Global markets have undergone several transformations since the repeal of the Glass-Steagall act in 1999. This enabled US-based global investment banks to trade on behalf their own proprietary interests, as well as the interests of their customers.
While the JSE is technically an older, medium sized market by capitalisation in the global network, its electronic trading platform in Johannesburg and fee model are relatively new.
In September 2013 the JSE overhauled its transaction billing system to eliminate the minimum fee of 4.00 ZAR per trade (excl. VAT), allowing fees to comprise a significantly smaller part of single-transaction commissions. At least one anticipated benefit was to make algorithmic buying and selling of large orders feasible by facilitating strategies of smaller, less obvious trades.
In addition to this, the exchange’s matching system [computer hardware and software], was brought back from London to South Africa and a new co-location service on the JSE’s premises, for investors to house their computerised trading systems, were announced.
“These regulatory changes were aimed at encouraging very fast, technology-driven trading on the JSE,” says Prof Diane Wilcox of the QuERI Lab Research group in the School of Computer Science and Applied Mathematics at the University of the Witwatersrand. “In developed markets, minimal transaction costs per trade make the processing of trillions of orders per day possible. Like any large-scale, safety-critical system, an electronic trading platform is vulnerable to process error and 'viruses'. For markets, the latter can include trading strategies which abuse technological advantage to extract risk-free profit or manipulate prices. If a market enables too many predatory trading algorithms then capital is leaked away from optimal investment and information contained in prices becomes less reliable."
Wilcox and her colleagues, Prof Tim Gebbie and graduate students Mr Michael Harvey and Dr Dieter Hendricks, presented their research on unintended consequences of the regulatory changes at the JSE in a recent paper on deviations in price impact.
For sustainability, market makers need to ensure market quality to attract and protect investment, and hence, the price-formation process. To this end, various measurements can be monitored. In 2003, a team of physicists reported on an investigation in the journal Nature, which applied advanced dimensional analysis to large volumes of data from the New York Stock Exchange. They uncovered evidence for a new demand- supply relationship which related price-change to volume of transaction.
“Persistent deviations in price impact and other market quality estimators can be symptomatic of the presence of disruptive arbitrage,” say Wilcox. “Thus, tracking such measurements is similar to monitoring the health of a patient or high-performance athlete. Significant changes in expected levels can be used to halt trading under extreme conditions.”
“Major market participants, who now rely on mathematical algorithms rather than human traders, have acquired more computing power and software development to stay competitive, but these costs are still passed on to the consumer ,” says Gebbie.
