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.