New study finds consolidation of UAE stock markets 'vital'

Amid the dramatic changes in the post-financial crisis world, there are high expectations of essential changes in the stock market industry around the world and this will have strong impact on local markets, according to a research study on the outlook of UAE stock markets. The main impact is predicted to be the need to consolidate and merge between Dubai Financial Market (DFM) and Abu Dhabi Securities Exchange (ADX) to create a stronger entity in the country, according to Wafa Sherif, a UAE-based researcher in stock markets. The study is part of a PhD thesis on the impact of the financial crisis on stock markets and the outlook of global markets, taking UAE stock markets as an example of the new trend. "Global financial markets are growing and innovating rapidly. "Physical trading floors have been replaced by electronic trading systems and the internet is playing a crucial role in the globalisation of markets. There is an increasing trend worldwide towards mergers of exchanges in order to mobilise resources and efforts to follow such rapid changes, as the forces of globalisation is making change inevitable and the status-quo is not an option. Thus, if exchanges are to survive, merger is the only way," Sherif told Emirates Business . "The advance in information, institutionalisation, and the growing competition in the rise of alternative trading systems has put more increasing emphasis on the need for stock exchanges to be more cost efficient, transparent and more widely accountable. "Accordingly, traders and investment firms no longer confine themselves to their domestic markets or their immediate homeland, but can reach out to pools of liquidity in other countries and route their orders whenever they choose seeking the best price for securities across a number of different exchanges," she added. Wafa said in order to survive in this highly competitive environment, stock exchanges need to concentrate on a number of critical success factors as there are high expectations that a lot of markets will not survive and only few exchanges will survive in the long run. Recently, the DFM acquired Nasdaq Dubai in a move to consolidate and integrate the two markets in one platform and the process is witnessing continuous progress to achieve full integration of the two markets by the third quarter this year. This trend came with expectations of the study that exchanges should merge and consolidate to create stronger and more cost efficient ones. Strategy needed "UAE stock exchanges need to have a strategy to compete in this global marketplace, and should prepare for these changes and the expected coming developments, which will be driven by mega stock markets, that accelerate the rate of developments in industry architecture," she said. "The DFM and ADX as separate exchanges in the UAE have no choice but to prepare for the changes taking place in the securities industry, which its cumulative effects pose fundamental challenges and threats to continuance as separate exchanges. Hence, merger is the necessary step in order to survive and compete in the globalisation area." According to the study, such proposed merger will lead to create a unified stock exchange in UAE that would help build strong credibility in world-class financial markets. It will create added value for merged markets, together with the economy. Merger will also clearly place the new entity in a better position to forge ties with other international entities, explore new markets, and attract international investors and strategic partners. "Therefore, given the competitive forces that play on the international stock markets, I believe the merger between DFM and ADX is entirely justified and potentially advantageous," Wafa said. She said it is just a matter of time before decision makers in the country would decide on a merger plan. "The logic supporting this initiative is compelling as the businesses uniquely complement each other. This merger is a sensible business decision since there is no need for two exchanges in UAE. "Combination of ADX and DFM will create a leading, diversified, and integrated stock exchange that is able to punch above its weight in the global capital markets. Such merger no doubts will be a great opportunity to enhance UAE capital market, and will have significant benefits for both sets of shareholders and all market participants. "Accordingly, merger is able to improve performance, and help UAE to get a significant rank among the stock markets regionally as well as internationally." Proposed merger The study highlighted benefits of the proposed merger as consolidating operations of the ADX and DFM will be an opportunity to create one strong and functioning stock market that could promote long-run economic growth for UAE more than two separate small exchanges can do. "Competition among exchanges is heating up on a global scale, as its scope has broadened from the domestic to the international level. This growing competition has