Reliance on retail investors is the Achilles heel of Abu Dhabi's stock market, said the newly appointed chief executive of the exchange.
Rashed Al Baloushi, who assumed the role on Sunday, said he aimed to encourage greater participation of institutional investors.
"One of the biggest weaknesses we have is that most of the trading activity comes from retail traders," Mr Al Baloushi said. "We need to develop and strengthen asset management activity. It is a challenge, but it is reachable."
Retail traders and high net-worth individuals make up about 80 per cent of about 900,000 investor base on the Abu Dhabi Securities Exchange (ADX), which Mr Al Baloushi said encouraged speculative movements.
The proportion of retail investors in Abu Dhabi compares with 70 per cent for emerging markets and 60 per cent for developed markets.
Many retail investors active in the Abu Dhabi market shared Mr Al Baloushi's concerns, with some saying the level of speculative activity was frightening. "There are very big fears in the market at the moment. It is very scary," said Ahmed Alazani, a day trader. "Without institutions, the markets are at risk of crashing very strongly without institutional investors."
Abu Dhabi and Dubai shares have risen 9.2 per cent and 29.6 per cent respectively since the start of the year on improved sentiment and confidence in the market. But analysts say small cap stocks, favoured by retail investors, may have gone too far.
The UAE is classified as a "frontier" market. The index provider MSCI delayed a decision to upgrade the country to "emerging" market status late last year.
Mr Al Baloushi said his job required developing the strategy for the growth and scope of the market.
A merger with Dubai's bourse, the Dubai Financial Market General Index, has been floated as a solution to the lack of liquidity and volumes needed for a healthy market.
He said in 2010 talks about consolidation "were not a rumour" and were being held at the highest governmental level rather than operational level. He added he was in support of a merger. The head of Dubai's stock exchange, Essa Kazim, has issued statements to the same effect.
The regulator of the exchanges, the Securities and Commodities Authority (SCA), said it was "supportive" of a merger but did not have a role in the decision making.
"The objectives in my new role are threefold: development of market capitalisation and the equity markets in general, which included infrastructure, and processes; encouraging participation of institutional investors; and introducing new financial products for the sake of diversifying investment tools for investors," said Mr Al Baloushi.
The SCA said last week regulations on short-selling would be finalised by the middle of this year.