The Abu Dhabi Securities Exchange (aka the ADX) today signed a memorandum of understanding with its Libyan counterpart. What does this mean?
Technical assistance, perhaps, in managing trading systems, sharing data on trading activity and, most intriguingly, the cross-listing of securities.
Memoranda of understanding among exchanges are commonplace these days. The ADX has inked similar agreements in recent years with exchanges in Qatar, Oman, Jordan, Syria, Sudan and Egypt. The Dubai Financial Market, meanwhile, has signed up with exchanges in Bahrain and Karachi (not to mention London).
But what's the point of such memoranda?
Technical assistance sounds fine, as far as it goes. There also may be something to gain, politically speaking, from agreeing to cooperate with regional exchanges: they're less likely to step on toes when your country's public companies want to set up businesses or expand into their territories. Even that, though, seems like a remote benefit.
And does cross-listing regional shares actually help develop regional capital markets? I'm assuming the idea is that foreign shares will be listed as depositary receipts, as is done in the West. In theory, that would give more foreign investors easy access to other regional markets. It would also mean (again, in theory) that companies could raise more money from a wider pool of investors. The "cost of capital" - a fancy term for the difficulty of raising money - would go down.
Cross-listing comes with other potential upsides. With broader regional interest in shares, trading activity might increase, which would make it easier to buy and sell. Greater liquidity (i.e. more trading activity) means quoted prices are more accurate, and the cost of trading goes down because spreads between the price at which people are willing to buy and the price at which people are willing to sell narrows.
Then, of course, there are potential benefits of increased transparency and regulatory strictness. A bigger pool of shareholders might mean closer attention gets paid to companies' balance sheets; shareholders of diverse backgrounds may also hold companies to stricter standards of transparency and corporate governance. You get more independent directors, in other words, and fewer companies that are tightly-held and controlled by just a few powerful people.
That sounds well and good. But will it work? That's an open question. So far, cross listings - at least those in the UAE - don't appear to have generated too much excitement from local investors. The Egyptian Commercial International Bank listed on the ADX in 2004, but trading volume is virtually nil, according to the exchange's website. Sudan Telecommunications, which was listed on the ADX in 2003, has attracted more attention, but it's still at the low end of the exchange's volume charts. Al Salam Bank, a Sudanese institution that listed in Dubai last year, appears to be doing a little better. Its shares were traded 490 times this year, Bloomberg data show. That hardly makes it an exciting issue - and the company's listing in Bahrain trades at a bit less than double the volume - but at least it's changing hands with some regularity. It'll be interesting to see how these cross-listings play out over time.
Ultimately, the best solution may be a regional hub exchange instead of a bunch of loosely-connected spokes, but for now, it's hard to argue with increased cooperation, even if the practical merits of that cooperation are hard to see or unlikely to materialise. Memoranda of understanding aren't hard to negotiate, but the proof of their efficacy will be in the pudding: will they lead to more cross-listings and inculcate a region-wide focus among investors, or will the retail investors that dominate trading in the region stay close to home, as they have in the past?
