The Dubai Financial Market (DFM) will allow share prices to rise and fall more sharply, in the latest in a series of moves by exchange officials and regulators to shake up the way stocks are traded in the UAE.
The exchange said yesterday that all shares would be able to increase by up to 15 per cent in one day and fall by a maximum of 10 per cent, from January 2. By allowing stocks to fluctuate more dramatically, exchange officials hope to encourage more trading and reinvigorate a bourse that has seen dwindling volumes in recent months.
The bourse's present rules make a distinction between "active" and "non-active" shares, with different fluctuation limits for each category. The non-active shares can rise and fall only by up to 5 per cent in a single trading session.
Some larger companies on the exchange, including Emirates NBD and Shuaa Capital, are classified as non-active shares on the basis of recent trading activity.
"The new rules will enhance trading on the current non-active stocks," said Essa Kazim, the bourse's chief executive.
According to the DFM's guidelines, a stock is qualified as active only if it meets certain criteria, including 500,000 shares traded and at least 150 transactions in a six-month period.
The new rules will allow trading to continue in all shares until they reach the new fluctuation limits, which could increase volatility but encourage further trading.
"Opening these limits will increase the risk of unjustified drops or rises in price when a single entity is attempting to enter or exit their position," Saad al Chalabi, an institutional trader AlRamz Securities in Abu Dhabi, told Bloomberg. "The market is opening up these limits to encourage liquidity in those names when they do fluctuate abruptly."
The DFM also said yesterday that it would limit the weight of single stocks on the DFM General Index to 20 per cent, down from the previous level of 25 per cent.
Analysts said the move was designed to make the index reflect a broader range of stocks rather than being dominated by a few heavyweights. Emaar Properties, the biggest company on the exchange by market capitalisation, is currently responsible for 20 per cent of the index.
"This move is very good because it gives a chance for small stocks like RAK Ceramics to be represented on the index," said Fadi al Said, a fund manager with ING.
DFM trading volumes have dropped by more than half this year. Regulators and exchanges have introduced measures in recent weeks to give investors more trading options in attempts to boost liquidity.
The Securities and Commodities Authority, the UAE's securities regulator, said last week it would allow margin trading in all publicly traded UAE stocks. Margin trading allows a trader to borrow money from a broker to buy a stock, using other stocks as collateral. There has also been discussion about allowing expanded short selling, which occurs when investors borrow and sell an asset, hoping to profit by buying it back later for less.
NASDAQ Dubai allows short selling, but the DFM and the Abu Dhabi Securities Exchange do not.
The UAE's markets are in the midst of a push for an upgrade from the index provider MSCI to emerging-market status, This would mean the UAE's shares would be tracked by a broader range of international asset managers, probably leading to additional foreign investment in UAE stocks.
* additional reporting by Farah Halime