CHAPTER III

In Secondary Market, securities are traded from one investor to others.

TRADING MECHANISM
How does trading mechanism work? This Chapter explains about trading process in Indonesian Capital Market and also the trading rules of each instrument. 1. Primary and Secondary Market Capital Market in Indonesia consists of Primary and Secondary Market. 2. Primary Market A. Primary Market is a transaction process of securities before being listed in Stock Exchange. In Primary Market, the Underwriters through the Selling Agents/Brokerage Companies offer securities newly issued by a company to the investors. The first public securities issue made by a company is referred to as an Initial Public Offering (IPO). A. Trading Process in Primary Market Generally, trading process of stocks and bonds in Primary Market can be described as follows:

Underwriter Issuer Company Broker-Dealer

Fund Securities

Investors

B. Procedure of offering and subscription Securities on the Primary Market: B. Secondary Market is a transaction process of securities after it is listed in Stock Exchange. The existence of Secondary Market is to provide investors with the opportunity to buy or sell stocks and other listed securities after the Initial Public Offering (IPO) is over. a. The first offering of companys stocks or bonds to the public investors through Underwriters and Selling Agents during public offering period. The term and conditions for subscription of newly issued stocks or bonds such as offering price, number of stocks or bonds offered, public offering period and other 30

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necessary information are published on nationwide newspaper or distributed in form of the Prospectus. b. Investors who wish to subscribe newly offered stocks or bonds should contact the Underwriters or Selling Agents and take necessary procedures guided by them. Investors subscribe new stocks or bonds together with payment. Underwriters and Selling Agents inform the subscribers the result of Public Offering. f. g.

originally applied or even none at all. Allotments are carried out proportionately to the number of stocks or bonds subscribers applied. Refund to the investors if not all of their orders are fulfilled (if oversubscribed is happened). New stocks or bonds are distributed through Underwriters and Selling Agents

c. d.

3. Secondary Market A. Trading Process in Secondary Market Generally, trading process of stocks and bonds in Secondary Market can be described as follows:
Buying Investors Buying Brokers

Offering Period > 3 wd

Allotment < 3 wd

Refund and Shares distribution < 2 wd

Listing at Stock Exchange

STOCK EXCHANGE
Fund Securities

Selling Brokers

Selling Investors

- Underwriter - Broker-Dealer

- Underwriter - Issuer Company - Securities Administration Bureau

- Underwriter - KPEI - KSEI

wd : working days

e.

The Allotment of Stocks or Bonds to the investors, which are conducted by Underwriters and Issuer Company. Relating to the allotment, there are term and conditions that should be noticed: Undersubscribed, that is a condition when total of stocks or bonds subscribed by public investors are less than original number of stocks or bonds offered. In this condition, the investors will receive stocks or bonds as many as they have ordered. Oversubscribed, that is a condition when total of stocks or bonds subscribed by public investors exceeds that original number of stocks or bonds offered. In this condition, subscribers are usually allotted with less number of stocks or bonds

B. Stock Exchange Securities companies that already become member of JSX & SSX as brokerage conduct buying-Selling activities in Stock Exchange. A brokerage company buys and sells securities based on orders from investors. Each company has its own staff called Securities Broker-Dealer Representatives who have the authorization to input all orders into the transaction system provided. Since 1995, trading process in JSX has been executed through a computerized system called the Jakarta Automated Trading System (JATS). JSX trading system is an open auction system operating continuously during exchange hours. Meanwhile, SSX has its own trading system called S-MART (Surabaya Market Information & Automatic Remote Trading) since 1996. 32

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Trading hours in Jakarta Stock Exchange and Surabaya Stock Exchange is divided into 2 session everyday, which is started from 9:30 PM until 4:00 PM. How are those orders (buy and sell) matched by the system? Main criteria for order matching are price priority and time priority. Price priority means that whoever places the highest bid price, they will be in first priority in order to be matched with whoever place the lowest offer or ask price. Bid price is the price an investor is willing to buy, while offer or ask price is the price an investor is willing to sell. Time priority means whoever has placed the order first, they will be in the first priority in order to be matched at same price by the system.

