Richard Inder: Double whammy hits NZX's plans

It is no wonder NZX boss Mark Weldon is looking tired. The former Olympic swimmer this week was hit by two setbacks that only frustrate his ambitions to grow the sharemarket.

On Monday, the exchange was out of action for two hours as a computer that protected the exchange's network from hackers failed.

Mistakes happen, but Monday's failure was the fifth time technology problems had halted trading in the past 12 months. Over two years, the record looks much worse and the reliability of the exchange is now in question.

The outcry on the day was muted only because Australian markets were closed for a holiday. Nevertheless, the frustration from the nation's trading floors was palpable.

NZX did its best to suggest that reliability was not a problem.

But that claim does not stand up well in comparison to the granddaddy of all markets, the New York Stock Exchange.

In the past 12 months, it has been out of action only once, on June 1, four minutes before the regular close of trading.

The market reopened the following day at the usual time.

Before this, the last time trading closed was on June 8, 2001, and, in the previous decade, the NYSE was closed for a total of only two hours.

The Australian Stock Exchange has a similarly strong record. During the past 12 months, trading ceased for a total of only five minutes in October 2004.

These exchanges maintain such a record despite dealing in far greater volumes of traffic and variety of securities than the local exchange.

NZX laid the blame at the feet of its service provider, Telecom.

But such buck-passing misses the point. It is in charge of the market and reliability and a fail-safe system is a fundamental building block of confidence in the market. Its reliability is well short of the best.

The second setback came the next day when venture capital firm CVC Asia Pacific launched its $159 million takeover bid for Pizza Hut to KFC chain Restaurant Brands. The bid looks as if it will succeed, depriving NZX of another major company (other potential bidders are at least showing an interest in the company and CVC's $1.65 a share offer is pitched above the $1.28 prevailing before the bid. Meanwhile, the company has never been well liked by investors, trading below its $2.20 float price for a considerable period of time since listing).

If Restaurant Brands does fall from the market, it will follow a raft of others including Westpac's New Zealand quote, former publisher INL, plastics group Vertex, transport firms Owens and Tranz Rail, property companies Urbus, and potentially Capital Properties, energy companies Powerco and potentially NGC and meat company Richmond. Others more than likely to follow in the long term include Ports of Auckland and wood processor Tenon.

Turnover is part of a healthy market, but what must be a concern to Weldon and the New Zealand financial market is the fact that the companies replacing these departures are largely not of the same quality.

The exceptions to this have been carpet-maker Feltex - which after a profit warning has only knocked investor confidence - and electricity lines company Vector, which must float by the end of this year.

Unfortunately for Weldon, there is more gloom on the horizon as the liquidators of the failed Access Brokerage could soon take the exchange to task over whether it could have done more to prevent the collapse.

Weldon can look forward to the changes in the Budget. From 2007, the removal of capital gains tax on managed funds should inject as much as $100 million a year more into the local stock market.

Meanwhile, planned changes to foreign investment rules also tilt the playing field in favour of investment at home.

Of the top largest companies in New Zealand, a majority are service companies and several are ex-public sector - Telecom, Contact, Auckland International Airport and Tower.

And with the exception of Fletcher Building and Carter Holt Harvey, any others that have pretensions at underpinning the New Zealand market - as General Electric, Microsoft and Boeing underpin the US - have been sold off before they reached their full potential. GPS maker Navman is the latest example.

This is not Weldon's fault and, setting aside the reliability of the exchange, he has done much to ensure that the mechanism exists to ensure such growth does occur. He now needs the rest of New Zealand to play ball.