Trading confidence

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The global credit crisis has wreaked havoc with regional stock exchanges. Claire Ferris-Lay talks to Malcolm Wall Morris, CEO of the Dubai Gold & Commodities Exchange about how he is trying to boost investor confidence across the Gulf.

"Overnight it was as if someone had switched off the lights; our volumes took a severe pounding," Malcolm Wall Morris, CEO of the Dubai Gold & Commodities Exchange (DGCX) describes the moment he realised the global economic crisis had finally hit Dubai. "Fortunately the growth we managed to achieve in the first three quarters managed to see us through until the end of the year," he adds.

Last year was a record year for the Dubai-based futures market. Fuelled by the region's construction industry and demand for commodities, the number of contracts traded increased by 26 percent to 1.14 million, totalling $57.5bn.

But the economic crisis, which has wreaked havoc on regional stock exchanges, saw trades on the exchange drop by 33 percent in the first quarter of 2009 compared to the same period the previous year. Morris also missed out on achieving his target of two million contracts by 860,000.

"Everyone [was] talking about the fact that Dubai seemed to be immune from the economic crisis and then we had the summer and Ramadan. Then everyone came back in the fourth quarter thinking it would be business as usual and it wasn't," he says.

The decrease in volumes of trade and the subsequent drop in investor confidence have forced Morris to ditch a number of expansion plans and instead concentrate on a series of workshops to encourage greater confidence in the market - not an easy task given the enormity of the economic crisis across the world.

"We've shelved an awful lot of the development plans and have gone very much back to basics in terms of getting back that core liquidity," he explains. "A lot of our client base has been hurt because they had exposure to securities, equities and real estate and they themselves are retrenching. So what we've been doing is very much refocusing on the fact that during these very volatile times, risk management and protecting yourself is a very important thing."

Metals trading

Morris has over fourteen years of experience in trading, but the significant decrease in trading volumes was the first time the Dubai exchange had found itself in negative territory, following three years of year-on-year increases in revenues and trading volumes.

Since its inception the joint venture between state-owned Dubai Multi Commodities Centre, Financial Technologies India and the Multi Commodity Exchange of India, has traded over 2.6 million contracts, worth in excess of $107bn.

Much of the growth last year was buoyed by new products introduced specifically for the region, such as the West Texas Intermediate and Brent oil contracts, which allows companies and investors to trade in oil futures without moving their money outside the region. The Indian rupee futures contract, established in June 2007, has also enjoyed relative growth.

But, it was some of DGCX's most lucrative contracts during the first three quarters of the year which suffered the most when the crisis hit. Trades in steel and gold, both of which reached record prices at their peak last year, both declined dramatically, notes Morris. "We haven't had a physical steel trade on the market for quite some time... in terms of volumes [steel] is literally very, very bad," he admits.

"The steel market went through huge volatility. That contract was issued in October and it started off extremely well. For the very first time [the] steel rebar community had a reference device, which had very good correlation to the physical market price. We had some good volume coming through the exchange, prices reached record levels - in excess of $1,400-$1,500 - and then there was a complete turnaround."

Gold also suffered as investors resorted to buying physical gold rather than gold futures, says Morris. "The gold contract was probably hit the hardest in Q3 and Q4 which probably is a bit of an enigma because gold tends to be viewed as a bit of a safe haven and gold traditionally accounts for about 70 percent of our business. [But] what happened is that people [started] buying physical gold rather than an option or a future, so in Q4 you saw a deleveraging of the market."

Although gold trades are improving, Morris is determined that other asset classes listed on DGCX will not be allowed to suffer similar fates - even if it means cancelling future launches. In February he delayed the introduction of the plastics futures contract, which was originally due to start trading on February 4, due to a drop in demand.

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