Faster than thought
Electronic trading on stock exchanges has been around since the 1970s, with the JSE going down this road in 1996.
The days when traders shouted buy and sell orders on a stock exchange floor, known as open outcry, are long gone. Today, computers and algorithms execute most of the world’s equity market trades.
Technological advancements have not only automated trades, but have also brought exceptionally high speed to trading.
Known as high-frequency trading (HFT), this is measured in microseconds — a millionth of a second, or quicker than the blink of an eye.
HFT makes use of sophisticated technology to execute trades at the fastest speed possible; preferably faster than those of competitors.
In the race for speed, proximity matters. In order to reduce latency — the distance that a signal needs to travel — these traders physically place their trading engines next to stock market servers via co-location services.
The JSE opened colocation to clients in mid-2014. Today, about 30% of the value traded in the its cash equities market goes through co-location.
“Not all of that is HFT,” says Donna Nemer, head of capital markets at the JSE. “A number of entities use co-location for their institutional clients due to the superior execution capabilities.”
High-frequency traders make money by, among other things, being the first to respond to information about stocks.
Profit margins per trade are often small — sometimes a fraction of a cent — but they add up when millions of trades are executed every day.
After the global financial crisis, HFT came under intense scrutiny when its market-manipulating misuses were exposed. For instance, spoofing sees highfrequency traders place orders they never intend to trade on, but which can misleadingly influence the price of a security.
To address this, exchanges have taken to limiting the number of orders that any single computer connection in colocation can place per second.
In the case of the JSE, orders are limited to 300/second for each connection. One firm can have up to three connections.
The JSE uses its own algorithms to detect market abuse, says Nemer.
“What you want in a highquality, fair, central order book market is transparency of information, where you know the price discovery is honest and that transactions are being executed at or better than the best bid and offer spread,” Nemer says, referring to the difference between the best buy and sell price of a share.
But high-frequency traders can gain the upper hand even in this context, intercepting large orders by