Merlin Rajah, head of equities electronic product at Absa Corporate and Investment Banking, explains how technological integration is key to allowing the world to access Africa’s trading markets – helping to break down barriers to entry and unlock important investment opportunities
Historically, Africa has been perceived as a continent brimming with untapped potential. Yet in recent years, significant strides in technology, infrastructure, and regulatory frameworks have propelled it into the spotlight of international financial markets. Today, Africa stands at the intersection of opportunity and innovation, leveraging its vast resources, growing consumer base, and strategic geographical position to forge new pathways in global financial trading.
Countries on the continent have been working in the background, building sophisticated electronic trading capabilities – powered by historical and real-time data – to strengthen the bridge between Africa and other global markets, offer more bespoke trading solutions to clients, and meet evolving requirements. The JSE is one of the world’s 20 largest stock exchanges today and the region’s trading infrastructure is on par with its more developed counterparts.
At the forefront of electronic trading in Africa is South Africa, where brokers are harnessing the power of machine learning to gain deeper insights, optimise trading strategies, and enhance key decision-making processes – such as risk management, text analysis, and microstructure analysis.
While South Africa has successfully positioned itself to rival developed markets, access to and between other African markets has previously proven challenging for global buy-side institutions. What is more, like several other jurisdictions, many African markets have witnessed a decline in liquidity over the past year as investment flows shift towards the United States, Asia, and the Middle East.
Yet liquidity moves in cycles, and international investors are prepared to seek out long-term investment trends and opportunities across a variety of different markets. We are witnessing a growing trend where investors require electronic access to markets across the continent. The digital wave is placing the South African ecosystem as the ideal venue to act as a hub of connectivity throughout Africa, enhancing transparency and presenting a wealth of opportunities for savvy brokers and investors.
The lifeblood of trading
Data can be likened to the lifeblood of trading strategies – fuelling decision-making, helping to give deeper insights into market trends, and mitigating risk more effectively. One of the most powerful tools at the disposal of traders in the South African market is the use of algorithms. This technology enables investors to make informed, yet automated decisions and executions based on a wealth of historical and real-time data.
Armed with advanced analytical tools, traders can have 360-degree visibility over how a stock is performing during certain periods: data which can then be collected to help clients make more strategic investments, input into research, or form the basis of a trading strategy.
Trade automation and enrichment are also sweeping through South Africa, driving the region forward to the next stage of electronic trading and bringing the market to a level playing field with other, more developed nations. South African brokers are harnessing the power of machine learning to automate crucial steps within the trade lifecycle and smooth out key processes into streamlined digital workflows.
Fast access to quality, accurate data is also crucial in managing risk. As firms become more sophisticated in their trading practices, regulation often follows suit, and rules around pre-trade checks and risk monitoring are expected to become tighter in South Africa to align with global norms. For brokers, this means that internal or client automated trading strategies must be completely separate and independent from the risk management layer to ensure appropriate risk controls, with full knowledge that it will introduce a few nanoseconds of additional latency in the order entry and execution report paths.
The advent of smart order routing technology has also revolutionised the way that trades are executed in South Africa, enabling investors to access liquidity across multiple exchanges and dark pools in the country. This not only enhances market efficiency, but also provides investors with greater flexibility and control over their cost management, providing best execution to their trading strategies.
New levels of global connectivity
As the South African ecosystem continues to advance its electronic trading infrastructure, it is becoming a market to watch for overseas investors. Attention is particularly drawn as liquidity cycles evolve, numerous listings are planned for 2024, and certain countries contemplate repatriating funds into the country. International investors are voicing their growing need for electronic market connectivity across the African continent, an area that the South African ecosystem is primed to fulfil.
In 2023, the Johannesburg Stock Exchange (JSE) introduced Colo 2.0, which removes connectivity barriers of entry into South Africa for various types of firms looking for easy entry into the marketplace. This datacentre offers both virtual and physical server options, with comprehensive connectivity to SE services at a minimal monthly cost.
Ideal for software vendors or proprietary trading firms, this solution allows for testing in the JSE environment, live market data collection, and testing some basic strategies before deploying more sophisticated hardware. Many African exchanges should look to follow suit as the South African blueprint proves successful.
There is a growing number of global financial institutions looking to trade products across the continent. The next wave is to roll out electronic trading capabilities further, helping investors to access lucrative – yet often untapped – markets. For instance, Kenya is a fast-growing, dynamic economy, with a wealth of raw materials and infrastructure needs that make it an ideal destination for overseas investment.
Egypt, Botswana, and Mauritius are also key regions to develop electronic trading capabilities, particularly as demand to access these markets continues to grow. For example, the Namibia Stock Exchange could significantly boost its trading value by embracing change and enabling direct market access. As this exchange is currently a partner to the JSE, this move would greatly simplify market integration and access for vendors, liquidity providers, and banks, potentially transforming its financial landscape.
Yet for international investors to get the most from the opportunities on the continent, they must seek out a partner that understands the nuances of African markets, across borders, languages, and cultures. While technology is acting as a bridge between the continent and global markets, the human touch in these markets is still essential to ensure high standards of governance, seek out liquidity, best execution, and best market practice.
