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NZX considers minimum size for off-market trading

Tuesday 10th April 2018

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NZX is seeking feedback on a proposal to set a minimum threshold for off-market trading in an effort to improve price disclosure and stoke liquidity on the stock market. 


The Wellington-based company is considering introducing a $50,000 threshold for investors to trade stocks outside the formal secondary market, which it estimates accounts for 5-to-7 percent of off-market trading, in an effort to drive more activity on-market. Off-market trading has been the subject of controversy and criticism and looms as an issue ahead of NZX's annual meeting, in Christchurch, on Friday.


NZX today released a paper seeking feedback on several proposals as part of a new strategy focused on reviving interest and activity on the local stock market, and has already announced plans to change its pricing to encourage greater values to be cleared. 


"Introducing a minimum cross threshold will result in a portion of these trades moving on-market," the paper said. "This will support the current positive trend in this area, particularly when coupled with the proposed trade pricing changes."


NZX has put improved liquidity at the centre of its new strategy and wants more trading done through the stock exchange rather than outside the market. On-market trading has improved over the past decade, with almost 51 percent of the average value traded on-market in the year ended March 31, up from an average of 23 percent in 2008. 


"Local and global market stakeholders have offered consistent feedback on the perceived quality of the market as a result of the lack of price transparency due to the number and overall value of trades performed off-market," the paper said. "We understand that there are competing considerations when considering amendments to the current secondary market trading rules, but the price discovery process and the health of the market as a whole must be a priority." 


The consultation paper notes international investors have become more active in the local market, although retail shareholders have tended to shift into managed funds, meaning the increased volumes have been driven by institutional investors placing large orders. Increased passive fund trading has also contributed to the "slight disconnect between increasing volumes and the perceptions of some participants around decreasing market quality." 


NZX said the off-market trading threshold is lower than in Australia, recognising the fact that New Zealand's market is less liquid than the ASX and harder to trade on screen, with some stocks on the benchmark S&P/NZX 50 index lacking "significant institutional participation." 


The stock market operator is also considering whether additional measures are needed for off-market crossings with uninformed client orders, such as when a retail client doesn't get current price information from the broker before placing the order. 


"The concern is there is a potential risk for a mismatch of information between these parties in these situations; this risk requires active management," it said. 


NZX also wants feedback on amending the rules for when a broker can delay bringing an order to market, and has been asked to reinstate reporting requirements of international crossings. 


Submissions close on May 11, with any changes to be introduced in the third quarter of this year. 


NZX shares last traded at $1.08 and have slipped 3.6 percent so far this year. 



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