Johannesburg Stock Exchange tightens oversight of algorithmic trading
In May 2024 the Johannesburg Stock Exchange (JSE) announced a set of formal rules that raise the supervision of algorithmic, or “algo,” trading on its platform. The move follows a global trend in which exchanges are strengthening safeguards around automated trading to protect market integrity and investor confidence.
Why the JSE introduced new rules
Algorithmic trading relies on computer programs or artificial‑intelligence models to execute buy and sell orders according to pre‑defined criteria. By removing the need for manual intervention, the technology can capture fleeting price opportunities and reduce transaction costs. A study published in the Journal of Finance noted that algo trading “has the potential to enable more efficient risk sharing, facilitate hedging, improve liquidity and make pricing more efficient”【1】.
Industry estimates suggest that up to three‑quarters of global equity volume is now driven by algorithms, and research from the University of the Witwatersrand indicates that a similar share of activity on the JSE is automated【2】. As the share of algo‑driven trades grows, regulators worldwide have become more attentive to the operational risks that can arise from faulty or poorly monitored code.
Key requirements for brokers and trading firms
The JSE’s updated rulebook elevates several previously advisory guidelines to enforceable standards. Firms that use or provide access to algorithmic trading must now:
- Implement robust pre‑trade risk controls designed to block erroneous or “fat” orders before they reach the market.
- Document the design, testing and ongoing monitoring of each algorithm, with senior management retaining ultimate responsibility.
- Maintain audit trails that demonstrate compliance with international best‑practice frameworks, such as those employed in the United States and Europe.
- Assume liability for the algo‑trading activities of any clients that connect directly to the exchange through sponsored access or direct market access (DMA) arrangements.
By codifying these measures, the JSE gains clearer authority to monitor trading patterns, investigate potential abuses and sanction non‑compliant participants.
Risks the rules aim to curb
Market participants and experts have highlighted several ways in which unchecked algorithmic strategies can disrupt orderly trading:
- Erroneous orders – oversized or mispriced trades that can trigger sudden price swings.
- Runaway algorithms – code that continues to generate excessive order flow after a fault condition.
- Spoofing and layering – placing orders with no intention of execution to create a false impression of supply or demand.
- Quote flooding – rapidly submitting and cancelling orders to manipulate perceived liquidity.
M’khuzo Mwachande, a Cape Town‑based investment banker, explained to African Business that the JSE’s reforms are not intended to halt algorithmic trading but to ensure a clear line of accountability when things go wrong【3】.
Industry reaction and outlook
Responses from the local brokerage community have been cautiously supportive. Many firms acknowledge that the added compliance workload will require investments in surveillance technology and staff training, yet they view the rules as a step toward aligning the JSE with global standards. International exchanges such as the New York Stock Exchange, Euronext and the Tokyo Stock Exchange already enforce comparable pre‑trade controls and senior‑management oversight for algo trading.
Looking ahead, the JSE plans to publish periodic reports on algorithmic trading activity and to engage with technology providers on emerging risks, such as those posed by machine‑learning models that evolve without explicit human reprogramming. By balancing innovation with safeguards, the exchange aims to preserve the efficiency gains of algorithmic trading while protecting the fairness and stability of South Africa’s equity markets.
References
- Journal of Finance, “The Impact of Algorithmic Trading on Market Quality,” 2022.
- University of the Witwatersrand, Centre for Financial Regulation Studies, “Algorithmic Trading Activity on the JSE,” 2023.
- African Business, Interview with M’khuzo Mwachande, May 2024.
