Regional bourses focus on alliances with global players and diversification from cash equities. Bahrain will launch the ninth stock exchange in the region next year – the United Arab Emirates alone has three bourses – and with volumes low and fees high, the case for consolidation is strong. But there is little enthusiasm yet among bourse officials for a pan-Gulf exchange, despite the fragmentation of liquidity being a major deterrent for foreign investors, and Dubai is likely to remain pre-eminent for some time to come, industry experts and analysts said. “A lot of this is political, if the exchanges were purely profit-driven then consolidation would happen a lot sooner,” said Robert McKinnon, Al Mal Capital managing director. The UAE apart, regional bourses have little domestic competition to worry about, with rival exchanges unlikely to receive regulatory approval to trade, as has happened in developed markets. This protectionism enables Gulf bourses to charge fees many times higher than their global counterparts. “The global economy has slowed the development of the regional stock markets. The question is whether an economy the size of the UAE's can support three stock markets competing for the same liquidity - the answer is no and I think they know that,” said a Dubai-based analyst. But Gulf bourses are increasingly eager to link up with international players and move away from cash equities. In June, the Qatar Exchange agreed to sell a 20 percent stake to NYSE Euronext and said it would launch a derivatives platform, exchange-traded funds and bonds. Analysts said the Qatar deal showed the accent was on rivalry and not consolidation, though competition could eventually lead to more pressure to merge. “It shows the race is on for who wants to become the regional hub,” said Haissam Arabi, chief executive of Gulfmena Alternative Investments. “This is in everybody's best interests, with more competition pushing innovation, the creation of new instruments and better pricing.” McKinnon said if markets opened up to competition, fees would have to come down eventually and if this happened there would be a need to consolidate. The alliances are driven by the needs of both the international players and the Gulf bourses. “International exchanges are making a land grab and placing their bets in terms of who will be stronger going forward,” said McKinnon. “They are buying an option on the future success of the exchanges and buying a seat at any potential consolidation in the future.” The Abu Dhabi Securities Exchange and Kuwait Stock Exchange have agreements with NYSE and Nasdaq OMX respectively and plan to launch derivatives markets. “Derivatives will enhance liquidity substantially and are part of the maturing of the regional markets,” said Rami Sidani, Schroders Middle East head of investment. Nasdaq Dubai is the regional leader of diversification, with an exchange-traded commodity, listed bonds and a derivatives exchange. The latter trades futures on 20 UAE stocks and an index future. Yet few of Nasdaq Dubai's 15 equities trade on a daily basis, while trade is buoyant on its sister exchange, the Dubai Financial Market, which is owned by Government-owned Borse Dubai. The latter sold a one-third stake in the rebranded Nasdaq Dubai exchange to Nasdaq OMX Group in 2008. There are signs that international players could have a role in pushing much-needed consolidation. Analysts anticipate a merger of Borse Dubai's two exchanges after the proposed consolidation of back office operations which will bring DFM and Nasdaq Dubai on to a single trading system. “There are areas where we're working very closely together where we could both benefit,” Essa Kazim, Borse Dubai chairman and executive chairman of the DFM, told Reuters in June.
