JSE data glitch

Traders beware of ‘hung’ in­stru­ments

Finweek English Edition - - Creating Wealth - MARC ASH­TON

THE JSE AND DEUTSCHE BANK have con­firmed they had failed to pick up a “hung” in­stru­ment in the war­rant mar­ket that re­sulted in in­cor­rect data be­ing sent to stock­bro­kers and private traders. A Fin24. com reader re­cently noted that war­rant is­suer Deutsche Bank wasn’t meet­ing its obli­ga­tions to pro­vide a mar­ket around a largely illiq­uid Tiger Brands war­rant. The share code for the war­rant is TBSDBP.

“The mar­ket maker hung,” says a Deutsche Bank dealer. That re­sulted in no bid or of­fer be­ing in the mar­ket for around 20 days. Fol­low­ing the query Deutsche Bank restarted the mar­ket maker and un­der­took to ne­go­ti­ate an exit from the war­rant with the Fin24.com reader.

How­ever, that en­quiry has re­vealed a data flaw that’s re­sulted in the JSE send­ing out in­ac­cu­rate trad­ing data that in­vestors may po­ten­tially act on. A war­rant is a trad­ing in­stru­ment al­low­ing a trader to buy or sell an un­der­ly­ing share at a cer­tain price at a fu­ture dated time. It al­lows traders to take ad­van­tage of gear­ing to re­alise big­ger prof­its due to fewer move­ments in the un­der­ly­ing shares.

A war­rant is­suer – in this in­stance, Deutsche Bank – is ob­li­gated to “make” a mar­ket to al­low traders to be con­stantly able to buy or sell the in­stru­ments, de­pend­ing on mar­ket move­ments. The mar­ket maker does that through an au­to­mated sys­tem that cre­ates a buyer and a seller in the mar­ket at all times, with prices de­cided by the un­der­ly­ing share price, gear­ing ra­tio and how soon be­fore the war­rant ex­pires.

There are cur­rently no safe­guards in place for ei­ther the mar­ket maker or the JSE to iden­tify when mar­ket mak­ers aren’t op­er­at­ing cor­rectly. JSE mar­ket man­ager Tseli Mat­sela says the clos­ing price for war­rants and in­vest­ment prod­ucts is based on the “best bid or of­fer” method­ol­ogy. “It’s based on the mid price, which is equal to the sum of the best bid price and the best of­fer price di­vided by two, rounded up to be con­sis­tent with the rel­e­vant price for­mat.”

How­ever, that sys­tem cre­ates a flaw in illiq­uid war­rants, such as this par­tic­u­lar Tiger Brands in­stru­ment. With no mar­ket maker be­ing in the mar­ket, the best of­fer price work­ing cor­rectly. To Deutsche Bank’s credit, it did ad­dress the prob­lem quickly with the reader. Stock­bro­kers and private clients alike de­pend on the in­tegrity of the JSE’s data to en­sure they make an in­formed de­ci­sion. If the data is wrong, sys­tems may in­cor­rectly flag buy and sell de­ci­sions. While trad­ing geared in­stru­ments, such as war­rants, should only be con­ducted by “so­phis­ti­cated” traders there are many novice in­vestors who dab­ble in such prod­ucts. If they base their buy­ing de­ci­sion on the fact that the JSE data re­flects that this has been was then used as the “clos­ing” price for the in­stru­ment. Hav­ing last traded at 61c ear­lier in the month the war­rant was us­ing the 96c best of­fered price as the clos­ing price for the in­stru­ment.

This price was com­pletely out of kil­ter with the per­for­mance of the un­der­ly­ing Tiger Brands share price.

There are two fun­da­men­tal prob­lems in terms of data in­tegrity: • Nei­ther the mar­ket maker nor the JSE

picked up that the in­stru­ment wasn’t the clos­ing price of an in­stru­ment – and there­fore is the price that the rest of the mar­ket is pre­pared to pay – then they may po­ten­tially base their bids on that data. The same could be said for au­to­mated trad­ing sys­tems aiming to make buy and sell de­ci­sions based on the data they’re re­ceiv­ing from the trad­ing plat­form.

Deutsche Bank en­cour­ages war­rant traders who iden­tify in­stances where no mar­ket is be­ing made to con­tact its deal­ing desk di­rectly so it can rec­tify the prob­lem. “Is­suers have an obli­ga­tion to en­sure that there’s best bid and of­fer in the mar­ket at 16:49. The JSE may have to re­visit the ex­ist­ing mea­sures in deal­ing with non-com­pli­ance,” says Mat­sela.


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