investors is most upset and the other delighted," says Cees Bruggemans, chief economist at First National Bank in Johannesburg. "The first group came in because the currency gave the impression of being more stable. The other group would participate more because of instability. But I don't think this volatility will be a benefit in the long term."

Whatever happens with the national economy, nearly everyone agrees that the modernization of the bourse is a good thing and sets an example for further needed liberalization of the nation's economy.

Traders accustomed to the personal contact of dealing face-to-face on the floor will have to content themselves with electronic mail and telephone calls or meeting after work.

Most analysts see this as a small sacrifice in the name of technological progress.

"Was the horse and buggy romantic? I wouldn't want to go back to those days," Mr. Bruggemans says. "This is similar. I'm sure the boys will miss the shouting, but the net benefit for the exchange cannot be ignored."