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First NZ Capital censured, fined for unintentionally 'negligent' trading

Monday 3rd September 2018

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First NZ Capital has been publicly censured and fined by NZX regulation over a complex trade of Auckland International Airport shares almost two years after the fact that led to a "disorderly market". 

Stock market operator and supervisor NZX and FNZC reached a settlement over the Dec. 30, 2016 trading on Aug. 28, agreeing that the broking house breached several listing rules by accepting an order with "complex execution instructions" to sell 698,956 Auckland Airport shares, worth $4.6 million at the time, with volume and price restrictions, specific timeframes and limits on how the order could be traded. The shares fell 4.4 percent to $6.25 on the day, which was also the final trading day of the year. 

The broker will pay a $45,000 penalty, plus $18,000 of costs to NZX, as part of the agreement that included public censure. 

FNZC was also trading as principal in Auckland Airport on the day, where a brokerage buys securities for a period of time and then sells them to create profits for their own portfolios through price appreciation, and didn't flag all relevant sales for its facilitation account as short sales. 

The trading was "inconsistent with recent trading in AIA's ordinary shares, impacted the market for AIA's securities with the price of AIA's ordinary shares declining 4.4 percent from receipt of the order to market close on the last trading day of 2016, negatively impacted the year-end valuation of AIA's ordinary shares and was not in accordance with Good Broking Practice given the potential conflict of interest in FNZW (First NZ Capital Securities) also trading as principal," the NZ Markets Disciplinary Tribunal said in its public censure. 

The tribunal's decision said FNZC's trading was unintentionally "negligent" by failing to appreciate the risks of the order, "which led to a disorderly market". Other aggravating factors included FNZC's failure to disclose a conflict of interest to the client over its use of the principal book to facilitate the order, that the transaction affected Auckland Airport's year-end valuation, and that the trades "were not undertaken in an orderly manner". 

Mitigating that, FNZC cooperated with the investigation and provided all information sought by NZX Regulation, NZX advised the broker didn't mean to cause a disorderly market, the firm didn't benefit financially from trading for its client, and that it was an isolated event rather than "conduct which indicated broader systemic issues with FNZW's trading". 

NZX's surveillance team conducted 105 investigations from its own monitoring in 2017, of which 14 were over participant compliance. That year it also inspected 23 market participants, identifying four breaches and making eight good practice recommendations. Trading conduct was a key focus for NZX Regulation, with most investigations typically resulting from minor breaches over crossings and late error cancellations. 


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