Component 5: trading shares on JSE

Question 1

What was the method of trading shares on the JSE before 1996?

Answer 1

Shares were traded through an open outcry market, where stockbrokers gathered and called out the names of companies to buy or sell shares.

Question 2

What replaced the open outcry system in 1996?

Answer 2

The JET system (Johannesburg Equities Trading system), which introduced electronic trading and continuous screen trading.

Question 3

What were the limitations of the open outcry system?

Answer 3

: It was administratively burdensome and prone to misunderstandings between brokers, limiting the number of shares traded daily.

Question 4

What is the JET system and how does it work?

Answer 4

The JET system is a computer-based trading system where brokers enter client orders into a computer. If buyer and seller prices match, the system executes the transaction immediately. Otherwise, orders remain in the order book.

Question 5

Why was the JET system replaced by the JSE SETS system in 2002?

Answer 5

The JET system became insufficient, and greater cooperation with the London Stock Exchange led to the adoption of the JSE SETS system.

Question 6

How does trading occur under the JSE SETS system?

Answer 6

Trading occurs through both auctions and continuous trading. Auctions accumulate bids and offers, and the system determines the price for maximum share trading. Continuous trading happens outside auction times.

Question 7

What significant change did the JSE undergo in 2007?

Answer 7

The JSE adopted the TradElect system, licenced from the London Stock Exchange, which increased trading volumes and situated the JSE’s trading platform in London

Question 8

What was the impact of the JSE switching to the Millennium Exchange platform in 2013?

Answer 8

The switch allowed trades to be executed up to 400 times faster, increased market liquidity, and relocated the trading system back to Johannesburg for enhanced operational efficiency.

Question 9

How does trading occur under the Millennium Exchange platform?

Answer 9

Similar to the JSE SETS system, trading occurs through three daily auctions and continuous trading outside of those auction periods.

Question 10

What is the significance of the relocation of the JSE trading system from London to Johannesburg in 2013?

Answer 10

The relocation improved operational efficiency and optimized trading for participants, along with faster trade execution.

Question 11

What are the two methods of trading on the JSE SETS and Millennium Exchange platforms?

Answer 11

Trading occurs through scheduled auctions and continuous trading.

Question 12

What are the three basic types of orders a client can give to a broker?

Answer 12

Market order, limit order, and stop order.

Question 13

What is a market order?

Answer 13

An order where the client specifies the volume of shares to buy or sell without setting a price, allowing the broker to execute at the best possible market price.

Question 14

What happens to a market order during continuous trading?

Answer 14

It is matched with orders on the contra side of the order book until it is fully filled.

Question 15

What is a limit order?

Answer 15

An order where the client specifies both the volume of shares and the price limit, with the transaction occurring at the price limit or better.

Question 16

In a buy limit order, what does the specified price represent?

Answer 16

The highest price the client is willing to pay for the shares.

Question 17

What happens if a limit order cannot be fully executed?

Answer 17

The remaining shares stay in the order book as a passive order.

Question 18

What is a stop order?

Answer 18

A market order that is triggered when the share price reaches a specified level (the stop price).

Question 19

What is the purpose of a stop-loss order?

Answer 19

To protect a profit or limit a loss by automatically selling shares if their price falls to a set stop price.

Question 20

What is a bear transaction (short sale)?

Answer 20

A speculative order where a person sells shares they do not own, hoping the price will drop so they can buy them back at a lower price to make a profit.

Question 21

What are the key steps in a bear transaction?

Answer 21

The bear sells borrowed shares, buys them back later (hopefully at a lower price), and returns the shares to the loan agent.

Question 22

What costs are associated with a bear transaction?

Answer 22

The broker’s costs, a loan fee to the loan agent, and potentially a security guarantee.

Question 23

What must a person do before executing a bear transaction under electronic trading?

Answer 23

They must negotiate with a loan agent to borrow the necessary shares and ensure they are reserved.

Question 24

What are execution constraints?

Answer 24

Execution constraints define how and when an order must be filled. The two main types are “execute and eliminate” and “fill or kill.”

Question 25

What does “execute and eliminate” mean?

Answer 25

The order must be matched immediately and as completely as possible. Any unexecuted portion is canceled.

Question 26

What does “fill or kill” mean?

Answer 26

The entire order must be filled immediately, or the entire order is canceled.

Question 27

What are validity constraints?

Answer 27

Validity constraints specify how long an order remains active in the order book. Options include “Good for Day,” “Good till Date,” and “Good till Time.”

Question 28

What is continuous trading?

Answer 28

Continuous trading is the matching of active buy and sell orders throughout the trading day, except during the opening, intraday, and closing auctions.

Question 29

How are orders prioritized in the JSE order book?