4. Trading Rules, Fee and Tax A. STOCK JSX classifies the market into three segments: a. Regular Market b. Negotiated Market c. Cash Market a. Regular Market Stocks which are trading at the Regular Market are based on fix lot and time of the continuous auction market mechanism. The prices formed on the regular market are used as the quoted prices for the Jakarta Stock Exchange. Terms and Conditions for Regular Market Transactions currently are as follows: The total shares traded in a standard lot of 500 shares Price movements (increments) for shares: - For the price below Rp. 500, the fraction is set at multiplies of Rp 5 and maximum price movement Rp 50. - For the price between Rp 500 to Rp 5,000, the fraction is set at multiplies of Rp 25 and maximum price movement Rp 250. - For the price above Rp 5,000, the fraction is set at multiplies of Rp 50 and maximum price movement Rp 500. All transaction done is based on time and price priority. b. Negotiated Market In this market, stocks are traded by direct negotiation between buying broker and selling broker based on the last stock price in Regular Market.

Stock Price Index Stock Price Index is an indicator of companys stock price listed in Stock Exchange. The Stock Price Index usually reflects the Capital Market and economic condition of a country. Currently, JSX has 5 types of stock price index, namely:
Name of Stock Price Index 1. Composite Price Index Description It is used as the indicator for stock price movements of listed shares in JSX. All shares listed in JSX are classified into each industry sector. JSX has determined 9 sectors of Industry, such as: Agriculture, Mining, Transportation, etc. This Index consists of 45 shares which are high in liquidity and big in market capitalization. This index consists of 30 types of stocks which are selected based on Islams Syariah Rules. This index reflects each stock price movements of listed shares.

2. Sectoral Index

3. LQ45 Index 4. Jakarta Islamic Index 5. Individual Stock Price Index

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c. Cash Market This market is provided for exchange member who failed to settle their trading obligations in Regular and Negotiated Market. The settlement in this market is based on the cash and carry system. Settlement Should a transaction has been matched, the delivery of the share certificates and payment must be settled through The Indonesian Clearing and Settlement Corporation (PT Kliring dan Penjaminan Efek Indonesia/KPEI), and The Indonesian Central Securities Depository (PT Kustodian Sentral Efek Indonesia/KSEI) at 3 exchange days after the transaction or T+3. Transaction Fees For every transaction, an investor has to pay a fee to the brokerage firm based on an agreement between them. This fee may not exceed 1 % (one percent) of the value of both buying and selling transaction. Fees varies among brokerage firms, basically it is determined as a certain percentage of total value buying/selling transaction or a% x (number of stock x price per stock). This fee is subject to 10% Value Added Tax. Taxes Income Tax amounting 0.1% will be charged on selling transaction or 0.1% x (number of stocks sold x price per stock). How to obtain dividend: Investors should buy the stock until Cum Dividend Date, at the time when buyers become eligible to receive a declared dividend. However, in the case of buying stock in a script way, buyer should register his/her name on the book of company through Registrar until the Recording Date.

B. Bond and Convertible Bond Trading In Indonesian Capital Market, Surabaya Stock Exchange provides information system for fixed income (bond) market, which is known as OTC-FIS (Over the Counter-Fixed Income Service). It provides bonds bid and offer quotations, transactions, and trade reporting on a real-time basis. The system enables participants to enter, withdraw and amend bid or sell quotations at anytime before execution of transaction. There are two types of bond trading transaction in Surabaya Stock Exchange, namely: Negotiation Transaction and Reporting Transaction. In Negotiation Transaction, participants submit one quotation, either buy or sell through OTC-FIS system. Then other participants who are interested in this quotation can submit sell or buy order through OTC-FIS. Should the agreement has been reached between both parties, they deliver the confirmation through OTC-FIS at the end of the same bourse day when the order submitted. In Reporting Transaction, transaction is done outside the system between both parties. Then, they report this transaction into the system. Participants are securities companies both member or nonmember of Surabaya Stock Exchange, and some banks which are actively trading bonds. Fees Usually, there are no fees charged to the investors in Bond transaction. However, the Securities Companies who act as the Dealer take a spread between buying and selling price, which including some fees charged to the securities companies related to OTC-FISs Bond transaction (varies from 0.005% - 0.01%).

