Dubai's exchange hat-trick confuses investors

MAC Capital’s Bob McMillen explains how Dubai’s labyrinthine stock market set-up and twin regulators do not help a country still struggling to emerge from crisis.

AsianInvestor recently quizzed Bob McMillen on how he has fared in Dubai in the past year.  During the course of the conversation he sought to explain how the set-up of the local bourses fails to provide clarity for investors.

The UAE has three stock exchanges: The Dubai Financial Market (DFM) in Dubai; the Nasdaq Dubai in the DIFC, Dubai; and the Abu Dhabi Securities Exchange Market (ADX).

It has two regulators. The Dubai Financial Services Authority and the Emirates Securities and Commodities Authority.

The DFM and ADX are retail-dominated markets very typical of emerging markets.

The daily volumes of the three combined UAE markets place them second behind the Saudi Arabian stock market in the region, the DFM being the most active local exchange (with turnover of $412 million per day in 2007, the height of the market), ADX second (with $190 million) and the Nasdaq Dubai third (with $8.2 million per day).

“We, and I am sure many other brokers who had seats on all three exchanges, lobbied for a merger of, if not the three physical markets, then at least the trading screens (so all the markets traded on the same screen) as we believed that this would foster trade and volumes,” says McMillen.

In June this year, the DFM and Nasdaq Dubai (both owned by the same company, Borse Dubai) merged their trading screens and back-office systems. Now brokers are able to trade two relatively small markets on the one screen. Indeed, Nasdaq Dubai’s volume improved and the retail markets of the UAE finally had access to companies listed on the Nasdaq Dubai.

“Unfortunately, the central bank was not going to let our euphoria last for long,” says McMillen. “One small problem was that companies listed on the Nasdaq Dubai were required to quote their shares in US dollars, despite the fact that local companies traded on the screen in dirham and the US dollar/dirham exchange rate was fixed at US$1 to AED3.65.”

At present companies trade on the same screen in different currencies. The Nasdaq Dubai companies have a note which indicates they are traded in dollars. Confusion obviously arose as to what currency each stock was trading in. The benefits of the initiative were diluted substantially and the underlying conflict between the two jurisdictions (onshore UAE and the DIFC) remained.

The brokers continue to have a significant cost disadvantage, having to fund three memberships, two trading screens, three trading guarantees and deal with two regulators. The ADX, DFM and the regulators also take almost half of the brokerage commissions in trading fees, yet there are less than 150 stocks on the combined three exchanges.

What can break the log-jam? "A number of the problems that brokerages face could be solved if the Emirates Securities and Commodities Authority took a more pro-active stance," suggests McMillen. "I hope this will happen soon.”

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