Contributor: Philippe Carré
At SunGard’s Dubai City Day, a panel looked at trading opportunities and challenges in the Middle East. Panel members started with the bad news first: due to regulatory constraints, the region’s exchanges remain largely domestic monopolies, with very little competition for listings, no high-frequency trading and no CCP. Add to this the constraint of settlement caps, the large retail focus of most exchanges, different working weeks and settlement models – all deterrents to the generation of regional liquidity abound, probably explaining the minimal foreign participation in the markets until very recently.
Trading in the region will eventually become more attractive and accessible to overseas investors, but the panelists in Dubai implied that regulators were understandably quite cautious at present. Of more concern was the diversity of regulatory regimes throughout the region.
It was suggested that the lack of drive to unify some of the basic rules could in part be due to a desire to preserve each exchange’s local dominance, but a lack of competition for flow and listings constrains liquidity movement and foreign participation throughout the region. As case in point, Saudi Arabia for example simply bars foreign ownership; currently, foreigners can only trade Saudi stocks through funds or swap structures.
Panelists indicated that in Saudi Arabia, the market has experienced a doubling of volumes over the first half of 2012, driven by local investors with a strong domestic focus in an economy growing at more than 5 percent per year.* The domesticity and retail-oriented focus of the Saudi market – an amazing 93 percent of trading volumes are said to be retail-generated – gives it a different character from international markets, where retail volumes can be more erratic. Conversely, the Egyptian market was said to be dominated by institutional volumes. In Qatar, the focus is on attracting both domestic flows – particularly from the expat client base that may not have been aware that participation was possible – and increased participation from GCC institutions rather than directly reaching international investors.
The difference in settlement structures and models is also naturally becoming a point of concern, especially for investors looking across different regional exchanges. For example, while Saudi is at T+0, other GCC countries operate in a T+2 environment.
Turning to connectivity, the panel looked at the GCC exchanges’ capacity to absorb a sudden influx of high-frequency external order flow. The panel’s answer was a qualified yes for the future, but not anytime soon. The implementation of new trading engines and the adoption of industry-standard trading protocols probably explain that enthusiasm. Attention was also given to the technical connectivity methods themselves: with more fiber-optic cables being laid and a greater belief in Internet security, panelists proposed that direct market access over VPN (virtual private network) could become a viable method in the region.
On the panel, there was a clear view that the Middle East needs new products to drive liquidity to its capital markets, besides the requirement to improve infrastructure and the need to provide market participants an experience similar to “Western” standards, through changes to the markets’ structure, such as market-making, full delivery vs. payment, etc.
There is no doubt that the region’s regulators and market operators are, in a carefully considered way, adopting policies conducive to market expansion, the narrowing of spreads, and the provision of liquidity. We may be getting closer to the day when Middle East equity markets become venues for international investment.
*Sources AMF & WFE