The stock market regulator is planning a shake-up of trading in a move to entice foreign investors back to the Emirates.
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The Securities and Commodities Authority (SCA) will consult with banks and brokerages until November 17 on the new regulations, which will cover market making, securities lending, the provision of liquidity and short selling, the regulator said in a statement on its website.
Offering more sophisticated instruments would attract international investors and their money to the UAE's markets, said Georges Elhedery, the regional head of global markets at HSBC Middle East.
"If you build a supermarket, the more products you have and the more choice you have, the more people you attract," he said. "These are some of the steps of a maturing market."
The proposed changes would allow some traders to take a more active role in buying and selling stocks, otherwise known as market making, which ensures that any investor can always close out of a deal when he or she chooses to do so.
Lending securities and short selling are both common around the world but are currently outside any regulation in the UAE.
The availability of new tools is expected to help in reviving trading, which has fallen off steeply since the beginning of the global financial crisis.
The value of stocks traded on the Dubai Financial Market last month was 97.2 per cent below the peak in November 2007.
The lack of trading has caused many share dealers to shut down. Almost half of the 110 brokerages in the country have closed in the past 12 months.
HSBC was among the companies closing its retail brokerage last month, while Al Mal Capital, an investment bank, is said to have closed its brokerage and cut staff numbers by a quarter.
As more brokerages close, any move towards greater market sophistication would be welcomed by the industry, said Fathi ben Grira, the chief executive of Menacorp, an Abu Dhabi brokerage.
"If the main point is to have the same tools as more-developed stock markets have all around the world, it's a good thing," he said. "Brokerage firms are paid on commission by volume generated by customers. Any tools that will make them trade more is beneficial for us."
Last week, the SCA responded to the industry's difficulties with guidelines intended to encourage mergers among the UAE's brokerages, allowing them to withstand the low volumes on local markets.
The availability of securities lending and short selling are among the market features favoured by the MSCI, an index provider, which many investors are hoping will upgrade the UAE to emerging-market status this year from frontier market.
Although the UAE's reclassification does not hinge on offering these facilities, bankers said their availability might convince the MSCI that the country is on the right track.
Short selling involves borrowing shares to sell and buying them back later at a lower price to return the owner.
The practice has been maligned by politicians and business leaders who believe it allows rumour and speculation to play an undue influence in stock markets, especially in the case of naked short selling, where the underlying security is not owned or borrowed. It is understood that this practice, banned in the West, will not be possible under the proposed rules.
Under the draft proposals, the regulator would be able to ban short selling of a stock in exceptional circumstances.
Advocates of short selling counter that it allows stock market activity to continue even during a downturn and can reduce the risk of bubbles forming in markets.
"When you're in a very hot market and a bubbly market, short selling will help ease the pressure on that market," Mr Elhedery said.