NZX Consultation: Trading Halts

NZX is reviewing its practice of seeking to identify whether information may be price sensitive prior to release and flagging this information to the market and applying short trading halts following the release of such announcements (“Administrative Trading Halts”).

As a result, NZX has published a consultation paper and requesting comments on the alternative approaches it has identified – for a change of NZX’s practice in this area. Submissions requested by 25 September 2015.

Background

The trigger for imposing Administrative Trading Halts is an assessment by NZX that an announcement, submitted for release during market open hours, may contain price sensitive information. The purpose of marking an announcement price sensitive is to draw the market’s attention to the announcement. A trading halt allows time for the market to consider the information before trading re-commences – so that the market can re-price the security in an orderly manner.

The continuous disclosure obligations of listed issuers seek to ensure that all material information in relation to quoted securities is released to market in a timely manner. This allows trading in an issuer’s securities to occur on a continuous basis. The limited interruptions to trading which are permitted under NZX’s rules are effected via the use of trading halts, including Administrative Trading Halts.

NZX’s current practice

NZX is responsible for processing and releasing announcements over the Market Announcement Platform (“MAP”). When an announcement is received for release, NZX will conduct a high level assessment on whether information contained in the announcement may be price sensitive to that issuer’s securities. NZX also encourage issuers to advise whether an announcement may contain price sensitive information on submission of the announcement within MAP.

Taking account of any such advice, NZX makes a subjective assessment based on the available information and if it is determined that an announcement may be price sensitive, it will be released to the market – and a short trading halt will be immediately applied to the issuer’s quoted securities.

While a trading halt is in place, the trading status of the relevant securities will be identified as halted. An Administrative Trading Halt generally lasts for 15 minutes (longer in the case of an Overseas Listed Issuer or a Dual Listed Issuer).

Provided certain grounds are met, the Listing Rules allow NZX to apply trading halts either following a request by an issuer or unilaterally.

Noting these grounds, NZX must be comfortable that the use of Administrative Trading Halts is “in the best interests of the market”.

Options for reform

Having identified a number of practical constraints with its current practice which may prevent Administrative Trading Halts from achieving their intended purpose, NZ X has identified four options for reform, namely:

1. Cease entirely the current practice of seeking to identify (and flag to market) information which may be price sensitive and applying Administrative Trading Halts;

2. Continue the practice but make these assessments based on a prescribed list of announcements (such as financial results, changes to key personnel or material transactions);

3. Continue the practice but require issuers to determine price sensitivity; or

4. A combination of 2 and 3 above.

Comments

NZX’s concerns about its current practice include the need for it to review (on average) 50 announcements per day in order to form a view. Amongst other things, this leads NZX to take a conservative approach. It may also cause the market to be unduly reliant on NZX.

On an initial review of the NZX consultation paper, I would suggest that NZX needs to retain the power to make the assessment – but arm issuers with more guidance to enable them to flag price sensitive information. As a result, using Option 2 as an example, reference to a pre-determined list would be likely to result in more consistency in applying an Administrative Trading Halt – without being too rigid so as to rule out the possibility that some other announcements may be sufficiently material as to be price-sensitive.

The difficulty with any approach that is reliant on the issuer (rather than NZX) forming an assessment is that the issuer (or rather a majority of issuers) are likely to take a conservative approach – and the risk of a mismatch with the statistical outliers creating a lumpy/inconsistent practice.

The NZX Discussion paper also highlights the need for NZX to retain the right to decide – because not all announcements relevant to a particular security are released by the issuer itself and some (for example substantial product holder announcements) are released by third parties and cannot be controlled by placing the obligation solely on the issuer.

It is also interesting to note that the discussion paper refers to NZX’s expectation that obviously price-sensitive information, such as results announcements, would be released outside of trading hours – thereby verbalising the informal guidance that has been provide by various NZX staff over a period of years.

Finally, any change to NZX practice needs to consider issues of harmonisation with Australia. This is obvious in the case of dual-listed issuers, where it would create an obvious difficulty if a different view was taken by each exchange in relation to price sensitivity because trading will be able to continue on one exchange but not the other. However, it would be better if NZX followed (or at least did not depart from) practice on its much larger neighbour – rather than seek to create a localised practice.

Further information

If you would like more information about any of the matters discussed in this note, please contact me.