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Thu 10 Jan 2008 04:00 AM

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New lease of life for the DIFX?

The huge DP World listing seems to have kickstarted the DIFX, but greater depth and variety is still needed.

After a slow start, the listing of DP World on November 26, 2007, appears to have awakened investor interest in the Dubai International Financial Exchange (DIFX).

As the first exclusive listing on the exchange, any investors interested in the shares have been forced to use the DIFX.

Everyone knew that the market needed a listing, and they delivered that.

The figures speak for themselves: in October, 84,230 shares were traded on the exchange; in November, including five days in which DP World shares were listed, 784,086,493 shares were traded on the DIFX. Although DP World shares accounted for 99.968% of trading by volume in November, the increase in activity could also benefit other listed securities.

Seif Fikry, head of brokerage at EFG-Hermes UAE, says the firm has seen a dramatic increase in interest in the DIFX since the DP World listing.

He points out that clients and brokers interested in trading the shares have had to invest time and money to set up the market on their systems, which removes one barrier to entry.

"Now anyone who is interested in DP World will have to set up that market on his platform, and at that point of time traders can now either buy Kingdom Holding on the DIFX or on the LSE order book," he says. "They were forced to set up the market because of DP World."

Fikry adds that the decision by the Dubai Financial Services Authority (DFSA) to allow retail investors to access the DIFX has also triggered a lot of interest in the platform. However, he believes that more could be done to bring different kinds of investors to the market.

"What I really think would do this market very well is a primary listing and a secondary listing between the DIFX and one of the local markets to allow specialised arbitreurs," he says.

"Because for the DIFX versus the LSE, there are not a lot of special arbitreurs there, but in the local market there are tonnes of them and they would come here. They're not your typical investor but at the end of the day these are liquidity providers, and they represent a special breed of investors that you do not find here in the UAE."

"These breeds are very active in Egypt. If there was an Emaar or Dar listing on DIFX, they would be here the next day."

Fikry points out that more mature market tend to be less volatile under normal conditions because there is such a broad spectrum of investors providing liquidity in both bullish and bearish conditions. By attracting specialist investors, the DIFX could benefit from increased stability.

Brokerage commissions and other transaction costs on the DIFX have tended to be higher than on more mature exchanges in the West, but the exchange's position in a region that has a booming economy and no other securities exchanges of comparable sophistication means that it is likely to become increasingly attractive.

"I think this will continue to grow going forward, especially since DIFX as a platform has much easier access than the rest of the Middle East and North African platforms," Fikry says. "I believe that going forward, further products - purely cash equity products - will help DIFX liquidity dramatically."
EFG-Hermes and Mashreq Securities are both accredited to offer retail trading on DIFX TraX, the exchange's structured products platform, which launched on August 28 last year. Despite its proposition as the only platform of its kind in the Gulf, TraX has seen low levels of interest from investors - in November, only four structured products changed hands.

However, Khaled Walid Kurdieh, CEO, Mashreq Securities, says that this minimal trading activity is down to lack of awareness rather lack of investor interest.

"It is not fair to say that there is little interest in the DIFX TraX among retail clients," he says.

"Since the launch of this platform, retail brokers and others have not pro-actively promoted these products and very few had gone back to their clients to remind them of the objectives in investing in TraX and, to a large extent, their outstanding performance since inception."

Investor education may play a role in driving interest in what is a new kind of product in the GCC region, he says.

"The complex concept of some structured products and how they work needs to be simplified as much as possible in order to get retail investors to build enough confidence to invest," says Kurdieh.

"The benefits of investing in TraX as an alternative tool to a direct investment in stocks can provide the investor with the diversification and exposure they are targeting and perhaps minimise their risk. Now this needs to be communicated regularly to retail investors until sufficient awareness has been created."

Kurdieh adds: "Perhaps asset managers can also play a more active role in creating this awareness."

But retail investors are not the only people who need to increase their knowledge of structured products: most regional investment houses do not have any staff specialised in derivatives, although Fikry says EFG-Hermes is looking to develop in this area.

He believes that, given the rapid development of the main DIFX platform, there could be an equally sudden breakthrough for TraX if someone can create the right product to do for derivatives what DP World did for the DIFX.

"Everyone knew that the market needed a listing, and they delivered that," Fikry says. "And they delivered it in less than a year. There must be a derivatives guy out there saying, ‘We need this', and it will happen."

Vital StatisticDP World takes the Lion's share

303,281,378: Volume of shares traded in DP World on the DIFX on 26/11/07.

4,656: Volume of shares traded in other companies listed on the DIFX on 26/11/07.

0: Volume of derivatives traded on DIFX TraX on 26/11/07.

Increase in traded volume on the DIFX

930,787: Increase in traded volume on the DIFX between October and November 2007 (from 84,230 to 784,086,493).

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