Per Larsson: Steering the DIFX success

 

Per Larsson (pictured above) is the man who tried to buy the London Stock Exchange. As the then chief executive of Sweden’s OMX, which operates the Stockholm Stock Exchange, Larsson launched the audacious 2001 bid to capture Europe’s largest stock market.

This may have failed, but it helped the LSE escape a hostile takeover from Frankfurt-based Deutsche Borse and it remains independent to this day. Now, as chief executive of the Dubai International Financial Exchange (DIFX), he is charged with making it the regional stock market hub.

This ambition took a giant step forward with the floatation of DP World, the globe’s fourth largest ports operator. The Dh18.4 billion initial public offering was the Middle East largest ever and provided the DIFX with the ‘big ticket’ listing it craved.

Liquidity was hard to come by prior to DP World’s debut in late November, but Larsson now expects the DIFX to prosper.

A major obstacle to kick starting trading on the fledgling market has been simply persuading individual investors to register with an approved broker. This was a prerequisite of subscribing to the DP World, so the DIFX now has an army of investors with the potential to trade. The next challenge will be to secure further primary listings.

Since his appointment in July last year, Larsson has embarked on a series of reforms designed to stimulate liquidity on the fledgling market. Perhaps the most notable has been the ‘Market of Markets strategy’, which was launched at the end of 2006.

“This means besides the main stock market, we are looking to create other markets under the same platform and jurisdiction,” said Larsson. “These markets will cover derivatives, Islamic products, investment products, structured products and exchanged-rated funds and they all need a different framework from the main stock market.”

Larsson said the launch of DIFX derivatives products was dependent on UAE DFSA regulatory approval, together with the development of short selling, stock lending and a ‘fails’ infrastructure. The latter will enable traders to borrow to cover losses.

“These are prerequisites for the derivatives markets, as is a proper underlying liquid stock index to support derivatives trading. We have not announced a date for the derivatives market. It’s too early to say whether it will be this year.”

Larsson said he was focusing on building the DIFX’s distribution network, with accessibility, listings and market development the key areas. “We recognised that it was difficult for both retail and institutional investors to trade on the DIFX. We will see a lot more activity with more brokers either directly or indirectly connecting to the exchange.”

In March, EFG Hermes and Mashreq Securities launched retail investor trading programmes for the DIFX. The two companies will route trades on the DIFX through their respective sister companies which are both members of the Dubai International Finance Centre (DIFC).

“Retail activity creates interest from market makers, institutions and hedge funds, so those will follow. We have seen some institutional trading both from regional and international investors,” said Larsson.

There are currently eight companies listed on the DIFX, including Rana Sugars, Albaraka Banking Group, Citigold Corporation and Man Industries.

Larsson said: “It’s vital that we accommodate all kinds of investors – institutional as well as retail, local as well as international, long term as well as hedge funds. This, over time, will create more stability than exchanges which have a very high dependence on retail traders, for example. Retail investors are trading on rumours, while institutions do a lot more research and have much more capacity to stay with a stock if they believe it is correctly or under valued.”

The DIFX has linked up with the Dubai Financial Market to enable the latter’s retail investors to trade securities on the former. DFM investors must first open a US dollar account and convert dirham holdings to trade on the DIFX.

Larsson said: “That’s a good example of how we needed to develop our infrastructure because it was not originally planned that way. We will see other currencies being listed on the DIFX this year. We cannot list securities in dirhams, but we can do other currencies. We’re looking at the big ones.”

Larsson would not reveal which companies were planning to list on the DIFX, but said it had “a healthy pipeline” of initial public offerings (IPO). “The market conditions will decide whether a company will list this month, this year or after. This is beyond our control so we wouldn’t make any official forecast. We have seen some delays in the pipeline. If market conditions suddenly become more positive we will have a lot more companies to list and vice versa, so it’s very difficult to predict.

“On the listings side, it has been important to create more awareness of what the DIFX can offer to local and regional entities that are looking to issue equity or debt. Over time this will secure growth. In 1997, when OMX acquired the Stockholm Stock Exchange it had a 135-year history so it was one of the most well recognised brand names in Sweden. The DIFX started in 2005 so we still have a long way to go to create that level of awareness.”

In the beginning…

During his seven years as OMX chief executive, Larsson oversaw the successful merger of the Stockholm and Helsinki Exchanges, but he said there were currently no plans for the DIFX to follow this blueprint. “We see a lot of organic growth. We are still a start up and have made a lot of progress in the past six months so we can develop our platform for new products and list more securities and debt. We are fully focused on that. The more mature exchanges have to gain growth through acquisition, but we don’t have to.

“Timing was an important part of the success for OMX. We started our operations in 1984 and listed in 1987, making us the first exchange in the world to go public. We had a very strong focus on development and innovation. We developed best practices for ourselves. There are already a lot of similarities with what we are trying to achieve with the DIFX such as developing and innovating the market and educating through the DIFX Academy.”

Larsson predicted the DIFX could help solve the problems of the region’s stock markets, which are currently too prone to retail-based speculation and apparent manipulation by big players.

“We offer a different market. We combine local, regional, institutional and retail investors. That will create the most stability. How the local exchanges will approach that is more for them to answer. In a way the DFM is a completely different market, because we operate a different market model. We have a lot of institutional interest in our market, together with contractual market makers and they both create stability. But of course the IPO climate is being affected by the downturn in the local and Asian markets and rest of the world.”

As part of the DIFX’s drive to become the region’s international exchange of choice, it has benchmarked itself against the best global regulations. “This applies to regulatory structure, listing and business rules. We believe we are on a par with the international financial centres,” said Larsson.

He denied claims the DIFX’s strict rules were deterring investors. “Issuers come from the region, Europe, South Africa and Australia, so its pretty much international.”

 

Larsson left OMX in 2003 after seven years as chief executive, having successfully agreed a merger with the neighbouring Helsinki stock market. During his tenure at OMX, Larsson saw it supply its market technology to 20 exchanges worldwide.

Perhaps the Swede’s greatest achievement at the DIFX so far has been attracting the Middle East’s largest initial public offering. The Dh18.4 billion DP World IPO will become the anchor listing on the DIFX, and is expected to kick start trading.

Larsson has promised a pipeline of listings in 2008, with further Dubai Government companies expected to float.