|~|57348954-200.jpg|~|Rising prices: DGCX is a far cry from the New York Mercantile Exchange|~|The popularity of Dubai’s Gold and Commodities Exchange continues to soar. Andrew White reports.Trading floors have changed since the days of Gordon Gekko. Where once there might have writhed a pit of anxious, angry traders, the exchange platform at the Dubai Gold & Commodities Exchange (DGCX) sits humming quietly in front of me, encased in steel.
“When we first started planning these offices, the computer servers were going to fill the room,” admits Ahmed Bin Sulayem, scratching his head. “Soon we’ll probably be able to fit it in a briefcase.”
For DGCX – the world’s newest online commodities derivatives exchange, that commenced trading in November last year – the hardware is about the only thing that’s shrinking. A joint venture between the Dubai Metals and Commodities Centre (DMCC) – Government of Dubai, Financial Technologies (India) Limited and Multi Commodity Exchange of India Limited (MCX), DGCX is growing at pace.
Bin Sulayem is a Director at DGCX, having held the role of Chief Operating Officer of DMCC since its inception in 2002. His colleague Framroze Pochara is Chief Executive Officer of DGCX, and has over 19 years of industry experience, much of it garnered on the Indian stock exchange. Both are polite, friendly, and intensely proud of their achievements at DGCX.
“As with every major project, these projects look far-fetched for a Middle-Eastern city,” admits Bin Sulayem. “It’s been talked about, many times, but it’s easy to mention that we should have our own commodities exchange, whilst executing it is something else. “Getting the brokers, and getting the big names involved, wasn’t easy for the DGCX management, but at this stage we are in a good and healthy position – as you can see, volumes are increasing month by month.”
Indeed they are. Two weeks ago, DGCX concluded 14,823 contracts valued at US$334.62 million, this following eight consecutive weeks of gains. In the same week, gold prices rose by nearly 4.5% to register a 25-year record that will, by the time you read this, have been surpassed.
“For a while, Dubai has been seen as a city of gold, and so it’s easy for people to say we should have a gold exchange for spot trading and futures,” Bin Sulayem continues. “Then came 2002 and the founding of DMCC, where we set up a few projects, one of which was DGCX.
“Dubai is an important centre for trading precious metal and for trading many other commodities, and yet there was no trading mechanism. It is the third largest re-export centre in the world, so in fact, an exchange should have been in place a long time ago, if you ask me. That’s why the DGCX is very much a required exchange in the region.”
If the region required an exchange, then the rest of the world is also waking up to the opportunity offered by DGCX as it moves “from local to global”, as Bin Sulayem puts it.
“Everybody is looking at Dubai, when it comes to setting up shop in the Middle East,” he continues. “It is the main financial and commodities hub of the region, plus it has a geographical presence that places it at the crossroads halfway between Tokyo and Europe. We have a strategic advantage in terms of time zones, so large international players are looking at Dubai as one of the emerging hubs in this region, and as a result coming here and setting up here.”
Pochara is equally confident that DGCX has filled a niche for those traders who are either unwilling to take a break whilst the more established markets are closed.
“So far as we are concerned, we are filling a gap,” he says. “When it comes to other exchanges in other time zones, ours is totally complementary – we are covering from 10 in the morning to 10.30 at night, so we open with the Tokyo market in the morning, and we close with the New York market. It covers all the markets that are open during this time zone, which is again a unique position for DGCX. We are very happy that we have filled the gap between East and West.”
Yet DGCX took time to grow into that gap. Even though the exchange opened less than a year after the government-backed joint venture was launched, it did face initial difficulties attracting members.
“A few months back, when volumes were increasing slowly, it was a chicken-and-egg scenario – for us to attract the big players, you need the volumes, but to get the volumes you have to have the big players,” says Bin Sulayem.
However, things are now looking highly encouraging, as the exchange’s success echoes across the region, and beyond.
“With these big organizations, it’s usually the volumes that attract them [brokers],” says Pochara. “We’ve had some members that came from the local region, and in total we’ve had over 200 applications to join DGCX. Currently, we have 90 operational brokers on DGCX.
“By the second or third month we were able to announce that Deutsche Bank was a DGCX trade member, and now we have Standard Bank, HSBC, Man Financial, and Matsui from Japan,” he continues. “These huge firms all see an attraction to DGCX now. DGCX is still a new entity, but these firms are not joining something which might happen or could happen – it’s happening, it’s a reality, which gives them confidence, I believe.”||**|||~||~||~|Deutsche Bank’s entry, in particular, has proved invaluable for DGCX as the international financial giant is now established as a market leader in the precious metals category. DGCX’s growth, both in terms of trading volume and the credibility that such high-profile members lend to an exchange, is reflected in the recent decision to increase membership fees from US$100,000 to US$150,000. This move, Bin Sulayem adds, also pleased the exchange’s first members.
