NZ RegCo recently reviewed the tools and procedures it uses to identify and to mitigate the risk of disorderly markets. As a result of the review, NZ RegCo will be introducing in Q4 2023, a new tool called the “trade with caution” alert (TWC Alert) to mitigate the potential risks to market integrity and of the development of a disorderly market in certain rare situations such as “meme stock” trading behaviour or where there is a high degree of confidence that trading in securities is subject to ongoing manipulation.  

Background

An important part of NZ RegCo’s work is monitoring trading on NZX’s markets to ensure fair, orderly and transparent trading and to identify indications of breaches of the prohibitions on market manipulation and insider trading. This is performed by NZ RegCo Surveillance.  

NZ RegCo Surveillance has recently seen an increase in share price movements driven by retail investor momentum trading – where investors buy shares simply because they are going up. That creates the potential for a “meme stock” trading scenario, which increases the risks of a disorderly market developing. This scenario also has the potential for significant volatility if share prices revert to prior levels.   

Market manipulation can have the effect of creating or maintaining an artificial price in an issuer’s shares. That means it impacts genuine share price formation.

Trade With Caution Alert

NZ RegCo is implementing the TWC Alert to mitigate the issues of market manipulation in certain rare situations as noted above, that will supplement its existing price enquiry process. Any decision to issue a TWC Alert is a qualitative one at the discretion of NZ RegCo – it is not based on brightline factors.  

There are two key situations where NZ RegCo would consider issuing a TWC Alert:   

• Orderly Markets – if NZ RegCo has concerns about potential disorderly trading in securities. This might arise if NZ RegCo observes trading in a security that appears untethered to movements that could be reasonably expected in an informed market (with trading having elements of “meme stock” behaviour), and NZ RegCo is not satisfied that a previously issued price enquiry is appropriately moderating that trading.
• Market manipulation – if NZ RegCo has a high degree of confidence that trading in securities is subject to ongoing manipulation, whether or not this manipulation has yet had any discernible effect on price, and whether or not NZ RegCo has issued a price enquiry.

A TWC Alert should not be interpreted as implying NZ RegCo has formed an adverse view on the issuer. Nor does a TWC Alert mean that NZ RegCo considers the issuer may not be meeting its continuous disclosure obligations.

Impact of Trade With Caution Alert

NZX Issuers

Issuers are not required and are not expected to provide additional information to NZ RegCo in relation to a TWC Alert. NZ RegCo will however, engage with an issuer before issuing any TWC Alert, and may have previously engaged with that issuer as part of an earlier price enquiry process. 

Investors

One of the purposes of the TWC Alert is to encourage investors to undertake additional diligence with their orders, which may result in an impact on the trading and pricing of the securities.  A TWC Alert issued in relation to an issuer will not impact investors’ or NZX Participants’ ability to trade in the issuer’s securities and will not impact existing orders that have been placed in the securities of an issuer, but which have yet to trade. 

Trade With Caution Alert process 

NZ RegCo anticipates that use of the TWC Alert will be rare. If NZ RegCo decides to issue a TWC Alert, it will be published under the ticker of NZ RegCo and the security for the relevant issuer. TWC Alerts will be published under the category “S/PRICE” and be flagged as both a 3rd party announcement and as “Price Sensitive”. That statement will provide information on the concerns NZ RegCo have on the trading observed and cautioning additional diligence by investors.

If you would like to discuss the new “trade with caution” alert, feel free to reach out to one of our experts.