Abu Dhabi to permit short selling in bid to boost liquidityShort Selling in Attempt to Boost Liquidity
Published: 18:26 December 27, 2016
Abu Dhabi: Abu Dhabi is poised to introduce services facilitating short-selling next year as it seeks to boost trading volume and attract foreign investors to the illiquid market.
ADX, as the local exchange is known, is conducting meetings with brokerages in the United Arab Emirates ahead of introducing a so-called technical short-selling service early in 2017, according to a statement posted on the bourse’s website on Monday. The step would make Abu Dhabi the first stock market in the six-nation Gulf Cooperation Council to permit the sale of securities owned by another investor.
Boosting liquidity in share trading is one of the biggest challenges for local regulators and stock exchanges in the Gulf. Since the start of 2015, the stocks of at least half of the 62 members comprising the ADX General Index have finished each trading session unchanged.
The plan to introduce short selling is aimed at “diversifying investment instruments in order to increase the level of liquidity to match global markets,” Abdullah Al-Blooshi, ADX’s chief executive officer, said in the statement. “This will enable us to attract foreign investors accustomed to these instruments.”
Short sellers borrow shares they speculate will fall in value, and sell these with the intention of buying them back at a lower price and pocketing the difference.
Most short selling is done by hedge funds and institutional investors to cushion their investments against falling stock prices or to bet that shares have risen too high. In October, the Securities and Commodities Authority in the U.A.E. discussed technical aspects for transferring the jurisdiction over some financial instruments, including margin trading and short selling, directly to ADX and to DFM, Dubai’s biggest stock exchange.
Attempts by other local markets in the Gulf to boost the offering for investors include steps by Nasdaq Dubai in September to permit futures trading on a selection of stocks. Trading in futures contracts for individual stocks or indexes is outlawed in Abu Dhabi.
With most local investors lacking the sophistication to trade complex instruments, short-selling will likely be muted following its introduction, said Ali Adou, an equities portfolio manager at The National Investor in Abu Dhabi.
“The local market is dominated by retail investors who will need a lot of education on investment tools,” Adou said in an e-mailed response to questions. “The example to consider is futures. There is a lot of effort being exerted by the Nasdaq and market makers to establish this investment tool, still volumes are low.”
Under Abu Dhabi’s plan, the bourse will select which stocks will be eligible for short selling. A decline of 5 percent or more in a single trading session will trigger a halt in the automatic short selling mechanism for the rest of that day and the following session.
Considering that regional markets have “all their lives been a one-way market: buy first, sell later,” suddenly permitting short-selling won’t change investor behavior overnight, said Ahmed Waheed, vice president of the institutional desk at Mena Corp Financial Services LLC in Dubai.