The Dubai Financial Market(DFM) introduced a major reform to its trading rules yesterday as the crisis in liquidity closed yet another brokerage.
The bourse accredited two companies - EFG-Hermes and Arab German International Broker - to offer margin trading for the first time, a move that could dramatically increase trading volume because it allows investors to leverage their cash into much larger trading positions.
The exchange is also processing "similar applications from other brokerage firms" in collaboration with the regulator, the DFM said yesterday.
"The introduction of margin trading should really help the development of the capital market," said Essa Kazim, the chief executive of the DFM yesterday. "We would like to see more brokers benefit from the new rules and regulations introduced to the market to offer better services to investors."
Riham Tawfiq, the head of brokerage at EFG-Hermes' business in the UAE, said she expected the introduction of margin trading to "bring more trading volumes in the market as more brokerages become accredited". EFG-Hermes plans to begin offering margin trading to clients in May.
"It should have a more positive effect on the market, we will see," Ms Tawfiq added.
The reform came as Al Awael Securities applied to the regulator to halt its operations due to declining revenues. Liquidity on the DFM fell sharply after the financial crisis began in 2008, and has continued to drive smaller brokerages out of business despite a modest recovery over the past three months.
"This business has always been controlled by a select few companies that have managed to stay in the business because they have a big market share and can withstand losses and have the extra capital to cover their mounting costs," said Musad Madhi, the operations manager at the brokerage firm based in Abu Dhabi.
"The board members finally decided to close the business after volumes increased rapidly and then cooled again back to levels seen in the recent past."
The traded value on the DFM rose from Dh2 billion (US$544.4 million) in January to Dh9.5bn last month. On the Abu Dhabi Securities Exchange, the traded value has risen from Dh1.4bn in January to Dh2.9bn last month.
Today, 50 securities firms are operating in the Emirates, down from 103 at the beginning of last year. Forty-five companies shut down last year, and eight have gone out of business so far this year.
Al Awael Securities is marked as "under permanent cancellation process" on the Securities and Commodities Authority's website.
Al Awael's revenues generated from brokerage commissions reached Dh683,847 last year, compared with Dh2.5m in 2010.
Net loss widened to Dh2.9m last year, from a loss of Dh2.7m in 2010. Receivables or money owed from clients reduced to Dh4.5m from Dh11.8m in 2010.
Many brokerages that shut this year would have made the decision last year not expecting that volumes would rebound, said Marwan Shurrab, the chief trader at Gulfmena Investments in Dubai.
"I don't think anyone expected the market would pick up," Mr Shurrab said. "The decision was probably in motion in the last three or four months," he said.
"Brokerages that are still in operation today are definitely in a better position than last year."
Al Awael Securities was ranked 42 out of 50 according to last month's trading report published by the DFM.