Exchanging in the Emirates

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On March 18, Abu Dhabi Securities Market (ADSM) announced it was forging a partnership with NYSE Euronext, the world's largest stock exchange firm, to develop its trading platform and products.

According to ADSM director-general Tom Healy, one of the first moves by the two companies will be to investigate the development of a derivatives market, which would be the first in the Gulf region. Companies would be able to list on both exchanges, increasing the visibility and accessibility of Abu Dhabi stocks to international investors. This is in line with ADSM's aim of internationalising the market over the next few years, and indeed fits with Abu Dhabi's overall strategic goal of becoming a regional financial centre. ADSM is also an attractive prospect for its foreign partner; in the past year, the ADSM index has grown more than 50%.

The agreement will see New York-based North American and European exchange operator NYSE Euronext provide ADSM its trading platform technology. ADSM will therefore shift away from its current system, which is provided by New York-based Nasdaq. NYSE Euronext has recently partnered with a number of exchanges, including the Tokyo Stock Exchange, to develop their platforms.

The deal is just the latest in a series of international partnerships and purchases involving exchanges based in the Gulf. In September last year, Borse Dubai, a holding company which owns the two stock exchanges in Abu Dhabi's neighbouring emirate, purchased a 20% stake in Nasdaq, as well as Nasdaq's 28% share in the London Stock Exchange (LSE). In return, the American outfit received a third of the Dubai International Financial Exchange (DIFX), which will be rebranded Nasdaq-DIFX. The two bourses then united to purchase Scandinavian exchange OMX, which was transferred to Nasdaq.

Meanwhile, Qatar Holding, an arm of the Qatar Investment Authority has taken a 15% stake in the LSE. The London bourse has confirmed that it wishes to use Qatar as a base for regional expansion, and that it would be providing the services and technology to Doha Securities Market. Dubai had previously been courting the LSE, but its agreement with Nasdaq meant that the British bourse eventually went for Qatar.

The deals could intensify competition between the Doha and Dubai exchanges, as Nasdaq and the LSE have a strong rivalry, with the latter turning down a takeover bid from the American exchange in late 2006 and early 2007.

Some analysts have seen the ADSM-NYSE alliance as move to strengthen the capital's exchange with respect to Dubai's, as well as setting up a regional base for NYSE Euronext to rival Nasdaq's, allowing the two American bourses to compete in the region through their local partners.

The adoption of different trading platforms may mean the technological link between the ADSM and the Dubai Financial Market will not be able to operate as it has in the past, with traders often bundling the exchanges together as a single UAE index, though it is still too early to tell. Certainly, it makes the merger anticipated by some seem a more remote possibility. However, there is little expectation of divergence and contention and ADSM's Healy has urged cooperation between bourses in the region. Furthermore, the ADSM's performance has long tracked those of others in the region. While the exchange certainly wants to grow in its own right, it is unlikely to benefit from poor results from its regional rivals. For the foreseeable future, strong growth in other exchanges across the GCC member states is likely to bring in more investors to the ADSM, with the rising tide lifting all boats.

The partnership with NYSE Euronext may well help ADSM build up other areas which it is looking to develop as it becomes more mature, in addition to derivatives and visibility. The exchange is working to improve transparency among its listed companies, which has been a troublesome issue in the past, and is also implementing a code of conduct for traders. Expertise from its partner on both issues will be welcome.

ADSM is also leading a drive to encourage Gulf firms to issue bonds on regional exchanges rather than in Europe or North America. With NYSE Euronext providing instant access for worldwide investors, and bringing its experience of global bond markets, bond offerings in Abu Dhabi are likely to become ever more attractive.

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