Trade Mechanism

The JSE has introduced a tool to prevent unintentional order matches

Trade Mechanism

In October 2024, the JSE introduced the implementation of self-match prevention (SMP) in the equity market. Self-matching refers to the inadvertent execution of buy and sell orders from the same trading entity against each other. This often arises in algorithmic trading, where multiple strategies interact on the same order book, or in high-frequency trading, where rapid-fire orders may overlap.

Unintentional order matches within a trading entity can distort stock market activity and create the illusion of inflated trading volumes. These trades incur unnecessary transaction costs without delivering any real economic benefit. Over time, repeated unintentional matches can undermine overall market integrity and transparency.

‘This functionality represents a significant step in refining market operations, particularly for participants engaged in high-frequency or algorithmic trading. SMP allows market participants to prevent unintentional order matches within their own trading entity, a key enhancement that minimises operational overhead and trade cancellations,’ says Vuyo Mashiqa, the JSE’s Head of Equities and Equity Derivatives.

‘Algorithmic trading and high-frequency trading often involve multiple orders being submitted to the market in quick succession, sometimes from different strategies operating within the same trading entity. This increases the likelihood of self-matching, which can disrupt strategies and require manual intervention to reverse trades.

‘SMP is particularly well-suited to this environment because it provides a mechanism to pre-emptively prevent self-matches without requiring changes to trading algorithms. Trading entities can assign unique keys to their strategies, ensuring that orders from one strategy do not interact with another.

‘This allows high-frequency operations to remain efficient, uninterrupted and aligned with market integrity standards.’

According to Mashiqa, the JSE has taken several steps to ensure the accuracy of the system in distinguishing legitimate transactions from potential self-matches. ‘The SMP system underwent extensive validation and conformance testing. This included real-world simulations of high-frequency trading scenarios to ensure that the system correctly identifies and prevents only those matches flagged by the unique key mechanism.

‘Additionally, the functionality is designed to operate solely within the normal order book and closing price cross session, further minimising the risk of false positives. The system’s logic does not interfere with orders that lack matching unique keys or fall outside specified trading sessions, thereby preserving the accuracy of legitimate trade executions.’

He says the SMP functionality is embedded within the Native Trading Gateway and FIX Trading Gateway, which have been enhanced to include fields for a unique self-trade prevention key. This key is attached to orders and enables the system to pre-emptively evaluate incoming orders against resting orders with matching keys.

‘This evaluation happens in real-time, leveraging the system’s low-latency infrastructure to ensure seamless detection and prevention of self-matches. Importantly, the system does not rely on post-trade reconciliation but instead operates at the point of order entry, ensuring unmatched efficiency in maintaining market integrity,’ says Mashiqa.

The unique key for traders plays a vital role in the functioning of the SMP. ‘The unique key acts as the core mechanism for distinguishing and managing order interactions within the SMP framework. Trading entities use this alphanumeric key to flag orders that should not interact with one another.

‘For example, in a firm running multiple trading desks or algorithms, each desk or strategy can be assigned distinct keys, ensuring segregation of activity. The key is immutable once assigned to an order, preventing unintended changes during its life cycle. This immutability is critical for maintaining the integrity of the SMP system, as it ensures that rules governing self-matching are consistently applied across all orders.’

Mashiqa says the JSE’s SMP initiatives align with international regulatory standards and best practices by mirroring mechanisms adopted by leading exchanges worldwide, ensuring that market participants operate on a level playing field. ‘By preventing self-matching, we’re adhering to international principles outlined by organisations such as IOSCO [International Organisation of Securities Commissions] and the World Federation of Exchanges. These standards emphasise reducing conflicts of interest and maintaining market integrity.’

By Patrick Farrell
Image: iStock