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Investors struggle to buy/sell shares on the NZX as the exchange can't cope with high trading volumes; EY brought in to do a review

Investors struggle to buy/sell shares on the NZX as the exchange can't cope with high trading volumes; EY brought in to do a review

The NZX’s board has appointed EY to review its systems, which are crashing under the pressure of a four-fold trading volume jump since the start of 2020.

Outages have been occurring over the past six days.

Consequently, investors are experiencing potentially costly delays buying/selling shares and the issue is proving to be an administrative nightmare for brokers.

The root cause is an overloading of the NZX’s clearing and settlement system, which in the NZX’s words, “acts as a gateway to report trade notifications and undertake shareholder balance enquiries for certain market participants”.

So the hold-up is occurring at the point the broker tells the market their client wants to buy or sell shares.

For example, if an investor tells their broker at say 10am that they would like to buy shares in Company X, because the share price has slumped to say $1, but the market only receives that message at 4pm, by which time those shares are now worth $1.30, then the investor potentially misses out.

Because different brokers use different methods to connect to the NZX’s system, only some are experiencing problems.

NZX CEO Mark Peterson told interest.co.nz generally those who connect over the phone or through “electronic execution” are fine.

He wouldn’t put a figure on the value of trades that have been delayed due to problems with the system.

He said technically speaking no trades have been “delayed” as orders are being processed as soon as the NZX finally receives and matches them. But from an investor's perspective, there is a hold-up, from the time they make an order with their broker to the time it's executed.

By way of background, the value of trades that had been made on the NZX from market opening until 3.30pm on Wednesday was $112 million. 

ASB Securities - one of New Zealand’s most popular online brokerage services for retail investors, which also services some institutional investor - is among those affected.

Its acting general manager, Gareth Stratton, wouldn’t put a figure on the value of trades implicated by system outages either.

He accepted the EY review would likely also highlight shortcomings in ASB Securities’ systems.

He said the issue was particularly bad on Monday.

“You had a culmination of a very very busy trading day and a system that had some lags in it. It’s the perfect storm, isn’t it?”

Leighton Roberts - the co-founder of Sharesies, a relatively new online platform that provides brokerage services for retail investors - said: "There is a small disruption to our clearing processes, but manageable so far.

"We have built our system more or less from scratch, so we don't have the legacy problems many others have."

Following a board meeting last night, the NZX's board and management agreed to:

  • Appoint EY to conduct an independent external review of the issues and NZX’s proposed remediation actions. EY will interview participants and vendor suppliers as a part of the review;
  • Establish an internal Board Technology Committee, chaired by NZX Director, John McMahon, to ensure all possible solutions are canvassed and ensure market participants and regulators are involved appropriately;
  • Review a range of hardware upgrade solutions to increase processing throughput;
  • Work with the clearing system vendors to split certain functionality into different processing streams to improve throughput; and
  • Engage with software suppliers to market participants to optimise interoperability with NZX’s system and the registries and consider all other options to reduce system stress.

The Financial Markets Authority said: “We have been briefed by the NZX on the issue. We understand that rectifying the issue is the highest priority and the NZX Board is looking at any additional processes or governance necessary to ensure it is fully mitigated and not repeated.

“We are satisfied with this approach and will remain informed by the NZX, as they progress the resolution of these matters.

“We note that the NZX issues are being driven by unprecedented trading volumes (more than three times the normal average) and are similar to issues that have been experienced in other markets, most notably Australia.”

Here's a copy of an announcement the NZX made to the market on Wednesday morning: 

NZX has experienced several technical issues in the last six trading days. The root cause of these issues appears to stem from a significant increase in trading volumes – up around four-fold since early 2020 – along with an associated increase in trade messaging within the market ecosystem’s IT infrastructure.

The incidents primarily involve NZX’s clearing and settlement system, which has come under significant pressure as it also acts as the gateway to report trade notifications and undertake shareholder balance enquiries for certain market participants.

NZX takes its responsibilities as market operator extremely seriously. The issues have resulted in considerable strain on the operations and technology teams of NZX participants, and flowed through to their customers at a time when there is a huge amount of interest – and unprecedented demand – in the New Zealand share market.

Chief Executive, Mark Peterson, said: “We appreciate how frustrating this is for participants and their clients. We deeply regret the disruption these issues have caused and solving them is our number one priority”.

Following a Board Meeting last night NZX Chair, James Miller, said Management and Board committed to the following actions:

  • Appointment of EY to conduct an independent external review of the issues and NZX’s proposed remediation actions, and report to the NZX Board. In undertaking this review, EY will be independently interviewing participants and vendor suppliers;
  • Established an internal Board Technology Committee, chaired by NZX Director, John McMahon, to ensure all possible solutions are canvassed and ensure market participants and regulators are involved appropriately;
  • Reviewing a range of hardware upgrade solutions to increase processing throughput;
  • Working with the clearing system vendors to split certain functionality into different processing streams to improve throughput; and
  • Engaging with software suppliers to market participants to optimise interoperability with NZX’s system and the registries and consider all other options to reduce system stress.

