Market stunned by NZX flip-flop

Photo / Kenny Rodger

Sharemarket operator NZX has been caught out operating a two-speed information regime that favours institutional investors over mums and dads as it botched a decision over whether Allied Farmers should be promoted to the NZX-50.

In a series of events that had market watchers reeling, NZX on Monday advised institutional investors who subscribe to its pay-per-view NZX Index Memo service that Allied Farmers would be promoted to the NZX-50 and related indices effective from February 22.

Allied's promotion had been widely anticipated given its equity-for-debt transaction with Hanover Finance had the effect of boosting its market capitalisation.

Although clearly price-sensitive, the news about Allied Farmers' promotion was not released to the wider market.

This week Allied Farmers shares rose sharply, with market watchers party to the information putting this down to index-tracking funds buying Allied shares in order to bring their portfolios into line with the rejigged index.

However NZX yesterday sent another Index Memo informing subscribers that there would, in fact, be no change to the index, effectively reversing its decision to promote Allied.

Allied Farmers shares quickly fell in response prompting the company to issue its own statement to the market.

Allied confirmed it had received an email from NZX on Monday notifying it of its imminent promotion and that it understood a number of institutions had bought its shares and boosted its price based on the Index Memo.

It also confirmed it had received a further NZX email early yesterday informing it of the reversal of the decision.

"This has seen Allied Farmers shares fall by over 10 per cent," Allied said.

"Allied Farmers Limited has requested an explanation of this reversal from NZX. From our advice and our own modelling we are at a loss to see why Allied Farmers shares on all known criteria should not be in the index immediately. By our modelling Allied Farmers Shares would have easily entered the NZX-50. Allied Farmers Limited has requested an explanation of this reversal from NZX."

The NZX yesterday issued a statement explaining why Allied Farmers had not been promoted to the NZX-50.

"Whilst on a six-month calculation Allied Farmers would meet the criteria, the significance of the Hanover acquisition has distorted the six-month ranking. A decision has been taken not to include Allied in the NZX 50 at this time," NZX said.

"NZX ... will evaluate this position after a further appropriate trading period has elapsed."

Market commentator Arthur Lim said the information on the index that was only made available to the subscribers of the Index Memo was clearly "very price sensitive information that is only accessible to a few".

Since its recapitalisation Allied Farmers' share register has been overwhelmingly dominated by "mum and dad" former Hanover debenture investors.

"They've got no idea," said Lim.

The incident is a poor look for NZX. Chief executive Mark Weldon sat on the Capital Market Development Taskforce whose recommendations aimed at improving retail investor confidence in the sharemarket were this week picked up by the Government.

The Herald on Thursday sought confirmation from NZX that Allied Farmers had been promoted to the NZX-50.

Yesterday the Herald also sought comment from the market operator on its subsequent reversal of the decision and its apparent withholding of price-sensitive information from the wider market. NZX had not returned our calls by deadline.

Allied Farmers shares closed 1.4c lower at 11c yesterday.