Short selling to spur liquidity

Key sectors such as real estate and banks that usually attract most trading activity in the UAE.

The UAE economy has proved to be resilient from regional as well as global risks simply due to the government's forward looking diversified strategic policies in key sectors. In a latest such move, short-selling introduction to the UAE bourses is all set to attract foreign investors and spur liquidity in the market.
The UAE will be the first to introduce this feature in the Gulf Cooperation Council and investors are closely watching the latest developments on short selling of stocks as the Dubai Financial Market (DFM) is busy in framing the new regulations, details of which will be announced in the due course.
Experts say that short selling is an ideal option for those stocks that enjoy high liquidity and the region's markets can attract foreign investors because in the GCC and UAE sometimes even small cap stocks enjoy very high liquidity.

Key sectors such as real estate and banks that usually attract most trading activity in the UAE, would be the ideal option for the stock investors who show interest in short selling.
Akber Naqvi, executive director and head of asset management at Al Masah Capital, said short selling increases liquidity in the market and allows investors a more sophisticated way of benefiting from various market cycles.
"The UAE markets having an effective short selling infrastructure and mechanism in place means that the local markets are becoming more developed and sophisticated thereby attracting more professional investors and money managers including greater participation by foreign money," Naqvi told Khaleej Times.
Short selling is a concept of trading that allows a trader or investor to borrow a stock from the broker and sell it with the intent of buying it back at a lower price and returning the stock to the broker. There is a growing consensus that introduction of short selling will enhance investors confidence in the UAE market. Abu Dhabi Securities Exchange (ADX) has started the technical short selling service by conducting meetings with brokerage companies in Abu Dhabi and Dubai, in order to begin the official introduction this year.
"Short selling also increases the objectivity and productivity of the companies listed on the stock exchange. Inherently short selling is anticipating that a stock price will go down - this means that the investor believes the underlying company is going to under perform fundamentally or technically. Therefore it is in the best interest of listed companies to continue to show profitability and efficiency in order not to be targeted for short selling," Naqvi said.
The DFM, in one of its recent statements, said it is planning implementation of regulated short selling (RSS) on a selected list of eligible securities in accordance with international recommendations under local market conditions in the coming months subject to regulatory approvals of its rules.
"Before placing an RSS order, an approved investor must have a borrow locate confirmation in place. RSS complements the securities lending and borrowing activity whereby approved lenders can lend securities to approved borrowers for settlement of RSS trades. DFM has completed its soft consultation on its operational model and is completing technical enhancements to identify RSS trades and settle any remote events of non-delivery of securities," according to the DFM.
Naqvi further explains a proper short selling system needs to have basic characteristics such as market making and pools of stock that can be loaned out against the short selling - this means it needs liquid names and stocks that have sufficient daily trading activity.
Investors' interest
The whole initiative of short selling should please MSCI index, which has been reviewing to ugrade the markets like UAE and Qatar for couple of years from frontier to emerging market status for past couple of years. The stock market index provider, decided to keep the classification of UAE and Qatar as frontier markets, despite the two countries efforts to align their stock exchanges with global standards. Last year even Saudi Arabia opened up its $400 billion to introduce short selling.
Globally markets in Europe, Japan and China and US are highly active on short selling keeping investors' interest as top priority. The Tokyo stock exchange has a daily trade of 1,065,810 million yen traded under short selling.
Naveen Sharma, vice-chairman, the Institute of Chartered Accountants of India - UAE (Dubai) Chapter, said short selling is being introduced for the first time in the UAE and now the local investors will have the option of hedging their positions.
"The UAE economy is strong and growing rapidly. However, sometimes global economic events can lead to decline in the value of a company inspite of good long term outlook," Sharma said.
He said short selling will protect investors as they hold long positions and now they may choose to protect their portfolio with short positions. Short selling will make the market more resilient and it will reduce volatility in the market and more investors will invest in the UAE markets, he said.
"When the broad markets gets bearish all sectors get affected. However some sectors react more, and this depends on sector cyclicals. More participation will prove good thing, because there will be more liquidity and therefore more opportunities for the well-trained trader/ investor," said Tareq Abu Hantash, general manager, Online Trading Academy.
However, Raghu Mandagolathur, senior vice-president-research, Markaz, cautions and said: "As a tool, short selling is more suited for institutional investors who can handle it with poise. Ironically, GCC markets including UAE is more retail dominated than institutional participation. Hence, it should be watched closely to see how it will benefit the market."
He said that short selling enables investors to make money when stock price falls.
"In the absence of short selling, investors can make money only when price goes up and can do nothing but watch when price falls. Though, short selling is designed to protect your portfolio when stock price falls, it more often leads to heightened speculation especially by retail investors. When traded without care, it can result in huge losses. This is the reason why regulators were dithering from introducing it in GCC," Mandagolathur concluded.
- sandhya@khaleejtimes.com