Online alternative to AX flourishes

By Michael Coote

Friday 5th March 2004

Launched with small fanfare here last year, internet-based Unlisted has helped usher in electronic trading platforms seen overseas as a big threat to conventional stock exchanges because buyers and sellers can transact at a fraction of the cost.

Electronic trading networks (ETNs), also known as electronic communication networks (ECNs) and alternative trading systems (ATSs), are all the rage in the US, where they are seen as the leading competitive threat to stock exchanges.

These electronic platforms are cheaper and they also require far fewer compliance burdens than stock exchanges impose.

Microsoft has been a big sponsor of ETNs in the US and announced their advent with pride back in 1999.

Microsoft's early ETN clients included Archipelago Services LLC, Ashton Technology Group, CyBerCorp, LIMITrader Securities, NexTrade ECN and OptiMark Technologies.

The 2000-2003 bear market in equities was most probably not a great help to Microsoft's pioneering band.

But a market opportunity is likely to remain open to provide a point of intersection between issuers aiming to avoid full stock exchange costs and compliance and traders wanting to cut out unnecessary fees.

Indeed, there is no contradiction in a security being both listed on a stock exchange and traded on an ETN, so exchanges could not only lose the opportunity to list new securities but could also see leakage in the volumes of trades in securities they have already listed. Consequently ETNs are not much beloved by exchanges.

At its website www.unlisted.co.nz, the local ETN is careful to state that "Unlisted is a trading facility, not a registered stock exchange under the Securities Markets Act 1988." It refers traders to its approved list of brokers, who are also NZX brokers: ABN Amro Craigs, Direct Broking, Esam Cushing and Greenslades Stockbroking.

The restructured New Zealand Rural Property Trust announced recently that it had cancelled its NZX second board listing and would trade its securities on Unlisted. It has 3100 unitholders and assets of $104 million.

Other companies traded on Unlisted include Bridgecorp, Skyline Enterprises, Blue Sky Meats, Waipara Hills Wine Estates, INTAZ and Rangitira. Bridgecorp will be remembered as having been denied a stock exchange listing.

For issuers, Unlisted promotes various advantages, not least that "Unlisted is a trading facility that is not a registered stock exchange under the Securities Markets Act. Investors in companies quoted on Unlisted are not protected by the Securities Market Act's protections relating to insider trading, continuous disclosure, Directors' and officers' relevant interest disclosure or Substantial security holder disclosure. The Takeovers Code does not apply unless the company has 50 or more shareholders or $20 million or more of assets, and the usual regulatory assurances associated with a registered exchange and Securities Commission enforcement of them are not available."

All a bit of a far cry from the NZX, which made a big fuss about high compliance standards being necessary as it hung out its "under new management" sign. Such a pitch might have reassured some investors but would not necessarily have gladdened the hearts of issuers or traders.

The NZX's AX board was supposed to be the lower-cost, lower-compliance entry into listing for smaller companies but Unlisted makes it plain that it possesses an alternative to that market that lacks even AX constraints.

The company that owns Unlisted is Efficient Market Services, a joint venture between M-co (The Marketplace Company Group) and others described as "successful individuals from New Zealand's finance sector."

M-co is an interesting partner. It runs the electronic wholesale electricity trading market, as well as being active in the same field in Australia, Singapore, Taiwan, and South Africa. Its parent is South Africa's FirstRand Banking Group.

There should be pockets deep enough to ensure that Unlisted gives the AX a run for its money.

There will be hitches along the way. Liquidity, for example, may be slow to build up on the ETN, and other facilities such as settlement will remain slow and paper-based for now. Reputational risk will be an issue, given Unlisted's securities are not constrained by what are seen as standard investor protections.

One assumes, however, that M-co has not signed its name on the dotted line only to see Unlisted go the way of the Wild West that the newly reformed stock exchange campaigned so vocally against when it set itself up as a paragon of investment virtue.

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