This weekend, the JSE will experience one of the biggest changes in its history as it moves from its current trading system to a new London derived system that will also alter the trading philosophy.
In preparation for the change, trade will cease today at 3pm, two hours early. Trade will resume at 9am on Monday, 13 May, on the new system.
Called SETS (Stock Exchange Trading System), it is essentially the system developed by the London Stock Exchange and will replace the incumbent JET (Johannesburg Equities Trading system), which was an offshoot of a system developed, but not used, by the Chicago Stock Exchange. JET was first introduced in 1996 when the trading floor was closed, and was updated in 1999.
The JSE has stated that the introduction of SETS integrates the exchange further with international practice, as it will facilitate the new trading model, called the JSE Equities Trading Model.
Based on the European Alliance Trading Model, it introduces segments and the ability to set rules per segment, introduction of an auction facility and post-trade anonymity, lot sizes of one, tick sizes on one cent, enhanced price discovery rules, a new closing price methodology and the use of price tolerances and volatility auctions.
While there has been a certain amount of scepticism among dealers towards the new trading system, they have generally been able to come to grips with the nuances involved and accept it. The key to the acceptance has been the training sessions that the JSE has hosted for the 70-odd stockbroking companies.
There have also been two weekend testing sessions in an attempt to iron out problems and many brokers feel this has been achieved. However, a number interviewed said they would have liked an extra weekend of testing. But the howls of staff protests against giving up three Saturday afternoons to do this seems to have put paid to that suggestion.
Another change will be the market structure. The current structure of having industrial sectors, or boards, will be replaced by a system that incorporates functional segments based on liquidity on the vertical and with functional sectors based on price volatility on the vertical.
Changing trading philosophy
Essentially this means that SETS is divided into four functional segments, namely top companies, medium liquid, low liquid and the NSX Market. Each functional segment will be divided into four sectors: high-priced, mid-priced, low-priced, warrants and exchange traded funds.
Instruments within the high-priced sector will be those that tend to have relatively large absolute movements in price.
The new system will divide the trading day into four phases with an opening auction beginning at 9am that will allow for price determination. Once completed, there will be a period of continuous trading, followed by the closing auction just before the close of trade at 5pm. The last phase is the post-trading run-off that will allow brokers to complete housekeeping chores, and while no new orders will be entered, persistent orders may be deleted.
Cost to change
The changeover to the new system has cost stockbrokers a fair amount of money. SETS is essentially a backbone system and the brokers are encouraged to develop their own interfaces, either by using an outside contractor or through in-house development.
Another cost factor is the increase in bandwidth that the new system will require. This is due to the increased amount of information that will flow between the JSE and the brokers on a real-time basis.
Comments from stockbrokers have been fairly positive. SG Securities director George Francesco says he feels the system was needed. "We have to be able to trade on an internationally-accepted basis. JET was not used by anyone else and now we are moving into the mainstream."
Paul Davis, MD of Watermark Securities, says that small stockbrokerages probably have not been as affected by the changeover as some of the larger brokerages. "The costs we have had to bear in order to move to SETS will pay us in the longer term. The benefits are there, although as a small broker we don`t really need all the functionality."
The main vote of confidence comes from JSE director of strategy Leanne Parsons, who says: "If there were any serious problems, we would not go ahead with the launch."
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