Abu Dhabi Bourse Launches Short-Selling to Boost Volumes in Illiquid Market

Some brokerages in the UAE have been forced to shut down as turnover slumped to several-year lows.

Abu Dhabi Securities Exchange (ADX) said on Tuesday that it is starting short-selling on the UAE’s bourse as it seeks to boost trading volume and attract foreign investors to the illiquid market. Authorised brokers in Abu Dhabi and Dubai have already started introducing a so-called technical short-selling service.

Short-selling wasn’t permitted in the UAE’s two markets and analysts have speculated that this is one of the reasons for falling trading volumes in recent years. In 2012, the UAE’s financial regulator followed the lead of Kuwait, the oldest established stock exchange in the region, by authorising stock lending and short selling, but restricted their adoption by limiting them to licensed market makers. As such, the step makes ADX the first stock market in the six-nation GCC to permit the sale of securities owned by another investor.

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ADX said that the initial tests were conducted in a restricted and gradual manner to boost liquidity and attract more foreign investors. Some brokerages in the UAE have been forced to shut down as turnover on the DFM and the Abu Dhabi bourse slumped to several-year lows, while Nasdaq Dubai was trading less than $3 million daily.

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Short selling – which allows investors to make gains in a falling market by borrowing a security they don’t own, selling it and agreeing to buy it back at a lower price – plays an important role in developed capital markets since it makes price discovery more efficient and smooths volatility whilst providing investors with a host of risk-management tools.

Meanwhile, the exchange explained that due to the characteristics of such instruments, the price of a sold stock will be above the price of last deal price – at least one unit higher. In addition, the short selling mechanism will be stopped on any given day, until the next session, should the stock price falls 5 percent during this day.

According to Abdullah Al-Blooshi, CEO of ADX: “The accounts allowed for short selling are only margin trading accounts and investors who obtained ADX acceptance to trade technical short selling, in addition to investment funds, institutional investors, custodian clients, and market makers. Bearing in mind that the door will be open for others who we ensure his/her financial and investing situation.”

Abdullah al-Nuaimi, Head of the Market Operations and Surveillance Department, added: “Brokerage companies must be committed that the technical short selling is a (minus) purchase in order to be fully disclosed. Also in the brokers’ books, a 20% of the deal will be added as a guarantee. By the end of the day the brokers as well as the custodian will evaluate the stocks that were short-sold in accordance to its market value, and against the guarantee presented by the client. If the price is not equal to the market value, the clients will be informed to increase their guarantee. Otherwise the broker has the right to purchase the stocks.”

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