Answer 29

Orders are prioritized by price first and then by time. The best-priced orders are executed first, and within the same price, earlier orders have priority.

Question 30

What happens when an active sell order is placed at a lower price than passive buy orders?

Answer 30

The shares will be sold at the best available price, starting with the highest bid, even if the seller offers at a lower price.

Question 31

What are the three types of auctions on the JSE that can take place daily?

Answer 31

The opening auction, the intra-day auction, and the closing auction.

Question 32

What is the main purpose of the JSE auctions?

Answer 32

To determine a transparent opening and closing price for each share every trading day.

Question 33

What happens during the “Call Phase” of an auction?

Answer 33

Members can enter, adapt, or remove orders from the order book. No trading occurs, and the order book is continuously updated.

Question 34

What are the time durations for the call phase in the JSE auctions?

Answer 34

Opening auction: 30 minutes, Intra-day auction: 15 minutes, Closing auction: 10 minutes (all times can be adapted).

Question 35

What is the purpose of the “Random End” period during the auction?

Answer 35

It discourages the entry of false orders by introducing a 0 to 30 seconds freeze period where no changes can be made to orders.

Question 36

What occurs during the “Price Determination Period” of the auction?

Answer 36

The order book is frozen, and a price determination algorithm is activated to find the auction price based on executable volume.

Question 37

What is the first principle used to determine the auction price?

Answer 37

Maximum Execution Principle – The auction price is the price that leads to the maximum executable volume.

Question 38

How are market orders prioritized during the price determination phase?

Answer 38

Market orders have priority over limit orders to increase liquidity.

Question 39

What happens if more than one price leads to the same maximum executable volume?

Answer 39

The next rule, the Minimum Surplus Principle, is applied, and the price with the smallest surplus is chosen.

Question 40

What is the “Minimum Surplus Principle”?

Answer 40

The auction price is the one that results in the maximum executable volume and the smallest surplus for each price limit.

Question 41

What is the final price determination rule if the first two principles still provide multiple prices?

Answer 41

The Market Pressure Principle is applied, selecting the highest price if demand surplus exists or the lowest price if supply surplus exists.

Question 42

What is the role of stock brokering firms in share transactions on the JSE?

Answer 42

All share transactions, whether through auctions or continuous trading, must be executed via a stock brokering firm.

Question 43

What is the purpose of the “Freeze Period” in the auction process?

Answer 43

It prevents manipulation of the auction price by discouraging fictitious orders, as members risk being bound by these orders.

Question 44

After the auction process, what happens to unmatched orders?

Answer 44

Unmatched orders are left in the order book until they are either executed or canceled.

Question 45

What is brokerage in a share transaction?

Answer 45

Brokerage is the commission charged by a broker during each transaction, either purchase or sale, expressed as a percentage of the transaction amount.

Question 46

Are brokers bound to charge a fixed commission on share transactions?

Answer 46

No, brokers are no longer bound to charge a fixed commission. Clients can negotiate the rate, though small investors often pay the broker’s standard rates.

Question 47

What is a “minimum tariff” in brokerage fees?

Answer 47

A minimum tariff is a set minimum fee that brokers charge per transaction, typically ranging between R90 to R230, regardless of the transaction size.

Question 48

What does the Strate settlement cost cover?

Answer 48

The Strate settlement cost covers the electronic settlement of share transactions via Strate, the settlement authority in South Africa.

Question 49

How much is the Strate fee for a transaction amount less than R116 116?

Answer 49

The Strate fee is R6.72 for transaction amounts less than R116 116

Question 50

How much is the Strate fee for a transaction amount between R116 116 and R1 867 868?

Answer 50

The Strate fee is 0.005787% of the transaction amount

Question 51

What is the Strate fee for transaction amounts over R1 867 868?

Answer 51

The Strate fee is R108.10 for transaction amounts over R1 867 868.

Question 52

What is the Investor Protection Levy?

Answer 52

The Investor Protection Levy is a fee used by the JSE to monitor transactions and ensure they aren’t based on insider information, set at 0.00031% of the transaction amount.

Question 53

What percentage is the Investor Protection Levy?

Answer 53

The Investor Protection Levy is 0.00031% of the transaction amount.

Question 54

What is the VAT rate on brokerage fees and other charges in a share transaction?

Answer 54

The VAT rate is 15%, and it is applied to the brokerage fee, Strate settlement cost, and the Investor Protection Levy.

Question 55

What is the Securities Transfer Tax (STT) and who pays it?

Answer 55

STT is a tax of 0.25% on the transaction amount, paid only by the buyer during a purchase transaction.

Question 56

Does the Securities Transfer Tax (STT) apply to both purchase and sale transactions?

Answer 56

No, STT only applies to purchase transactions, where the buyer is required to pay the tax.