x Abu Dhabi, UAETuesday 23 January 2018

Lack of volume is breaking brokers

The value of equities traded by UAE brokerages was down more than 80 per cent in the first seven months of the year, putting pressure on brokers.

The value of equities traded by UAE brokerages was down more than 80 per cent in the first seven months of the year, documents from the Abu Dhabi Securities Exchange (ADX) show. The figures illustrate how brokers are fighting for slices of a pie that grows smaller by the week because of declining trading volumes. So far this year seven brokerages have stopped trading and 12 have asked the Emirates Securities and Commodities Authority (SCA) to cease operations temporarily, said Ibrahim al Zaabi, the deputy chief executive of the markets regulator.

Many others are looking to close temporarily or merge with other companies. At Nqood Financial Brokerage in Abu Dhabi, the manager simply stopped coming in to work. "It is not just us. All the brokerages are in the same boat. Everyone is suffering from the market," said Shaimah Mustapha, the assistant to the general manager at Nqood. Last month brokers on the ADX and the Dubai Financial Market (DFM) executed trades valued at a total of Dh7.5 billion (US$2.04bn), down from Dh42bn in January.

Based on a standard commission of 0.0015 per cent, brokerages would have collected more than Dh11 million in the month, which comes to an average of about Dh135,000 for each of the 83 brokerages in the country. According to several sources in the industry, it costs at least Dh500,000 a month to operate a brokerage, indicating many companies are losing money each month as trading volumes remain sluggish.

Those commission figures are not exact as brokerages can change the commission rates they charge, but they have been cutting rates to attract business. "The appearances are deceiving," said Rami Awwad, the operations manager at Al Awael Securities in Abu Dhabi. "While [some of the larger brokers] have a lot of inflow in trades, their margins are decreasing." On the ADX, the average daily trading volume this year has been about 66 million shares compared with 149 million last year, while on the DFM average daily volume has dropped close to 170 million from 445 million.

The pain has been felt throughout the ranks of brokers, as the top five companies saw their traded value fall to Dh1.3bn last month from Dh2.6bn last January. On Sunday, EFG-Hermes, the second-largest brokerage in the UAE by traded value, posted a 39 per cent drop in profits that the company attributed to falling commissions throughout the Middle East. There is also the possibility the SCA will raise the minimum capital requirement from Dh30 million for brokers because of concerns that their reserves are too low.

This would provide additional protection to investors but some companies said it would put further stress on their finances. "It is very difficult for us now to increase," said Ameed Kanaan, the chief executive of Al Jazira Financial Services. "We need the requirements to be eased up if we want the brokerages to continue in business." Some companies said they were happy to increase their capital requirements provided brokerages could increase their activity in other areas.

Allowing brokers to engage in new services such as margin trading or short-selling would make sense if the SCA is planning to increase capital requirements, said Mohamed Moussa, the acting general manager at Taib Securities based in Dubai. "It should be easy for banks and larger brokerages," Mr Moussa said. Mr al Zaabi said the new regulations, which were expected to be in place soon, would cover trading on margins, market making and short selling.

Even mergers do not seem to be a good idea for some given the economic conditions. "Mergers in this economic climate are very difficult. Two weak companies will merge into an even weaker company," said Mr Kanaan. "Nobody is winning in this equation." halsayegh@thenational.ae