Brokering Change

With black stockbroking firms facing immense challenges in the South African market, Sandile Luthuli looks at what is being done to balance the scales.

The transformation of the financial services sector in order to benefit black professionals has long been the mission of the Association of Black Securities and Investment Professionals (ABSIP).

Founded in 1995, the organisation represents the empowerment aspirations of black professionals within the securities and investment industry. It’s also a platform for black professionals and black businesses to exchange information and ideas. ABSIP membership consists of corporates, small and medium financial-services firms, professionals and students in tertiary institutions – a database of more than 9 100 individuals and corporates.

At the moment ABSIP is deeply unhappy about the slow pace of transformation in the financial-services industry, particularly the stockbroking sector. This sector includes asset managers, asset owners, asset consultants and stockbrokers. Together they handle the trading of securities on the Johannesburg Stock Exchange (JSE) on behalf of clients.

ABSIP worries that despite volumes of lucrative trades on the JSE, only under 2% of these transactions are handled via black stockbrokers, leaving them severely disempowered, with minimal prospects to grow their businesses. In fact, the picture of transformation in the brokerage sector is so bleak that in the past ten years the number of black brokerage firms has declined instead of increasing. There are about 553 practicing stockbrokers in the country, and only 20 of them are black.

A bleak picture

ABSIP president Sibongiseni Mbatha blames large asset houses for giving black stockbroking firms tiny amounts of work. “Black brokerages face unyielding ‘school-tie connections’ by the gatekeepers at institutional asset houses who allocate on a preferential basis to firms where they have past connections,” says Mbatha. “Institutional support for black brokers is intermittent, short-term and inconsistent, making it difficult for these firms to plan with any predictability.”

Mbatha blames decision-makers within large asset houses for not making transformation a priority, leaving stockbroking firms with little trading action on the JSE. He says black brokers are given “low-quality, illiquid and small trades to execute”. On top of that, he adds, they are pressured by larger institutions to transact at unviable rates and fees. “The current status of transformation in the industry is not ideal,” he adds.

If this scenario persists, it means black brokers will have little to show for their undeniable expertise at executing meaningful trades and, as a result, they will fail to take any significant part in the economy. “We want black professionals and black businesses to gain a fair, just and equitable dividend in the economy, to grow in scale and prosper, and not be undermined through crumbs and leftovers of the economic cake,” he says.

Du Mhango, co-head of trading at Legae Securities, also believes that more needs to be done to transform the brokerage sector. “If only about 2% of trades are channelled via black stockbrokers, it means we are essentially left out of the food chain,’ he says. “Our chances of survival in the sector are minimal. The situation is very dire and we need to change this picture as soon as possible.”

Lincoln O’Shea, co-CEO at Argon Securities, a black-owned brokerage firm that launched on the JSE in July, says, “Transformation has not received the required attention from most industry players, being mostly treated as ticking certain boxes to please regulators.”

Size matters

Worse still, the small size of black firms is a stumbling block as they try to compete against bigger, more-established and better-resourced white financial-services-sector institutions – a David-and-Goliath scenario. “Stockbroking as a part of the wider investment-banking industry has been mainly used by big banks as byproduct to attract clients to other more profitable parts of their business,” O’Shea says. “Many clients are attracted to trade through such institutions mainly because of other nonexecution-related offerings. Black stockbrokers suffer through the allocation in favour of the big international banks with large balance sheets.”

Mhango agrees: “To be able to trade on the JSE you need to have certain levels of capital and that capital grows with the number of trades you do. The bigger the trade value, the bigger the capital you need to inject to be able to execute on those trades. If I can’t do a R1 billion trade because I need to have R200 million in my account, it’s a chicken-and-egg situation. That becomes a barrier to entry.”

Solutions up and down the chain

ABSIP believes that legislative and regulatory support are key to accelerating transformation, as is a collaborative, supportive and inclusive effort by both large established and small emerging players. Transformation, both quantitative and qualitative, must be mass-based and ought to be characterised by mass access to financial services and opportunities, instead of narrow capital interests, ABSIP argues.

The organisation has been trying to involve many industry players to try and find a lasting solution. In July, ABSIP held a second summit of the stockbroking industry in Cape Town. The theme was “Breaking down barriers to transformation in the stockbroking industry”. At the summit, Mbatha presented the organisation’s Vision 2025, which prioritises development of youth and women, thought leadership, advocacy and financial sustainability.

Mhango believes that transformation of the stockbroking sector involves everyone. “We are just one component in the value chain,” he says. “This chain has asset owners such as the government employees pension fund, Eskom pension fund and Transnet pension fund. We need to make sure that asset owners include measures of transformation looking at who is managing their funds and what happens to those funds downstream.”

O’Shea echoes the sentiment: “All the players within the value chain need to do their part and be accountable for their contribution towards transformation. We need to address the issues from the asset owners all the way to the last cent spent.”

At the coalface

It seems the JSE, where all the action takes place, is also willing to be part of the solution. “Transformation in the capital markets industry is an imperative,” says Zeona Jacobs, director of marketing and corporate affairs for the JSE. “It is important for the partners in the ecosystem to engage on how we will succeed in this quest.”

In 2016, the JSE launched an enterprise development programme offering financial assistance to emerging black stockbroking firms to support them in the sustainable growth of their businesses. “Through the programme, we as the JSE will pay cash disbursements to black brokers on a quarterly basis, which forum firms must use to grow their businesses,” says Jacobs.

According to the JSE, 14 black-owned stockbroking firms participated in the 2016 programme and there are currently 14 brokerages participating in the 2017 programme. “We realise we are on the starting blocks of the transformation of the capital markets and there is much to be done,” says Jacobs. “We cannot only be inward-looking; we all have to extend ourselves beyond our core business to drive inclusive growth. Honest, respectful engagement is what we require to grow a transformed capital market. Let’s keep the lines of communication open and drive symbiotic transformational growth.”

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