First NZ Capital censured, fined after trying to fix up trading error

Wednesday 6th May 2015

First NZ Capital Securities, the research firm and broking house, has been publicly censured and fined $15,000 by the New Zealand Markets Disciplinary Tribunal after trying to fix up a trading error without informing the market operator.

The stock market's disciplinary tribunal found First NZ breached stock market rules by failing to notify NZX immediately of an error that had a market impact, it said in a statement. The broking firm's decision not to inform the stock market operator meant NZX wasn't able to take the appropriate regulatory response, and was aggravated by First NZ's attempts to rectify the problem itself.

"The practice of market participants taking matters into their own hands has the potential to impact on market integrity and bring both the market and NZX into disrepute," the tribunal said in its decision. "The penalty is intended to send a clear message that self correction of errors by market participants is unacceptable."

Policymakers are trying to restore public confidence in capital markets, introducing a raft of legislation in recent years aimed at improving disclosure, making it easier for retail investors to understand offer documents, and beefing up oversight of financial markets and penalties for egregious misconduct.

First NZ's error arose from one of its clients placing an order on July 28, 2014 through the broker's direct market access (DMA) system to sell 8,194 shares in an issuer on the main board at market price, which was stopped by the system's filter to prevent trades that would cause a movement of more than 3 percent in the last traded price. The order was redirected to a trading desk and manually put through by a dealer, resulting in six trades of 4,788 shares being executed at five different price levels and prompting a decline in the share price to $2.70 from $3.13.

The broking house then cancelled the outstanding portion of the order, and subsequently placed four buy orders, one of which was with a pre-existing client for 1,000 shares at $3.15.

On Aug. 1, 2014, First NZ then deleted the three remaining buy orders it had placed leaving them unfulfilled, and subsequently confirmed in later correspondence with NZX that its dealer had clicked through the full order to market by mistake.

NZX submitted the broker breached rules by failing to notify it immediately of the error, and because it failed to ensure its conduct helped promote and maintain an orderly market.

That the error was unintentional and no clients were adversely affected were seen as mitigating factors, though NZX submitted the broker's attempt to remedy the error and similar breaches in 2012 were claimed to be aggravating factors.

First NZ disagreed with the view that the previous breaches were an aggravating factor, but admitted the mistake and accepted the penalty.

The tribunal accepted First NZ's submission that mistakes happen, but said it was concerned the broking firm didn't have adequate systems in place to manage errors appropriately.

"The tribunal also considers FNZ needs to address its systems for dealing with orders that are caught by DMA filters," it said.

BusinessDesk.co.nz

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