NZX needs transparency and modernisation to support New Zealand’s future

Suzanne Snively ONZM Chair Transparency International New Zealand

Suzanne Snively ONZM
Chair
Transparency International New Zealand

Suzanne Snively ONZM
Chair
Transparency International New Zealand

The New Zealand Stock Exchange (NZX) seems to regard initiatives aimed at enhancing its culture or that of its members, as a low priority. This inactivity and the lack of transparency may be stifling the availability of quality equity capital in New Zealand.

The NZX is not keeping up with the pace of transparency and access compared with exchanges around the world and other segments of New Zealand business and government.

A comparison of the NZX and other exchanges in the recently published World Federation Exchange (WFE) Annual Statistics Guide for 2017, suggests that the NZX’s approach is contributing to its potential decline.

Between December 2015 and December 2017, the number of companies listed on our stock exchange declined by nearly 7 per cent while the total number of listed global companies increased by nearly 2 per cent. The NZX has been unsuccessful in attracting new companies to list, with only one last year and ten in 2016. In contrast, the Australian Stock Exchange (ASX) had 233 new listings over the same two-year period.

NZX’s trading activity lacks transparency.

Electronic Order Book (EOB) trades are the trades through an exchange’s electronic trading system where all buy and sell instructions are exposed to market users.  Globally, the proportion of electronic share market trades have been steadily increasing, averaging 72 per cent of all trades by value in 2017.

In stark contrast to international trends, the NZX has a large proportion of negotiated deals.  These are broker-driven, off-market transactions, where the buyer and seller agree on price and volume without the bids or offers being exposed to all participants through the electronic market. 

The NZX also has a larger than average number of “reported trades” – trades reported through a trade reporting facility where only one counter party provides information on the trade.

In other words, in New Zealand almost 70 per cent of share trading, in value terms, occurs off-market through broker negotiated deals. Between 2014-2017 less than a third of transactions, by value, went through the electronic market.

The WFE data shows that New Zealand and Palestine have the lowest number of brokers – eight – of any exchange.  This compares with 221 brokers operating in Australia.  The NZX is effectively controlled by a small number of brokers negotiating large off-market trades for their preferred clients. New Zealand’s exchange lacks transparency because these off-market buy and sell offers are not disclosed, or made available electronically in real time, to all market participants.

New Zealanders say that they want to live in a country that provides them with work they enjoy and that pays sufficiently to support wellbeing, including generating a tax base that funds quality education, health care and housing.  A major component of a growing tax base is a profitable business sector.  For businesses to innovate, expand profitable markets and grow the tax base they require sources of capital that are from informed investors and which are cost-effective and dependable.

Lack of transparency in NZX transactions is stifling the availability of quality equity capital in New Zealand.  The concentration of off-market trading contributes to a reduction in the integrity and transparency of the domestic market.  As the world’s investors increasingly look for places to invest responsively, lack of transparency of the NZX combined with the additional diligance required when there is less trust in an institution, has sucked equity capital away from New Zealand to Australia and elsewhere.

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