The Abu Dhabi Securities Exchange (ADX) said yesterday it plans to allow brokers next year to practice technical short selling in a restricted and gradual manner to boost liquidity and attract more foreign investors.
“This service is part of continuing efforts to modernise, enlarge and upgrade the market,” said Rashed Al Baloushi, the chief executive of ADX, in a statement. “It also aims at diversifying investment instruments in order to increase the level of liquidity to match global markets. This will enable us to attract foreign investors accustomed to these instruments.”
Short selling is the practice of selling borrowed shares in the hope of buying them back later at a lower price, returning them to the original owner and keeping the difference.
The Securities and Commodities Authority (SCA), which regulates trading on the ADX and Dubai Financial Market (DFM), only allows short selling for market makers.
A market maker is a broker and dealer that balances supply and demand for shares by matching buyers to sellers. It also stands ready to buy or sell shares when there are no public buy or sell orders, thus creating a market.
“The accounts allowed for short selling are only margin trading accounts and investors who obtained ADX acceptance to trade technical short selling, in addition to investment funds, institutional investors, custodian clients, and market makers,” said Mr Al Baloushi, adding that “the door will be open for others”.
Illegal short selling has in the past been blamed for stock market routs.
The practice is common globally but is restricted in the Arabian Gulf region, with the exception of Kuwait.
The introduction of short selling on ADX will follow the start of equity futures trading on Nasdaq Dubai in September, which comes amid increasing efforts to deepen markets at a time when volumes traded have been diminishing.
The introduction of short selling on the ADX is a positive step and a sign that the market is maturing, said Mohammed Yasin, the head of NBAD Securities in Abu Dhabi.
“It is going to be very limited in terms of use because the risks that come with introducing short selling to the brokerage companies that are going to do it are bigger than its benefits initially with the current proposed structure,” said Mr Yasin.
Foreign institutional investors are unlikely to rush to adopt the practice.
“Probably what we will see is that some of the local more experienced investors, they may like to try it out and see how it goes,” said Mr Yasin. “Once this becomes more a widespread kind of practice in the market, it will create certain balances and it will create liquidity in times when markets are not moving.”times when markets are not moving.”
dalsaadi@thenational.ae
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