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b. Taxes Bond which is traded or reported its trading to the Exchange, Interest and Capital Gain are subject to final tax of 20%. Bond which is not traded or reported its trading to the exchange, Interest and Capital Gain are subject to With-Holding Tax of 15% not final, which at year end can be credited and will be subject to Corporate Income Tax (maximum 30%). Settlement The settlement process will be depending on the type of the bond. For script Corporate Bond, the settlement process is conducted between the participants through the custodian based on the agreement. For scripless Corporate Bond, the settlement is conducted by overbooking between account holders in KSEI. For Government Bond, the settlement is conducted by book-entry settlement in Bank Indonesia.
Investors Investors

C. Rights Most of rights trading rules follow the same procedure applied on stocks trading mechanism. On the exercise date, the investors pay the fund to the issuer through brokerage firm, and in return, they will receive new stocks.

D. Warrant Warrants holders can convert their warrant into new common stock by paying the exercise price to the issuer through brokerage firm. Most of warrants trading rules follow the same procedure applied on stocks trading mechanism.

E. Stock Index Futures Trading Facilities 1. Trading Session in SSX is similar with stock trading in JSX, and it is based on electronic auction system operating continuously during exchange hours. Trading is facilitated by Future Automated Trading System (FATS), and is conducted in each brokerage firms office (remote trading), and supported by RMOL system or Risk Monitoring On Line. RMOL is a real time reporting system, which will enables the investors to monitor their current open position and balance of their capital.

Order
Dealer

Order 1) Quotation

SSX OTC-FIS

2) Observe Quotation

2.

Dealer

Trade Report 3) Negotiate Settlement Instruction Settlement depends on Settlement Instruction

Script Bonds

Govt Bonds

Scriptless Bonds

Bank Custodian

Bank Indonesia

KSEI

Type of Contract: 1. Spot Month Contract, which will be matured on the last exchange day at respective month. 2. Second Month (next month) Contract, which will be matured on the last exchange day at following month, right after spot month.

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3. Quarter Contract, which will be matured on the last exchange day at the nearest quarter month (March, June, September and December), right after second month contract. Similar to stock investment, investors should open an account in brokerage firm. For each contract, the investor should place an initial margin amounting to Rp 3 million for each contract. The order will be inputted by FATS Trader into FATS terminal for further process. The only different thing is the settlement in this Stock Index Future is T+1, not T+3 as prevailed in stock trading in JSX. Contract Specification of LQ45 index futures 1. Underlying is LQ45 Index that calculated and published by Jakarta Stock Exchange 2. Each index point is converted into Rupiah by using a contract multiplier, currently Rp 500,000 for each point 3. Settlement is in cash 4. Settlement period is T+1 5. Matching mechanism is price priority and time priority. 6. Last Trading Day is the last bourse day in contract month 7. Initial margin is Rp 3 million per open contract 8. Fee is Rp 50,000 excluding VAT, per contract

Fees Investment Manager charges selling fee to investors when they buy unit/stock of mutual fund, which varies between 1% to 3% of total value. When the investors would like to sell/redeem their investment, then Investment Manager would charge them a redemption fee, which usually varies between 1% to 2% of total value. Tax Mutual Fund investors are exemted from taxation, since some of funds income such as Capital Gain from Securities transaction has been taxed.

F. Mutual Fund In case of the Open-end Mutual Fund, the amount an investor pay to own a piece of a Mutual Fund depends on NAV per unit, which is determined at the end of each day. In case of the Close-end Mutual Fund, trading mechanism follows stock trading mechanism.

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