JSE technology: Out with the old, in with the new

Someone once said that trying to get stockbrokers to agree to anything was like trying to herd cats. "They are all looking for their own angle, deliberately refuse to co-operate and then complain bitterly about what has gone wrong," the exasperated administrator said.

By their very nature, stockbrokers look to buy low and sell high, and are always looking out for the best possible deal, if not for their clients, then at least for themselves. Horse trading they understand, systems are seen at best as a necessary evil. Stockbrokers want to know everything about everybody else, but become very upset when people ask them questions about themselves. When a deal has to happen, it has to happen now, but they will deliberate for hours on who gets the better parking spot, or who received the cocktail snub.

One can only sympathise with those responsible for driving the changes on the JSE through the introduction of a new trading model and the subsequent change of computer systems, while allaying the fears of stockbrokers who have had their cosy world rattled more in the past five years, than in the 100 before.

In 1996, the JSE made the big step forward in moving to automated trading. The subsequent closure of the trading floor and stockbrokers having to learn how to use keyboards and doing deals over the telephone rather than over lunch was a big change.

Financial services, by their very nature, have to change. If they do not, then they are not progressing.

Leanne Parsons, head, JSE`s strategy division

But an oft-overlooked fact was that when the JET (JSE Equity Trading) system was first introduced, it was already seven years old, although, at the time, the JSE had little choice. It was bought from the Chicago Stock Exchange, but was not used by the Chicago exchange as it had a different market model at the time.

Almost six years later, the JSE is trying to find not only a new automated trading system, but also a new trading model - and the two have to be compatible.

As she did six years ago, Leanne Parsons, head of the JSE`s strategy division, stands at the coalface of this change.

"Financial services, by their very nature, have to change. If they do not, then they are not progressing," she says.

While the JET system has proved the value of automated trading, it is time for the JSE, its members and the investing community at large to begin to move on. This partially means that the US model of trading is not really appropriate to SA, while the European manner - by the very factor of being in the same time zone - is appropriate.

This also means that the evolution of JET has hit its zenith. While the aged system went through an upgrading process about a year ago, it seems that it will soon go the way of the trading floor it replaced.

Six potential replacements have been tendered to the JSE and the upgrade of JET has already been discarded. Due to confidentiality agreements, the JSE will not disclose the other five still in contention.

Parsons says any new trading system employed by the JSE and its members will have to take in the new business model that is in the process of being developed through a series of consultations.

"The JSE has a wide range of stakeholders and it seems that most of the members are happy that the institutions, for instance, have been included in the process," she says.

While the JSE and its stakeholders thrash out their trading model, the IT suppliers have to keep their nuts and bolts boxed until the final decision is made.

With about 50 stockbroking companies with an average of 10 traders and the need for front-end, back office and electronic settlement applications, the market is worth a considerable amount of money. Rough estimates put it at about R40 million per year for the application protocol interface (API) and trading solutions products, and about the same amount for the back office systems.

Following JET`s upgrade, the basic information model currently in use has the trading system API on top of JET itself. Then JET communicates with the Broker Dealer Accounting (BDA) system for the settlement of the trades and this software is currently supplied by the JSE. Lastly, there is STRATE (Share Transactions Totally Electronic) that is the electronic certificate repository

While JET, or its successor, is a necessity, the back office functions can be done quite adequately by other commercial products rather than the JSE`s.

Richard Shaw, director, Ensemble

Richard Shaw, a director of Ensemble - a company that supplies IT systems to the financial services industry - feels that the weak link in the model is the JSE itself.

"The JSE should stick to its role of regulating and compliance, monitoring the market rather than forcing its own systems (BDA) on the brokers. They should have the right to choose," he says.

Shaw says several of the larger stockbrokerages are concerned that the BDA security levels are not tight enough and this may allow unauthorised people to snoop or complete transactions where they should not.

"While JET, or its successor, is a necessity, the back office functions can be done quite adequately by other commercial products rather than the JSE`s," Shaw says.

Ensemble is hedging its bets on what JET`s successor will be, but its new products will employ the FIX messaging protocol that will allow a broker to interact with any number of stock exchanges around the world.

Probably the biggest seller of broker systems at the moment is Peregrine Systems with its Hermes product. Named after the ancient messenger of the Gods, this system caters to those who wish they were.

Hermes sits on top of the API which interacts with the JET system, which in turn links into the BDA and finally into STRATE.

"In many ways, BDA is at the heart of what the JSE does. It is stable and a lot of functionality has been built into it. The market is developing Microsoft Windows-type interfaces with it," says Ashley Mendelowitz, Peregrine Systems director of trading applications.

Mendelowitz says the prospect of the JSE selecting a new trading system is good for the local software industry too as he plans to export Hermes overseas.

"The selection of any new trading system really just means that a new API has to be written and would not mean any major programming changes," Mendelowitz says.

According to Peregrine Systems, its Hermes product is in service with 27 of the 70-odd larger stockbroking companies. The system was introduced at the same time that the JET API made its debut in May 2000.

"The great thing about the API system is that it allows brokers to develop their own data bases, compile their own trade histories and this is all part of the value-added service to their clients. At the same time, they can send electronic broker notes and generate reports very quickly," Mendelowitz says.

The selection of any new trading system really just means that a new API has to be written and would not mean any major programming changes.

Ashley Mendelowitz, Peregrine Systems director of trading applications

Finally, STRATE is near its completion. After a prolonged and troubled start, with the basic concept of replacing traditional share certificates with electronic means such as compact discs having to be overcome through a process of legislation and general scepticism, it seems to be on track.

Parsons says about 100 companies per month are being moved onto the STRATE system, starting with the least liquid and ending with the most heavily traded in October.

"It is not just the change that is happening, but the magnitude of the change and how it is managed, that is key," Parsons says.

• The JSE plans to begin replacing JET by the fourth quarter of this year. There are five contenders for the contract, but it seems the direct follow-on to JET has been rejected.
• The JSE and its community are in the process of hashing out the last few elements of its new trading model. This model will be closer to the European way of trading and will have a direct influence on the new trading system.
• Currently the IT model has a front-end product linked through API to JET which interacts with the BDA and finally settlement and transfer are done through STRATE. It is expected that the basics of this model will be adhered to.
• Increased competition from other international markets has forced SA brokers to be more adaptable and the new trading system will have to cater to that need.

The new trading model has been structured so as to incorporate the following business drivers:

• Increased market liquidity;
• Equality of information access;
• Lower transaction costs for participants;
• Minimised system complexity for participants;
• Attraction of new and development of current capital flows;
• Guaranteed investor protection;
• Enhanced market integrity;
• Enhanced access to the trading environment; and
• Harmonisation with global trading practices, in particular the European Alliance Market Model.

Core philosophy

The central vision for the trading model is to facilitate a single market for all securities, traded with flexible functionality on electronic order books and supported by internationally aligned rules and practices.

(Source: JSE)