A study of the effect of STRATE (Share Transaction Totally Electronic) equity/electronic settlement in the South African market and the position of STRATE in emerging/world markets, 2000-2002/3.
Bhabha, Goolam Hoosen.
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Formalised markets for the trading of securities have been impacted upon to the same degree as other business entities by the advent of electronic commerce. Globalisation has furthermore forced these markets to adapt their operation with a view towards improving efficiency while simultaneously catering for increased demands on their capacity. Clearing and settlement of securities is a core financial function on which fundamental confidence in the financial market depends. It is also an area experiencing rapid growth, profound technical and structural change, and infrequent but severe market shocks. Growth has been tremendous. For example, the value of shares traded annually in world markets rose nearly 63 times between 1980 and 2001. Advances in telecommunication technology, has brought far-reaching changes in the characteristics and supply of financial products and services, and in trading and settlement systems. Changes have also fuelled cross border activities. The South African equities industry has not escaped this dramatic paradigm shift and has itself initiated STRATEgic projects, all with a view of catapulting South Africa into the world's financial markets. It is also meeting these challenges, has often been expensive and met resistance amongst individual and professional investors who have become accustomed to established ways of trading securities. To counter these challenges and resistance (and further justify the expense and effort in transforming), various contentions (such as an increase in trade volumes arising in greater liquidity levels) were forwarded. The introduction of the STRATE (Share Transactions Totally Electronic) system by the Johannesburg Securities Exchange (JSE) is an example of an exchange adapting its operation to meet new challenges. This exploratory research examined whether the contention that the transition to an efficient electronic settlement system STRATE, has been successful, the effect of STRATE equity/electronic settlement in the South African market and to determine the position/standing of STRATE in comparison to other developing/emerging and world markets. An analysis of the STRATE system from inception to current status was done as well as a comparison of the South African settlement system to other emerging and world markets. A Questionnaire was sent to various major Financial Institutions (banks) and investment professionals in the employ of equity broking firms, to ascertain their opinion as to the impact ofSTRATE's result/success of the transition to an effective electronic settlement system and to determine STRATE's position in comparison with emerging/developing countries and world markets. The views of the respondents are that STRATE will increase trade volumes although it may perhaps be too early at this stage to note a difference. The major themes elicited from the respondents are that they have a greater confidence and faith in the workings of the market, lost share certificates and lack of an ease of settlement infrastructure prevented effective settlement previously, barriers to private investors have been removed, share certificates are in some instances missed, STRATE makes stock broking and investing more cost effective or easier, there is a greater liquidity potential for the Johannesburg Securities Exchange, an increase in market activity due to greater and more efficient settlement of trades, principal risk being reduced, increased foreign investment, a better international image as regards settlement through the adoption of best international practice has arisen, greater ease of transaction should lead to an increase of trade volumes, the benefits of STRATE as regards trading volumes are not yet apparent, the benefit is apparent and poor market conditions have prevented the benefit from becoming apparent.