Mr Peterson said NZX has had a Trading System Upgrade project underway since 2019. As a result of COVID-19 delays, and subject to COVID-19 developments and market feedback, this is now expected to go live later in 2020 and will include the shifting of non-settlement functionality off the clearing and settlement system and onto the upgraded trading platform.

These architectural changes are expected to provide sufficient capacity for significant further trading volume growth.
Since the outbreak of COVID-19, trading volume activity in the market is the highest NZX has ever seen.

John McMahon noted that NZX has appreciated the support and understanding, particularly from participants over the past week, and will continue to clearly set and communicate expectations to keep key stakeholders informed on progress with addressing these issues.

James Miller noted that NZX’s Board is fully committed to working co-operatively with NZX’s various technology partners and all industry participants to ensure these issues are resolved in as timely a manner as possible.

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27 Comments

"For example, if an investor tells their broker at say 10am that they would like to buy shares".

Good lord, does this still happen ? Explains why brokerage in NZ is still at eye wateringly high levels.

Perhaps EY could also ask Interactive Brokers to add NZ to their platform.

What Walter and Maureen can't see can't hurt them

Could have told their broker via electronic platform, not by phone, delay still happened if you were with Asb. Asb phone line clogged as well so left for hours not knowing what the hell is going on on Monday. Eye watering brokerage in Nz is due to lack of scale.

Its just not on , this is a tiny market and they have seen trading volumes up since way before Covid , so they should have used a better platform that can cope with bigger volumes such as the ASX system.

I would not be surprised if the ASX buy the NZX out in due course , the NZX is itself a listed entity , listed on its own market

Slightly surprised there are that many buyers to be honest. I think there are a whole bunch of inexperienced investors that are going to get their fingers burnt shortly.

Then again there could be very experienced investors doing what they do best.
Gotta be buyers and sellers.

On reddit and FB finance groups, i've never seen to many n00bs asking for recommendations on how best to buy shares and on which platform.

What are these 'shares' of which you speak? Asking for a friend....

I do wonder if people are pumping the market currently to dump before things really get bad.

Wonder not my friend, that's exactly what's happening...

At these levels (look at a ten year graph of the NZX50) I think "investors" who by definition have a longer-term view would understand the risk of greater pullbacks to come and be happy to wait. So that leaves the inexperienced and the day-traders/scalpers to swim in the high volatility.

I heard it was the Sharesies fractional shares and small amounts that helped tip the Nzx system over.

Or people who want to get their cash out of the banks but don't want it under the mattress?

Wow, this is shockingly bad. Forget the buyer-phones-broker, and even retail-investor-clicks mouse, it should be able to handle a significant level of high-frequency automated trading these days - not that we want that. Is this the early 1990s?

Yes this has actually been an issue for several weeks now, I was disappointed in the latency of my NZX feed during the big wipeouts a few weeks back, it made for epic viewing even if I had to refresh screen every 10 seconds to keep up with the pace of the action!

Could exchanges be decentralised to avoid this issue? In effect it doesn't matter who plays market maker as long as they are all operating with the same lack of integrity.

blockchain it I reckon...

Certainly the exchange is outdated. Even the ASX is outdated. The alternative is already there, in place, up and running. The NSX, is the digital equivalent, and while it has a small market cap at present, it is growing. Unfortunately, it's the younger investors that have higher expectations of exchange processes, as older generation generally do not understand blockchain, or digitization. However, the NSX, (traded on the ASX, ironically enough) will allow 24 hr instant trading, lower fees, etc etc. Basically linking company directly to shareholders, making dividend payments easy, along with a whole host of other benefits.

Thanks, I'll look into that. Sounds like the future.

Interesting that NZX 50 is up 4% year on year

Woolworths , owners of Countdown , are shooting the lights out , their share price is just shy of its all time record

Does the NZX allow high frequency trading?

I would buy Z energy if it got to $2,50 , at that price its a bargain , likely less than break-up value .

And , even though its suspended it dividends , I have just realized that New Zealand's fuel market is 100% unaffected by what the rest of the world 's oil sector is doing .

Somehow our oil companies are magically able to keep the price of petrol ( which I dont use ) at $2.00 per litre , when the rest of the world is paying you to take it away .

We are real suckers .............

Oh no we make our margin on pies and cigarettes! Btw just as the lockdown happened I heard OMV have had something of a major find in their oil exploration efforts offshore of Taranaki, not sure what plans are at present but theres oil to be pumped if we want it...

where oh where in the world is anyone paying anyone to take petrol off their hands?

A litre of petrol and an oil futures contract are two very different things

The oil price is but a small input in retail petrol prices.

The traders are making a killing at the moment.....there is an observable pattern where they are all acting as one: the the index is pushed up in late morning to mid-afternoon trade, and then sold off. Sometimes it moves up for two or three days and then sold off.
I'm not going to be buying or selling anytime soon. The traders will soon weary of this game if no-one else joins in.

LMAO - Does the NZX allow high frequency trading?

Days to the General Election: 23
See Party Policies here. Party Lists here.