JSE data glitch
Traders beware of ‘hung’ instruments
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.