Making the market

News that Saudi Arabia's stock market regulator has rejected proposals to artificially stabilise the Tadawul using a market-maker fund is evidence that it is growing in sophistication.

Dr Abdul Rahman Al-Tuwaijri, chairman of the Capital Market Authority (CMA), was reported to have dismissed the scheme yesterday in Arabic newspaper Al-Jazirah.

Saudi Arabia's Shoura Council had put forward the idea of establishing a market-maker fund which would provide liquidity for the Tadawul by offering to buy stocks whatever the condition of the market.

While this could have boosted investor confidence, propping up share prices by these means would have been a backwards step. The market needs to find its own level based on fundamentals and investor demand - even if that is low at present.

In the long term, institutional investors are the ones who will bring liquidity to the market. Of course, opening up the Tadawul to international institutions would help enormously, but for now the best way to encourage trading is to show that the stock market is independent and transparent.

Exchange solutions provider OMX is currently working on a project to upgrade the Tadawul's trading and market data systems, while there are also plans to change the way that share prices in IPOs are determined.

These are all positive moves. By putting them in place while the market is low, there is a greater chance that the Tadawul will show more resilience the next time that share prices leap.

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