UAE brokers see a boon in margin trading

An investor monitors stocks on the Abu Dhabi Securities Exchange. Trading activity and market interest in the country's bourses have improved this year. Sammy Dallal / The National

Brokerages are rushing to offer margin trading services to their clients, a boon for the industry as it tries to accommodate a renewed interest in local stocks.

"The appetite is really huge right now with the current market conditions," said Talal Toukan, the head of research at Al Ramz Securities in Abu Dhabi. "It is a considerable amount of money we are talking about, which will translate to bigger trading volumes, the lifeblood of our business."

Al Ramz Securities became the fifth brokerage firm to secure accreditation yesterday. The Abu Dhabi-based brokerage said it expects to offer margin accounts as early as this month.

The introduction of regulated margin trading by the Securities and Commodities Authority earlier this year is expected to dramatically increase volumes because it allows investors to leverage their cash into much larger trading positions.

Margin trading is trading with borrowed money in an account set aside for the purpose. Typically, an account holder puts money in the account and is then allowed to trade with a sum in excess of that deposit. Brokerage firms have been suffering from depressed trading volumes on the country's bourses, the Abu Dhabi Securities Exchange (ADX) and the Dubai Financial Market (DFM), after unrest in other parts of the Middle East and North Africa region last year drove away investors. But trading activity and market interest improved this year, bringing some optimism for the flagging industry.

The ADX General Index has risen 10.23 per cent so far this year, while the DFM General Index has risen 20.22 per cent in the same period, boosted by increased investor confidence following a gradual recovery for banks and property firms, the two sectors that hold the largest weighting on the indices.

The Securities and Commodities Authority has awarded five firms accreditation so far: Arqaam Capital, Arab German International Broker, Direct Broker for Financial Services, EFG Hermes and Al Ramz Securities. It was processing many other applications, a spokesperson said.

Menacorp, a financial services company based in Abu Dhabi, has made an application.

"We are definitely interested. The papers are in the works," said Nabil Al Rantisi, the managing director at the brokerage in a telephone interview yesterday. "There is a lot of appetite for margin right now."

Before the global financial crisis of 2008, securities firms borrowed loans from banks and extended them to high-net worth clients as unregulated facilities. Brokerages were mired in a spate of legal disputes with their clients when markets slumped and trading volumes crashed.

"This activity is moving from unregulated practices by brokers to regulated practices," Mr Toukan said. "The traditional approach was to close the client's account before the end of each month. But the regulation now offers clients more space to hold leverage position for a longer period, and widen the practice to a larger sphere of investors. In the past, it was exclusive to VIPs only."

Tumbling volumes forced 23 brokerages to shut down last year. Many of the independent securities companies have had their capital replenished and maintained the bare minimum staff as required by the market regulator: a trading manager and two brokers.

There are now 50 brokerages in operation from a peak of 103 more than two years ago.

"Imposing high interest rates is not an option, because competition among brokers is high," Mr Toukan said. "But the increase in volume will indirectly impact revenues for us through bigger trading commissions."