Story: Stock market
Page 6 – Institutional reform and technological change
The 1987 crash changed practices in the stock market. The Securities Commission tightened company law. From 1988 the exchange enforced new rules to ensure that brokers were fiscally and personally responsible for their performances:
- The minimum capital required for a member firm doubled from $500,000 to $1,000,000.
- The net assets of a firm had to exceed their gross liabilities by 5%.
- New capital adequacy measures were based on the level of a firm’s business, not on its fixed assets.
- The system of regional inspectors was replaced by accountants Deloitte Haskins & Sells, who demanded monthly reports from broking firms and had the power to exact fines.
Efficiency and centralisation
The stock exchange also persuaded the government to abandon the stamp duty (tax) on share transfers, which had been in place since 1903. To broaden its range of professional expertise, it appointed outsiders to its board for the very first time. In June 1988 the final stage of a new stock-trading computer system was activated. The new technology was a godsend. Within months, the chaos had gone and transactions were completed within 15 days.
With the computer system in place, smaller floors became redundant. Dunedin’s trading floor closed in 1988, and only four brokers remained on the Christchurch floor. By mid-1988 national daily trading turnover was down 75% on pre-crash figures.
Leading the world?
In the year after the 1987 crash the New Zealand market’s performance was the worst in the world. While the market in New Zealand was 50% below its peak, the Sydney market was 32.7% down, the New York market 21.6% down, and Tokyo only 3.6% down. Shares in Judge Corporation was trading at 6 cents, compared with $9.20 at its height, and Brierleys had dropped almost $4 to $1.35.
In 1989 the system of entry into the exchange changed. The secret election, where family connection and personal wealth were key criteria, was replaced by entry based solely on qualifications and experience. In March that year the exchange changed its corporate structure, with the two-tier executive and council structure disappearing, and a board of directors assuming responsibility for the exchange’s direction and control. Bill Foster became the exchange’s first managing director.
The three regional exchanges were finally merged in 1989. The trading floors were still managed locally, but within a national structure from Wellington’s head office.
Cleaning up the market
In 1988 the government passed the Securities Amendment Act, which allowed for civil action against insider trading and required that major shareholders declare their interests of 5% or more in any listed company. In 1989 the exchange board established a Market Surveillance Panel to gather more comprehensive information from listed companies and help clean up the market’s tarnished image.
The exchange instituted a new takeover code in 1994. It included controls for shareholding protection, tighter disclosure requirements and stronger provisions for company acquisition. However, it was less regulatory than overseas codes and many believed it did not offer enough protection for minority shareholders.
In June 1991 trading floors closed forever as the exchange moved to screen trading (trading via computer). It adapted an Australian-developed system to local conditions. The new system proved quicker and more competitive internationally. Some broking firms installed large screens in their offices linked to the exchange computer system, so investors could track individual stock movements.
Soon after 3 p.m. on Friday 21 June 1991, the three trading floors of the stock exchange stopped operating as screen trading took over. On the Wellington floor the clock was stopped permanently at 3.11 p.m. A bugler played the ‘Last post’ and members drank champagne. In Auckland members sang ‘For they are jolly good fellows’ for the six chalkies who were now out of a job. The previous evening company names from the board had been auctioned for charity.
The exchange introduced an NZSE-40 (the top 40 companies by market capitalisation and liquidity) and NZSE-30 (the 30 stocks with the largest float capital) to accurately measure the market’s performance. From 1992 there was an electronic registration system that enabled the electronic transfer of share ownership. By 1993 it had reduced maximum settlement times to eight days, and the average to 2.9 days, among the fastest in the world.
A new culture
The effect of the crash was the emergence of a new business culture. Investors and the exchange hardened their expectations of New Zealand companies. In 2009 the exchange kept close tabs on business behaviour through its capital adequacy rules and market surveillance; so did the Securities Commission and the Serious Fraud Office. A revamped Companies Act stiffened the requirement for directors in public companies.