This article originally appeared in the NZ Herald.
The World Federation of Exchanges (WFE), which was established in 1961 and is based in London, is the industry association for global stock exchanges and clearing houses.
Its members had 44,048 companies listed on their exchanges at the end of 2017 with a total market capitalisation of nearly US$70 trillion ($99 trillion).
WFE publishes a huge range of statistics, including a yearly guide. Its recently released Annual Statistics Guide 2017 allows us to compare the performance of the NZX with other exchanges.
At the end of 2017, the NZX was the 41st largest global stock exchange, out of 57, according to WFE figures. This was a two-position decline from its 39th position at the end of 2016.
The NZX now represents 0.11 per cent of total global market values compared with 0.12 per cent at the end of 2016. Its share of Asia-Pacific stock exchanges, which are the fastest growing markets, has declined from 0.35 per cent in December 2014 to 0.30 per cent three years later.
The NZX had 178 listed companies at the end of 2017 compared with 189 at the end of the previous year and 191 in December 2015.
Over this two-year period the number of NZX-listed companies has declined by 6.8 per cent while the total number of listed global companies increased by 1.8 per cent.
Asia-Pacific listings expanded by 6.1 per cent, from 25,401 to 26,961, between December 2015 and December 2017 while ASX listings grew by 1.9 per cent over the same period.
The NZX has a huge problem attracting new listings, with only one last year and 10 in 2016.
The ASX had 233 new listings over the same two-year period while Asian markets, excluding Australia and New Zealand, attracted 2136 new listings.
The NZX has one of the worst records in terms of the value of delisted companies compared with the value of newly listed companies.
In 2016 and 2017, the NZX lost $6.4 billion worth of companies while gaining only $2.8b through new listings, a ratio of $2.30 lost for every $1.00 gained.
The 2018 year could also be disappointing for the NZX as there seem to be far more mergers and acquisitions than IPOs under consideration at present.
Share trading activity
WFE divides share trading activity into three distinct groups:
1. Electronic order book (EOB) trades: These represent trades through an exchange’s electronic trading system where all buy and sell instructions are exposed to market users.
2. Negotiated deals: These are broker-driven, off-market transactions where the buyer and seller agree on price and volume without the bids or offers being exposed to all participants through the electronic market.
3. Reported trades: These are trades reported through a trade reporting facility where only one counterparty provides information on the trade.
The NZX’s biggest problem is the huge amount of share trading, in value terms, that occurs off-market through broker negotiated deals.
Source: Herald graphic.
As the accompanying table demonstrates, between 57.6 per cent and 64.2 per cent of trades by value were off-market in the 2014-2017 period, compared with only 32.2 per cent to 37.8 per cent through the electronic market.
This is completely out of line with the rest of the world as 71.6 per cent of total WFE monitored trades went through EOBs in 2017, 96.2 per cent of Asia-Pacific trades and 87.9 per cent of ASX trades by market value.
The NZX is effectively controlled by a small number of brokers negotiating large off-market trades for their preferred clients. The exchange lacks transparency because these off-market buy and sell offers are not disclosed, or made available, to all market participants.
The focus on off-market trading means that the value per trade on the NZX was $10,950 in 2017 compared with only A$4470 on the ASX (see right-hand columns in accompanying table).
These value per trade figures indicate that there is a far wider retail investor participation in the ASX than the NZX.
The volume trade figures tell a similar story. According to WFE data there were 117,800 negotiated trades on the NZX in 2017 compared with only 105,400 on the ASX.
Meanwhile, there were just 1.9 million electronic trades on the NZX compared with a massive 274.5 million electronic trades on the Australian exchange over the same 12-month period.
While NZ brokers have focused on big block trades for institutional investors, the ASX has encouraged widespread retail participation. This is a major reason why many NZ companies prefer to list on the ASX, rather than the NZX, because successful IPOs are dependent on individual investor involvement.
WEF measures turnover velocity as the ratio of electronic trades by value to the market capitalisation of listed domestic companies.
WFE uses EOB turnover only because it considers these trades represent the true activity of a stock exchange.
Not surprisingly, the NZX has a turnover velocity of just 13.3 per cent compared with the ASX’s 57.0 per cent and 74.2 per cent, on average, for all Asia-Pacific markets.
Tokyo had a turnover velocity of 103.9 per cent in 2017, Korea 121.9 per cent, Hong Kong 49.2 per cent and the two Chinese exchanges, Shanghai and Shenzhen, 161.6 per cent and 264.5 per cent respectively.
These are dealers, brokers, broker-dealers, and individuals acting as principals who trade on an exchange through direct access to the trading system. Clearing and settlement members are not included.
WFE statistics show that the NZX has only eight equity trading participants, the lowest of any market on the WFE database except the Palestine Exchange.
The latter also has eight trading participants. By comparison, the ASX has 121 equity trading participants and most exchanges smaller than the NZX have more trading participants than our sharemarket.
The NZX is paying a huge price for its poor leadership and governance in the 1980s, 1990s and early 2000s. This was when the exchange had a light-handed regulatory regime and allowed brokers to do almost as they wished.
This regime led to a concentration of off-market trading which reduced the integrity and transparency of the domestic market, while discouraging individual participation.
Meanwhile, the NZX was a lucrative playground for the rich and powerful, particularly before the establishment of takeover rules in the early 2000s.
The introduction of a takeovers code was a great opportunity for the exchange, and its brokers, to change tack and place more emphasis on attracting retail investors.
However, most of the exchange’s leadership were opposed to the code and didn’t want to change their self-centred ways.
The predominance of off-market trading has led to a reduction in trading participants, which has cut the number of brokers promoting new listings.
There are also fewer brokers to service individual investors and this has had a negative impact on individual participation in the market.
Xero’s delisting was partly due to the unwillingness of many large offshore investors to trade through the NZX because they don’t trust off-market trading.
They believe, quite rightly, that the dominance of these negotiated trades on the NZX creates inherent integrity and transparency issues.
The current NZX leadership is trying to reverse 40 years of poor governance but it is moving far too slowly.
There has been an increase in electronic trading in recent years but it still represents only 37.8 per cent of total trades by value.
The NZX needs to move far faster if it wants to play an important role in the country’s capital markets in the years ahead.