Trading volumes have plunged in the last two years, putting many brokers out of business
Trading volumes are a fraction of what they were just two years ago, and broker-dealers are closing up shop for lack of business. But a merger of the three stock exchanges of the United Arab Emirates (UAE), a move that could solve many of these woes in one stroke, remains entangled in politics and technical problems.
While stock market trading across the Middle East has dropped off sharply with the onset of the global financial crisis, figures from the Arab Monetary Fund (AMF) released Thursday show that two of the UAE’s bourses shrunk the most last year: Volume on the Dubai Financial Market (DFM) plunged 61% this year and on the Abu Dhabi Securities Exchange (ADX) by 51% through December 29.
Only Nasdaq Dubai, which isn’t included the AMF figures, showed some improvement this year, with the value of securities traded reaching $1.2 billion in the first 11 months, compared with $1.08 billion for all of 2009.
The sensitivity of the merger issue came to light last week when the advisory board of the UAE’s Securities and Commodities Authority (ESCA) publicly backed a merger, saying “the markets would witness significant growth if merged into one.” Within hours, ESCA retracted the statement, attributing it to an error in translation from Arabic.
But brokers and investors are nearly unanimous that a merger is urgently needed. Jeff Singer, the chief executive officer of Nasdaq Dubai, has come out publicly in favor of a limited tie-up that would enable investors to trade on a single platform with much the same rules and regulations.
“A merger is definitely positive from our perspective,” V. Subramanyeswara Sarma, an investment analyst at Dubai International Securities, told The Media Line. “The most important thing is the volume, which has dwindled quite significantly for all three exchanges in the last past 1-1/2 to two years. For survival and ease of operations, it’s imperative [for brokers] to reduce their operating costs.”
The DFM lists 98 brokers on its website but when end-of-2010 figures are released the number will probably fall to about 80, as operations with the highest costs drop out in the face of declining business, industry executives say.
For the stock exchanges, a merger would help them eliminate duplicate staff and infrastructure. Investors would gain by having all UAE companies available to trade on a single platform, with a single set of rules and regulations. For instance now, the DFM lists the property giant Emaar while Nasdaq Dubai is the only exchange to trade DP World, one of the world’s biggest port operators. The DFM and AFX are regulated by ESCA while the Nasdaq Dubai answers to the Dubai Financial Services Authority.
Merger discussions on a governmental level have been under way since at least last March. Reports surfaced in June a decision was imminent. Traders say ESCA’s flip-flop on the prospective merger could have been an honest error but suspect officials would prefer to avoid public discussion of the subject until they have reached a consensus on how to proceed.
With an economy of about $220 billion and a population of less than five million, the UAE nevertheless boasts three stock exchanges. When the markets were booming and even for a long time after the global financial crisis and Dubai’s debt woes struck, the thought of a merger was out of the question.
Two of the three stocks markets in question are controlled by governments, which see the development of world-class financial-service industries has been part of the game plan for Dubai and Abu Dhabi. Hosting a stock exchange is not only a prestige factor, but is likely to draw the brokers, bankers and other financial service professionals, industry executives say.
“It’s really a power struggle, and we don’t know how that can worked out, whether Abu Dhabi will be the financial center or Dubai,” said Sarma.
The ADX is building a headquarters with more than 21,000 square meters of office space and a trading floor of 1,000 square meters. But trading on the ADX amounted to just $9.1 billion for 2010 through December 29, compared with more than $61 billion in the record year of 2008, according to the AMF.
On the DFM, volumes reached $18.4 billion this year, down from just under $70 billion in 2008. Even Nasdaq Dubai’s trading volume is down from its 2008 level of $1.75 billion.
Nasdaq has performed better than the UAE’s two other exchanges because it relies more on institutional investors. Trading on the DFN and ADX is mostly in the hands of small, retail investors, who were burned badly in the financial crisis and have retreated from stocks.
While the merger waits, regulators have introduced a handful of new measures in recent weeks to boost liquidity. Last July, the DFM and Nasdaq Dubai merged their trading platforms. ESCA said last week it would allow margin trading in all publicly-traded UAE stocks.
On Sunday, the DFM said it would allow all stocks to fluctuate more widely in an effort to boost trading by eliminating the distinction between "active" and "non-active" shares. Because of the drop-off in trading volumes, some of the DFM’s larger companies on the exchange, including Emirates NBD and Shuaa Capital, have been designated non-active shares.