Abu Dhabi Securities Exchange introduces market making to calm volatility

The Abu Dhabi stock market’s first market maker began operations on Tuesday, with the bourse anticipating a boost in trading volumes and a reduction in the frequency of sharp price swings.

The Abu Dhabi Securities Exchange General Index has declined by more than 10 per cent since October, when Brent oil prices were at US$80 a barrel. Crude traded at about US$56 a barrel on Tuesday.

The equity index lost as much as 23.8 per cent from October to mid-December, before a rebound followed by a period of sharp ups and downs.

National Bank of Abu Dhabi’s market making business, at a paid-up capital of Dh30 million, will stand ready to make liquidity available on four stocks.

They are: Aldar, FGB, Waha Capital and Abu Dhabi Commercial Bank. A market maker is a broker-dealer who balances supply and demand for shares by guaranteeing to hold a certain number of them to facilitate buying and selling “in all market conditions”.

“This will have a radical change not just for the local exchanges but the GCC,” said the ADX chief executive Rashed Al Baloushi. “We expect to see more liquidity, more trading.”

NBAD secured a licence for market making in the UAE last April from the markets regulator, the Securities and Commodities Authority (SCA).

Its debut followed weeks of testing and months, building IT infrastructure and making sure that the entire operation was commensurate with SCA compliance and reporting standards, said Galen Moore, executive director for Mena equities market making at NBAD.

“This is going to lead to greater liquidity and depth in the market,” said Mr Moore. “Our obligation to the exchange is to be there if the market is going up or down and will reduce volatility sometimes.”

Trading volume on the ADX has generally declined since oil prices began to fall. The busiest trading day in November saw 479 million shares change hands. Just 192 million shares were traded on Tuesday. This compares with April, when the busiest day registered a volume of 804 million shares.

The bank plans to expand its scope of coverage of stocks across the UAE’s three exchanges including the Dubai Financial Market and the Nasdaq Dubai. Across UAE equity markets, much of the liquidity is concentrated between 10 and 12 stocks out of more than 80 listed companies. Trading activity is mostly dominated by retail investors, which can aggravate price swings during both bull and bear markets.

In December, Sultan Al Mansouri, Minister of Economy and chairman of the SCA, urged investors to make decisions based on reason and not emotion.

Wadah al Taha, the chief investment officer at Al Zarooni Group in Dubai, said that NBAD’s move to begin market making operations is “a very good step in which there’s a commitment from the market maker to defend the stock which will add more confidence to the traders on these selected shares.

“The timing is challenging in fact. I would say it’s a brave move from NBAD as a lot of international factors may affect the market, but it looks like a message from the bank that they have confidence in the UAE market.”

The ADX is currently in talks with other banks and brokerages to ramp up the nascent market maker business.

“Introducing the market making business on the ADX puts the exchange in line with emerging markets,” said Hisham Tuffaha, a portfolio manager in Riyadh. “This will certainly get more attention from global investors and will reduce volatility in the medium to long term.”

UAE stocks were incorporated into MSCI’s Emerging Markets Index last June.

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