Small and mid-cap stocks listed on UAE bourses will benefit from a Dh30 million liquidity boost after National Bank of Abu Dhabi became the first licensed market maker in the country.
“The last time I looked, two-thirds of the market doesn’t trade and a third doesn’t have bids or offers, so there’s certainly scope,” said Galen Moore, the head of the bank’s equity strategies group.
“There’s not much for us being a market maker for stocks like, say, Emaar. Where I think you will be seeing more liquidity is in the small and mid-cap names. We plan to actively target companies that have illiquid shares and help them create a market for their stocks.”
A market maker is a broker and dealer that balances supply and demand for shares by matching buyers to sellers.
The market maker holds inventory and stands ready to buy or sell shares when there are no public buy or sell orders, thus creating a market.
It also has the ability to short – the act 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 UAE federal stock market regulator, the Securities and Commodities Authority, licensed NBAD after more than three years of legal preparation, starting when the regulator first introduced a series of draft rules, including stock borrowing and lending and short-selling, to aid market making.
NBAD’s market-making operation plans to initially create a market in its index fund, OneShare MSCI UAE ETF. The fund, which was launched in April 2010, suffers from a lack of liquidity and demand from investors.
“One of our prime reasons to be a market maker is to give our ETF more liquidity,” Mr Moore said. “So we want to be market maker for all underlying stocks in the ETF.”
NBAD’s entrance into the market-making business comes as many older names in the United States are leaving as a result of the increased role of technology in trading.
The Financial Times reported earlier this month that the United States investment bank Goldman Sachs was looking to sell its market-making unit. Goldman acquired the unit in 2000 as part of a US$6.5 billion purchase of Spear, Leeds & Kellog, which was the biggest US stock and options clearing firm by volume at the time.
One of the oldest specialist firms on the New York Stock Exchange, La Branche & Co, sold its business to Barclays in 2010 for $25m after the bourse eliminated traditional specialist booths – where people on a trading floor of an exchange are the market makers – and introduced an electronic system instead. Bank of America Merrill Lynch sold its market-making unit in 2011.
Brokers argue the exit of market makers has more to do with high frequency trading taking a sizeable slice of the market they once enjoyed and the profits that come with it.
“High frequency traders (HFTs) took advantage of a lag within the electronic communication network (ECN) between new orders generated and orders currently in the market,” said Saad Chalabi, an institutional trader at Abu Dhabi’s Al Ramz Securities.
“But we are already seeing new ECNs coming out in the US that have fixed the flaw that HFTs are taking advantage of. The exchanges are evolving to take the profits of HFTs even if policymakers don’t take action. It’s too premature to say market makers are going away anytime soon.”
High-frequency trading is illegal in the UAE equity markets.
halsayegh@thenational.ae
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