DFM boosted by euphoria over plans for short-selling

Shares in the company that runs the Dubai Financial Market surged to their highest level in five months as investors bet that new regulations on short-selling will give the nation's only listed bourse a boost.

New regulations could increase trading volumes on the floor at the Dubai Financial Market. Jeffrey E Biteng / The National

Shares in the company that runs the Dubai Financial Market (DFM) surged to their highest level in five months as investors bet that new regulations on short-selling will give the nation's only listed bourse a boost.

"The new regulations should increase trading volumes, which would affect DFM's bottom line," said Tariq Qaqish, the deputy head of asset management at Al Mal Capital in Dubai. "Investors are allocating their portfolios with a long-term view, in the expectation that the new regulations will help their business going forward."

DFM's shares surged 4.8 per cent to Dh1.08, the highest level since May 7. It was the most actively traded stock yesterday with more than 36.7 million shares traded. On Thursday, the Securities and Commodities Authority approved a package of regulations, including short-selling, borrowing and lending, and market-making.

Short selling is an investment tool commonly used by sophisticated equity investors to hedge their bets when markets take a different direction. An investor will sell borrowed shares in the hope of buying them back later at a lower price, returning them to the original owner and keeping the difference.

DFM is trading at "rich valuations", Mr Qaqish said, at about 40 times a forward estimate of its earnings for next year.

"It has been a long time coming, but we now need to work on an operational mechanism, how to put these regulations into practice," said Marwan Shurrab, the vice president and chief trader at the asset manager Gulfmena Investments in Dubai. "More tools to bring liquidity means more commissions for DFM."

The bourse, which currently only offers long-only positions, has struggled to post consistent profits following the global financial crisis.

In a market where more than 80 per cent is dominated by retail investors, the new regulations should help to stabilise its traditionally rampant trading volatility, said Mohammed Ali Yasin, the managing director of brokerage at National Bank of Abu Dhabi.

It would also give investors a legally permissible way to hedge large exposures to individual stocks, a key component of risk-management strategies for institutions, he said.

"If there is a huge bubble coming on a stock, and institutional investors feel it is vulnerable to extreme speculation, whereas there no fundamentals to support it, short-selling is a tool that can be used to create stability," said Mr Yasin. "Any custodian today who is licensed will see it as a positive development and see how they can comply with it and introduce this service to their clients."