“One thing that made the first members of DGCX very happy was, I think, the fact that we’ve raised the membership fees – which shows that the values of their memberships have gone up,” he says. “The other thing was the surprise announcement that we’d be handling forex trading and currency futures – something these players had no hint of when they applied for DGCX membership.”
However, whilst the commodities-trading revolution is gaining pace, its managers are careful not to move too far, too fast.
“So far, we’ve not really marketed to the western world,” says Pochara. “We want to create a strong vehicle, and get the liquidity going, and then international players will hop onto the exchange more readily. Right now we might get the numbers, but we would not get the liquidity going.
“We don’t want to be an exchange that has good numbers, but hardly any transactions, so in that sense we are creating a strong base for expansion,” he explains. “We have good support from participants in the region. Now we’ve done that, we can go over our track record, and say ‘this is an exchange, this is what our record is, now do you want to participate?’”
DGCX is one of the few exchanges to have a fully de-mutualised board, a decision that, Pochara argues, mirrors a restructuring in exchanges worldwide.
“The management does not have any trading interests, and the members are not part of the management or part of the board. We believe that the referee cannot be a player as well,” he confirms. “This is the direction in which the new generation exchanges are definitely going. Even traditional, established exchanges are looking at de-mutualising and giving out shares to the public.”
The independence of management from trading operations also allows DGCX to retain credibility in terms of self-regulation, says Pochara.
“As an exchange, we regulate our members, and so act as a self-regulatory body,” he says. “We will be the primary regulators, and then of course the Emirates Securities and Commodities Authority oversee our operations. But the main regulatory responsibility lies with the exchange.”
This self-regulation is enhanced by a fierce commitment to top-level security at DGCX. The heart of the exchange, the server that digests thousands of deals a day, is supported by a specialist IT team and sits in a temperature-controlled room not even Pochara may enter.
The purring black box is currently supported by backup batteries and – once at its new home in the under-construction AU Tower – will be able to draw exclusively on the resources of a secure generator. Bin Sulayem, however, suspects that the generator will rarely be called upon.
“We have an excellent relationship with Dubai Electricity & Water Authority and the landlord, and they know that if there are any surprises, I will be in their face in seconds,” he chuckles.
In addition to this operational security, DGCX are acutely aware of the threat hackers could pose to a trading platform based exclusively in cyberspace. Again, measures are in place to preempt the problem.
“Of course, we have built in very tight security around the trading engine so that people cannot hack into the system and get up to mischief,” says Pochara, who stresses that the ease with which members can access the exchange is one of DGCX’s strongest advantages.
“The brokers connect to the exchange from their offices, whilst they’re sitting at home, or whilst they’re sitting on the beach or in a café,” he says. “The system is so flexible – you could have a member based in another major city altogether, such as New York or Tokyo, for example, fully linked to DGCX and operating from there, without even leaving their office.”
In anticipation of further growth, DGCX’s state-of-the-art trading engine is capable of handling any contract volume that traders may care to throw at it.
“The technology is one of the key strengths of our project, and is maintained by FTIL, one of our official partners,” says Pochara. “They are operating a similar market in India, the MCX, which is completely electronic and deals in volumes worth almost US$2 billion a day. The MCX is just three years old, sees this kind of liquidity on the exchange, and has not had any problems. The technology is completely scaleable, and this is one of the key strengths upon which we are building our exchange.”
As the exchange grows in size, it should – in theory – become easier to manage.
“When we first set this project up, we started with three partners who were not from ‘the trade’, per se,” admits Pochara. “DMCC, a government initiative, again doesn’t have any interest in the trade. I’m not saying it’s easy now, but we have a mandate, and once we provided the technology platform for these members to join in, the transaction process became much simpler.”
However, and fortunately for DGCX, neither man is short on ambition for the exchange’s future. Steel and fuel oil contracts are next on the agenda: September for fuel oil contracts, and the third quarter of 2006 for steel contracts. In addition, gold and silver options should also arrive before the end of the year.
“We are introducing those products that are demanded by the market, not just those that we think we need to introduce,” insists Pochara. “We will listen to the local market, and our traders, to determine what they would like to trade on, and what would be of use to them.”
He highlights fuel oil contracts as one such example, expressing bewilderment that the Middle East should turn to Singapore for its prices, and also suggests that the three currencies DGCX is to begin trading on will soon be joined by a host of others.
Bin Sulayem is equally bullish in his aspirations for DGCX.
“We want to be one of the world’s top five leading exchanges, as far as trade volumes, as far as members participating, as far as exposure,” he says. “We’ve made our mark in the Middle East region, it’s easier now to approach international players that have not yet participated in DGCX – they can look at the platform and see the trade volumes increasing from around 100 contracts a day, up to over 4,000 a day now.
“Word of mouth is spreading, members are talking to each other, and it’s happening,” he says with a smile. “We’re not out of the woods yet – we still have a lot to do,” he continues. “However, the critical time has passed. The brokers are in, they’ve tied the knot, and they’re married to us now and a divorce will cost more. They’re going about their business, and things are moving.”||**||
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