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BSE further revises equity brokerage commission

Publishing Date : 14 January, 2019

Author : REARABILWE RAMAPHANE

Following the successful demutualisation of Botswana Stock Exchange to a company held by shares BSEL limited has been introducing a number of changes within its stock trading operations , of which many automatically comes with a demutualised stock market.


 In April 2016 while still a mutual organization under the Ministry of Finance the BSE amended the equity brokerage commission to introduce a floor of 0.60 percent. However, the introduction of the floor has experienced several challenges since inception, receiving backlash from asset managers also viewed as impediment to potential investors, especially foreign asset managers.         


Now that BSE is a demutualised institution on transition to becoming a globally competitive stock trading platform that attracts universal multinational fortune 500 companies and international investors  further review on the equity brokerage commission has been ongoing.  After several consultations with asset managers BSE reiterates that the 2016 revised brokerage commission that is currently in effect has challenges and limitations that impedes smooth running of an evolving demutualised stock market.


A statement released by BSE this week said introducing the floor effectively raised the cost of trading and presented an opportunity for brokers to undercut one another in a bid to win trades. “It also has the potential to result in low trading activity in dual listed stocks as asset managers circumvent the BSE to trade the stocks in stock exchange where brokerage is comparatively lower.” reiterated BSE.


The stock market also said concerns underscored with the current brokerage commission are that benchmarking exercise which was undertaken to review the brokerage commission relied on information provided by an interested party, a broker, and the exercise could not have provided an independent and objective analysis for the BSE to make a well informed decision. In addition BSE observed that the information presented by the broker was not complete and comprehensive.


 “From that end, the benchmarking exercise selected higher ends ceilings of the brokerage commissions to give an impression that brokerage commission in Botswana is very low compared to the chosen markets to support the introduction of the floor,” BSE statement said.
Since the brokerage commission was revised effective April 2016 BSE trading turnover levels declined in 2016 and 2017, and still remained very low in 2018 compared to corresponding periods prior implementation of the floor.


 Further analysis indicated that if the impact of the trades in New African Properties (NAP) which accounted for 18.0 percent and 18.4 percent of turnover in 2016 and 2017 respectively is removed, trading levels for 2016 and 2017 would have lagged those for 2013, 2014 and 2015. On the back of reduced trading levels, particularly in 2018, it is generally believed that this is attributable to the introduction of the floor. Stakeholders have since expressed to the Exchange that the floor could be revised or removed with expectations of revival in trading activity.


“In part, their concerns are attributed to the pressure that the brokers are experiencing on their revenues as a result of subdued trading activity,” says BSEL. The Exchange further lamented that the introduction of the floor came with negative skewness to overall turnover distributions increased the variance and the deviation of daily average turnover and reduced the stability of turnover. A brief overview of BSE trading figures indicates that conventionally, high value trades attract lower commission compared to low value trades.


Historically, asset managers have been paying brokerage averaging 0.36 percent on the basis of the size of the trades.  It therefore could have been expected that introducing a floor that elevated the fees almost twice on average and by as much as six times what was paid for high value trades would result in a reduced propensity to trade in order to minimize the transaction costs incurred by the funds.  In bookovers, where the effort to facilitate the trades is correspondingly lower, asset managers have paid an average rate of 0.30 percent.


 An introduction of the floor of 0.60 percent effectively doubles the rate and doubling the rate would have been expected to curtail trading. To further support the review and possible scrapping out of the floor BSE say in a liberal market and a free market economy, fees have to be driven by competition on the basis of the quality of service and effort and have to be commensurate with the level of services provided.


 “In our case, the brokerage commission was not justified by any improvement in value added services, such as increased coverage of stocks or increased cost of execution that warrants passing the costs to the end investors. Therefore, this was mechanically engineered and this is against the order of free market economy,” lamented BSE. In most markets, brokerage commission is on a sliding scale. The scales are such that brokerage declines as the value of the transaction increases.


In a few markets, brokerage is negotiable within certain 3 ranges and in some market it is flat. Further, we have noted that the BSE’s ceiling of 1.85 percent is one of the highest in comparative markets.  Currently BSE is engaging stakeholders including the Public for ideas and views exchanges towards the possible removal of the floor.The Exchanges says in the interest of promoting the ideals of a liberal market, stimulating competitiveness and trading activity it recommends the removal of the floor of 0.60 percent such that brokerage is negotiable up to 1.85 percent as was the case prior to April 2016.


 “We base this on the fact that asset managers are capable of paying any fees and brokers are free to charge any fees, so without imposing mechanisms in the form of the floor, it is ideal to allow the broker and the asset manager to negotiate any rate,”  indicated the statement.
According to BSE the removal of the floor would positively impact overall transaction costs of the funds and stimulate trading activity also taking into account that increased trading activity directly contributes to more income for brokers.  


“This  will avoid situations where brokers are undercutting one another to cannibalise trades , also this will minimize situations where asset managers could potentially seek rebates for the trades they avail to the brokers with lesser broker effort,” observes BSE. The review and possible removal of the 0.6 percent floor is viewed by BSE as a great opportunity to attract more foreign asset managers who currently view the BSE as expensive.


The latest FTSE classification published in September 2018, the BSE is rated as having relatively unreasonable and uncompetitive transaction costs and BSE says this rating was a result of the introduction of the floor. In paper titled, “What attracts international investors to emerging markets?” the World Federation of Exchanges (WFE) found that reducing trading fees is associated with an increase in foreign trading activity. BSE says revision and possible removal of this charges would make the BSE more competitive relative to other markets.

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