Market cleanliness summer scholarship study published

24 May 2018

The Financial Markets Authority (FMA) and NZX Regulation (NZXR) today published a study carried out by Victoria University student Anna Hensen, ‘New Zealand Equity Market Cleanliness for the years 2010-2016’.

The research was carried out as part of the Victoria University Wellington Summer research scholarship and was jointly supported by the FMA and NZXR. The views are those of the author, rather than the FMA or NZXR.

The study assesses the cleanliness of New Zealand’s equity markets based on the prevalence of abnormal price movements ahead of material announcements. This is an established measure of equity market cleanliness.  The market cleanliness statistic (MCS) is indicative of the level of insider trading in a market, but is not a direct measure of the level of insider trading.  This is the first study to examine MCS in the New Zealand equity market.

The results of the study show the MCS for New Zealand for the period from 2010 to 2016 was similar to the Australian MCS.  The report notes that there is an apparent decrease in the New Zealand statistic after 2013, but it is not big enough to qualify as significant.

The report notes that the New Zealand MCS was more variable than the Australian MCS over the period assessed, which is likely due to the smaller sample size.

The report notes that enforcement of insider trading regulations, rather than the existence of insider trading regulations, is likely to cause the level of insider trading to decrease. The first prosecution for insider trading in New Zealand occurred in 2017.

Garth Stanish
Garth Stanish

FMA’s Director of Capital Markets, Garth Stanish, said “Ms Hensen’s report provides useful insight into New Zealand market integrity. Insider trading, market manipulation and other unethical trading activity erodes investor confidence at a fundamental level.  The negative effects of unethical trading ripple out far beyond the immediate consequences of the particular questionable trade.

“We actively work with NZX Regulation to identify and investigate anomalous trading behaviour.  Where we find examples of potential insider trading we will take action and use our enforcement powers to uphold the law.”

NZX’s Head of Market Supervision, Joost van Amelsfort, noted “NZX is committed to supporting vibrant and efficient capital markets activity, including through its frontline market surveillance role. We continue to explore resource and infrastructure enhancements that will further facilitate that work, in collaboration with the FMA.”