The Johannesburg Stock Exchange has adopted the ‘maker taker’ pricing model for its equity derivatives, and has cut trading fees for single stock futures and options traded through the central order book almost to zero.

The new billing model follows a consultation with market participants, advisory bodies and regulators. “Since our last change in fee structure, the market has evolved drastically and we have adopted the new model to adapt to these changing circumstances,” said Anthony Leibrandt, manager of equity derivatives trading at JSE in Johannesburg.

While the exchange acknowledges that a mechanism will always be needed for reporting bilaterally agreed trades to the exchange, as a regulator it also has to ensure the end customer gets the best price.

This can only be guaranteed, JSE believes, if all prices are visible to all market participants at all times. It therefore wants to encourage price making on the central order book.

Under the new fee structure, the market maker will get the booking fees for each transaction as a 100% rebate, meaning that effectively it pays no fee to the stock exchange.

The system is designed to attract traders not just to report transactions to the stock exchange, but to bring them on screen.

At present, 90% of single stock futures contracts and 60% of index trades are only reported to the stock exchange, making for a fairly opaque market in which price discovery is challenging.

By contrast, JSE’s flagship product, the FTSE/JSE Top 40 Index Future, is mainly traded on screen.

The new model rewards liquidity providers – anyone posting a price on the central order book – and charges price takers a reduced fee. It is also intended to enable smaller traders to compete with larger firms to ensure more competitive markets.

Stimulating liquidity

“We hope to incentivise clients to trade and provide liquidity to the market,” said Leibrandt. “Under the new model, anybody who has access to a DMA system can act as a market maker, which we hope will bring in more market participants. Hedge funds and other international investors can use JSE as a gateway to trade in all futures and options on African stocks, even if they are not members of the stock exchange.”

The new fee structure is based on the nominal value of the underlying product. That means when stocks fall, fees will decrease, encouraging trading. The stock exchange will benefit from rising markets.

The new system also makes allowances for complex trades such as butterflies, which, under the previous flat fee structure, were too expensive. “We are one of the few stock exchanges where fees are based on the delta of the option traded, which we hope will increase options trading overall,” Leibrandt said.

The new billing model has halved fees for trading single stock derivatives and raised fees on index futures by basing them on the trade’s value.

Price makers trading single stock futures and options through the central order book will not pay any transaction charge.

Price takers’ transaction cost has been reduced to 1bp of the value of the underlying. The maximum cost of transacting has also been reduced from R1.40 to R1.20 a contract on central order book trades.

In general, off-screen reported trades will be 20% more expensive than those on screen, to drive traders to the central order book.

Finally, trading in standardised contracts, defined by the exchange and traded in high volumes, will be cheaper than non-standard contracts such as Can Do derivatives, which are tailormade to the specifications of each client.
While JSE’s fee revenue has been lower since the new system was introduced on Monday July 5, this week trading volume has been low anyway.

“I think we’ll see the actual effects on fee revenue in about a month’s time,” said Leibrandt. “Most market participants are still working to get their heads around the new model.”

Mareen Goebel +44 207 779 8358 mgoebel@fow.com