Chapter 5 - Trading shares on the JSE

Question 1

JHB SE established in ?

Answer 1

1887

Question 2

open outcry market

Answer 2

market participants gathered at a at a geographical place and then became knowledgeable about each other by calling out loud the name of the company whose shares they want to buy or sell.

Question 3

The open outcry system works by?

Answer 3

1. Buyer selects broker and instructs him on what shares to buy/sell
2. brokers notify their offices
3. broker calls out name of company
4. brokers w/ buy and sell orders move closer
5. negotiate in order to close sale
6. transaction succeeds - confirmed by the clearing system of the exchange

Question 4

how many days after transaction is confirmed must the share certificate be sent ?

Answer 4

7 business days

Question 5

electronic trading

Answer 5

continuous screen trading (JET)

Question 6

JET

Answer 6

Johannesburg Equities trading system

Question 7

JSE SETS

Answer 7

replaced JETS, trading done in two fold manner

Question 8

JSE TradElect

Answer 8

replaced the JSE SETS system,
increased trading volumes capacity
situated in London

Question 9

millennium exchange

Answer 9

replaced TradElect
move from london back to JHB
enhanced operational efficiency and trading optimisation (up to 400x faster)
increased market liquidity

Question 10

Orders to brokers

Answer 10

market
limit
stop

Question 11

how does a market order work?

Answer 11

simplest instruction
only specifies volume of shares that must be bought or sold.
Broker attempts to carry out instruction a the best possible price

Question 12

Limit order

Answer 12

client specifies volume of shares to be traded as well as price limit
(specified price is the highest/ lowest that client is willing to pay/accept).

Question 13

What happens if you cannot carry out a limit order

Answer 13

the remaining un-executable shares will remain as a passive order until executed

Question 14

What happens if a limit order cannot be fulfilled

Answer 14

The remaining shares remain on demand (buy) side of the order book as a passive order to purchase 1000 shares at 160c.

Question 15

Stop Order

Answer 15

Market order to buy and sell shares when the price of a share reaches a specified price level (stop price).
Once stop price is reached the order is entered into the book and treated similarly to a regular market order

Question 16

Stop limit order

Answer 16

once stop price is reached, order is entered into the order book and treated as a regular limit order.

Question 17

Stop- loss order

Answer 17

Order used to protect a profit or limit a loss.

Question 18

What happens when the share price decreases by 10%

Answer 18

program automatically places shares on the order book to sell.

Question 19

What are bear transactions (short sales)

Answer 19

a highly speculative order that is sometimes given to the brokers by their clients.
person sells shares they do not posses, in the hope prices will drop so that he can purchase required no. of shares at a lower price to deliver them to buyer.

Question 20

What are bear transactions (short sales)

Answer 20

a highly speculative order that is sometimes given to the brokers by their clients.
person sells shares they do not posses, in the hope prices will drop so that he can purchase required no. of shares at a lower price to deliver them to buyer.

Question 21

What are the pre-requisites of a bear transaction

Answer 21

• negotiate before hand w/ a loan agent to acquire the necessary shares.
• The bear must be certain that the required shares have been reserved at the CSDP

Question 21

What are the pre-requisites of a bear transaction

Answer 21

• negotiate before hand w/ a loan agent to acquire the necessary shares.
• The bear must be certain that the required shares have been reserved at the CSDP

Question 22

When will the bear receive his shares

Answer 22

Day T + 3

Question 23

Costs associated with a bear transaction

Answer 23

bear has to pay a loan fee to the loan agent.

will need to provide the necessary security to the loan agent for the borrowed shares.

Question 24

execute and eliminate

Answer 24

• execution constraint
• Order must be matched immediately and as completely as possible.
• Order that remain unexecuted will be removed from the order book.

Question 25

Fill or kill

Answer 25

• Execution constraint
• Order must be matched immediately and in full with existing orders in the order book.
• Or complete order will be cancelled and never appears in the order book.

Question 26

Further limitations: validity constraints

Answer 26

Good for day:Order will expire at the end of the current trading day
Good till date: Order will expire at the end of a specific day
Good till time: Order will expire on a specific time on the current trading day
Good till date/time: Order will expire on the specific date/time

Question 27

Equity trading according to the millennium exchange system

Answer 27

order-driven central order book trading system with open (8:30-9) , intra-day (9-16:50) , closing (16:50-17:00) auctions.
The rest of the day is continuous trading
Passive orders: Appear in price/time priority during continuous trading

Question 28

What are the three phases of the auction process

Answer 28

1. Call phase
2. Random end
3. Price determination period

Question 29

What is the Call phase of the auction process

Answer 29

The entering of new orders or the adapting and removing of existing orders
No trading done
Opening (30 min) Closing (10 min) Intra (15 min)

Question 30

What is the random end phase of the auction process

Answer 30

Call phase ends with a random end phase of 0-30 seconds. impossible to enter/ adapt orders
Purpose: discourage members from entering false orders in order to influence the auction price.

Question 31

What is the price determination period of the auction period

Answer 31

the order book is frozen and the price determination algorithm is activated determine an appropriate auction price.
no transactions of any kind can be made.

Question 32

Determining the auction price

Answer 32

1. Maximum execution principle
2. Minimum surplus principle
3. Market pressure principle

Question 33

Maximum execution principle

Answer 33

The executable volume is determined for each price limit in the order book.
The auction price is then the price that will lead to the maximum executable volume.
To increase liquidity market orders have priority over limit orders.

Question 34

Minimum surplus principle

Answer 34

if MEP provides more than one price that will lead to the highest executable volume then the MSP in applied.
The auction price that also leads the the smallest surplus for each price limit.

Question 35

Market pressure principle

Answer 35

If after MEP and MSP there are still more possible auction prices then the MPP is applied.

1) auction price = highest acceptable price the surplus for all relevant prices is on the purchase side (demand) .
2) auction price = lowest acceptable price if the surplus for all relevant price limits is on the sell side (supply)

Question 36

What are the costs of share transactions

Answer 36

Brokerage
STRATE settlement costs 
investor protection levy
VAT
securities transfer tax

Question 37

What is brokerage

Answer 37

during each transaction the broker will charge a commission fee which is expressed as a percentage of the transaction amount.
They can negotiate their commission rate

Question 38

STRATE settlement costs

Answer 38

covers electronic settlement of share transactions through state
*refer to tb for prices

Question 39

Investor production levy

Answer 39

Used by the JSE to monitor transactions on the marker to ensure that they have not been executed based on insider information (0.0002%)

Question 40

VAT

Answer 40

government insists the broker must charge VAT on brokerage (15%)

Question 41

Securities transfer tax

Answer 41

purchase and transfer of securities.
levied at 0.25% on the transaction amount.
only buyer pays STT