Publications
Partners
The collapse of Steinhoff was unlike anything I have ever seen in my many decades in financial markets.
The crash of 1987, the emerging market crisis of 1998, the dot-com implosion, the 2008/09 global financial crisis and even African Bank’s collapse all pale in comparison with what has happened at Steinhoff.
A Top40 company got decimated and will never recover.
But that’s not what I want to write about today. We’ll have plenty of time to dissect this disaster in time.
What I want to focus on is volatility auctions that have been a feature of the Steinhoff collapse, as these auction processes have confused many.
Every day starts with an opening auction that concludes with the market open at 9am and then ends with the closing auction from 4.50pm to 5.00pm.
During the day, if a stock moves beyond a certain predetermined range, it will automatically go into a volatility auction. All these auctions work in the same manner and are designed to enable price discovery.
During the auction period, no trades are matched but orders to buy or sell can be entered or deleted from the market.
At the end of the auction period, the JSE system determines at what price the largest volume trades, and will then match at that price and continuous trading will resume.
That match price at maximum volume is important.
We need to remember that the JSE works on a price-time methodology for orders. If my buy price is better than yours, I will go ahead of you in the queue to buy. If our prices are the same, whoever was first goes in front.
But also important is that if you place an order to buy a share at a fixed price and there is a better price in the market, you will get the better price. So, a buy order at say 1 000c may actually trade at 950c if there was already a seller in market at 950c.
During the auction process people will put in all sorts of prices to try and get matched, and orders at high levels (for buyers and low levels for sellers) are in many ways trying to get to the front of the queue.
The JSE publishes a live match price during the auction which is the price that the share will start trading at. This is useful if you are trying to get in or out. Buyers go higher than match and sellers lower.
For example, if the match price is 500c and you place a sell order at 450c, you’ll get out at 500c. But a word of caution. The match price is dynamic and changing as orders are entered and deleted.
The whole auction process works very well and while it does not prevent share price collapses (it is not intended to), it does enable efficient price discovery, and the volatility auction process lets people breathe for a moment when prices are falling.
The process is especially useful for opening and closing prices. Before this system a small quick trade could be the open or close and could distort price discovery, especially in smaller stocks. The auction prevents this from happening.
A last point is the “at market” orders. Typically, an order is entered with required volume and price. But an at market order is when no price is entered and the buyer or seller just wants to trade at the best current available price. During an auction process, at market orders always go to the front of the queue – but they carry extra risk.
You are essentially saying I want to buy or sell that share at any price. That’s fine – as long as one understands the implications.
Simon Brown is the founder and director of investment website JustOneLap.com and a regular finweek contributor.
