Chapter 5 - Trading shares on the JSE Flashcards
JHB SE established in ?
1887
open outcry market
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.
The open outcry system works by?
- Buyer selects broker and instructs him on what shares to buy/sell
- brokers notify their offices
- broker calls out name of company
- brokers w/ buy and sell orders move closer
- negotiate in order to close sale
- transaction succeeds - confirmed by the clearing system of the exchange
how many days after transaction is confirmed must the share certificate be sent ?
7 business days
electronic trading
continuous screen trading (JET)
JET
Johannesburg Equities trading system
JSE SETS
replaced JETS, trading done in two fold manner
JSE TradElect
replaced the JSE SETS system,
increased trading volumes capacity
situated in London
millennium exchange
replaced TradElect
move from london back to JHB
enhanced operational efficiency and trading optimisation (up to 400x faster)
increased market liquidity
Orders to brokers
market
limit
stop
how does a market order work?
simplest instruction
only specifies volume of shares that must be bought or sold.
Broker attempts to carry out instruction a the best possible price
Limit order
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).
What happens if you cannot carry out a limit order
the remaining un-executable shares will remain as a passive order until executed
What happens if a limit order cannot be fulfilled
The remaining shares remain on demand (buy) side of the order book as a passive order to purchase 1000 shares at 160c.
Stop Order
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
Stop limit order
once stop price is reached, order is entered into the order book and treated as a regular limit order.
Stop- loss order
Order used to protect a profit or limit a loss.
What happens when the share price decreases by 10%
program automatically places shares on the order book to sell.
What are bear transactions (short sales)
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.
What are bear transactions (short sales)
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.
What are the pre-requisites of a bear transaction
- 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
What are the pre-requisites of a bear transaction
- 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
When will the bear receive his shares
Day T + 3
Costs associated with a bear transaction
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.
execute and eliminate
- execution constraint
- Order must be matched immediately and as completely as possible.
- Order that remain unexecuted will be removed from the order book.
Fill or kill
- 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.
Further limitations: validity constraints
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
Equity trading according to the millennium exchange system
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
What are the three phases of the auction process
- Call phase
- Random end
- Price determination period
What is the Call phase of the auction process
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)
What is the random end phase of the auction process
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.
What is the price determination period of the auction period
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.
Determining the auction price
- Maximum execution principle
- Minimum surplus principle
- Market pressure principle
Maximum execution principle
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.
Minimum surplus principle
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.
Market pressure principle
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)
What are the costs of share transactions
Brokerage STRATE settlement costs investor protection levy VAT securities transfer tax
What is brokerage
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
STRATE settlement costs
covers electronic settlement of share transactions through state
*refer to tb for prices
Investor production levy
Used by the JSE to monitor transactions on the marker to ensure that they have not been executed based on insider information (0.0002%)
VAT
government insists the broker must charge VAT on brokerage (15%)
Securities transfer tax
purchase and transfer of securities.
levied at 0.25% on the transaction amount.
only buyer pays STT
