Abu Dhabi bourse won't sell investors short

The introduction of short-selling is a small but important step for attracting international investors

Short-selling doesn’t have a very good public reputation, to put it mildly. The practice – which involves the sale of shares or other securities that the seller has borrowed, with a view to buying them back at a lower price at a later date to realise a profit – has been blamed for numerous financial crises over the centuries.

These range from the earliest instances of shareholder activism against the Dutch East India Copany in 1609, via George Soros shorting the Bank of England (and making a fortune in the process) in 1992, right up to the events of the global financial crash of 2007, immortalised in the 2015 movie The Big Short.

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Happily, the introduction of short-selling by the Abu Dhabi Securities Exchange (ADX) yesterday is unlikely to result in a repeat of such dramatic events. The bourse will suspend trade in a given stock if its reference price falls 5 per cent in a day, or if the short sold securities reach 10 per cent of total capital issued, all but preventing the calamitous price drops witnessed in previous crises.

More importantly, the introduction of short-selling is a key development step for the capital’s bourse, adding a level of sophistication to the market that may well attract more mature investors to the table, according to Tariq Qaqish, the managing director of asset management at Menacorp. The practice, which was introduced by Saudi Arabia earlier this year, is also being considered by other regional stock markets, including the Dubai Financial Market, as a means of increasing liquidity.

Such sophistication is still severely limited at this stage. ADX’s price controls will be of comfort to local listed firms, but such restrictions may be off-putting to the outside investors the bourse is trying to attract, as will the fact that short-selling will only apply to a small number of stocks.

Nevertheless, short selling’s introduction yesterday is still a positive statement of intent from the Abu Dhabi bourse, that it is willing to modernise, albeit gradually, and to increasingly align itself with the international norms that major global investors demand. It will be a long journey, but every step counts.