Abu Dhabi, UAETuesday 20 November 2018

Saudi clampdown on insider trading is welcome news

The Capital Market Authority of Saudi Arabia has bared its teeth and a prominent Saudi investor has been fined 100,000 riyals.

The Capital Market Authority (CMA) of Saudi Arabia has bared its teeth and a prominent Saudi investor has been fined 100,000 riyals (Dh97,940) for insider trading, sending shivers down the spines of those who had assumed the authority might shy from going after such personalities. The accused is no small fry, but a prominent investor in key Saudi companies such as Saudi Hotels Company, Savola, Riyad Bank and Calyons, the subsidiary of Saudi Fransi Bank.

Saudi press reports claim he is the third-largest retail investor in the Saudi market after Prince Al Waleed and Sulaiman al Rajhi, and reportedly worth US$2 billion (Dh7.34bn). According to the CMA, Mohammed bin Ibrahim bin Mohammed al Issa was guilty of insider trading activities in shares of the Saudi Hotel Company, using information based on his membership of the company's board. Mr al Issa was also ordered to pay back to the Saudi watchdog 3.3 million riyals, the amount the CMA said he made in profit from the insider share trading.

The CMA action is to be welcomed, as sometimes the effectiveness of stock exchanges is not based on the volume of transactions and speed of settlement, but on the number of jailed insider dealers. In the Gulf, jails are woefully empty of insider dealers and public cynicism is rife that big cats are getting away with impunity. It may be some time yet before a national company in the Gulf is forced to settle investors' claims of some $352m, such as the one related to Shell's wrongful 2004 energy reserves estimates.

This was an unprecedented settlement for a large-scale European shareholder dispute, let alone for an inside dealing case. The firm was also fined a record $160m by both US and UK regulators. And what was the alleged issue? Apparently, the energy giant had shocked investors when it revealed that it had overbooked its oil and gas reserves by 20 per cent. The message is clear from hawk-eyed financial regulators: those involved in financial business and public trust must be committed to maintaining the highest standards of business ethics, and aim to advance best practice leadership in all their business dealings.

The financial sector must foster a culture of compliance that is second to none. The reason is simple: lack of effective regulatory supervision and the consequent failure in financial market participants leads to well documented panics - the so-called "contagion" effect - with ramifications that go beyond the affected financial institution itself. Investors, depositors, economic confidence and business cycles become interlinked in a vicious downwards cycle of lack of confidence.

The continuing malaise of the Saudi stock market seems to be due to a combination of factors. These include lack of investor training, rumours and a herd trading mentality, along with public disquiet about the level of transparency of listed companies and the need for tougher penalties for financial malpractice. The CMA's fine of one of the largest retail investors is bold and indicates that a political green light must have been given to go ahead and prosecute. Coming on top of the Saudi Arabian Monetary Authority's (SAMA) decision to freeze the accounts of prominent family business groups such as Saad and Al Gosaibi, which are embroiled in inter-family disputes, this indicates that Saudi Arabia is sending out strong signals to domestic and international investors.

It certainly needs to do so as it opens up its capital market. The CMA has been doing a commendable job of market regulation and adapting with circumstances as its experience and supervisory role has evolved. The CMA is now not shy of "naming and shaming" such people. It has insisted on more regular and meaningful financial reports that set out clear responsibilities and punishments for boards of directors.

More needs to be done. Gulf financial market regulation can only be as good as the technical capability of those supervising such emerging markets. As new products develop, whether conventional or Islamic, Gulf regulators have to be one step ahead in monitoring risks and abuses of investor confidence. They must be able to quickly detect unusual market movements and pricing behaviour, and request cross-border regulatory assistance if needed.

The Saudi and other Gulf markets will become more mature over time, but in the short term some intraday trading movements can be detected in the Saudi market. What has been driving the markets then? There could be some degree of intraday manipulative trading by core groups of more "sophisticated" investors who trigger buying spurts and then sell-off after certain threshold index levels have been reached.

There is absolutely no economic or other rationale on why all the stocks seem to behave in such a herd-like fashion of ups and downs several times a day, except to suspect some adept and sophisticated manipulation of prices is taking place. The CMA is working hard to ensure that eventually the Saudi bourse is a more transparent and safer investment vehicle, both for the sophisticated and relatively unsophisticated investors. The fine imposed on Mr al Issa is a salutary lesson to potential insider dealers.

Dr Mohamed Ramady is a former banker and visiting associate professor, finance and economics, at King Fahd University of Petroleum and Minerals, Dhahran, Saudi Arabia