It has proved to be a rollercoaster summer for the Dubai Financial Market (DFM), after a major scandal in late August led to lingering questions over the regulators' ability to deal with the booming bourse. Yet such events had little impact on the market's trading activity, which continued to boom.
The scandal, which involved allegations of share manipulation, dealt the DFM's reputation an embarrassing blow.
The allegedly bogus trading was centred on the purchasing of stocks in Dubai Islamic Bank, the world's first Islamic bank and one of Dubai's most powerful financial institutions. On August 28, the bank saw its shares rise 7.4%, ending the day with $2.6bn of the company's stock being traded, accounting for 84% of the daily turnover of the DFM.
Looking at the large volume of trades in the bank's shares over just a few hours, the authorities from the DFM and Emirates Security and Commodities Authority (ESCA), the UAE's financial regulator, moved to strike all the day's trades in Dubai Islamic Bank. The finger quickly pointed at certain brokerage houses, which the authorities promised to name after they completed their investigation.
Holding true to their promises, the regulator panel identified the main culprits as a few local traders.
"The ESCA said on Tuesday [September 6] that the panel found that the deals had been struck by two UAE investors, namely Rashid bin Zayed bin Ouaidha al-Qubaisi [underage] under the tutelage of his father, and Khalid Ahmed Mejrin al-Kindi in addition to Yahia Awadhallah Salama [a Palestinian] who is managing the second investor's accounts without a formal letter of authorisation," reported the Emirates News Agency (WAM).
The deals were conducted through al-Sharhan Stock Centre, which came under heavy speculative attack after the controversy hit. The centre had allegedly spread unfounded rumours about an upcoming rights issue from the Dubai Islamic Bank to drive activity higher.
Yet the fact that only two people were named seems suspect to many analysts, given the scope of the manipulation. The amount of money that was turned over - $2.6bn - indicates to many that this was a well-planned operation. Many suggest that the alleged fraud had been in the works for months and had serious financial backing.
Yet despite one of the largest crackdowns ever by the central bank, life on the DFM has never been better. After a July that saw it experience a significant drop, the market rebounded back to its original highs in August. Even after the Dubai Islamic Bank's shares were erased from that day of trading, the market quickly rebounded to its old levels.
On September 14, the market even hit a record-high, besting the all-time record set on the previous day. The bourse attracted over $55bn during the first seven months of 2005, while the market only generated $13bn in all of 2004.
Amidst the buoyant years' growth, the regulators have had a rocky year steering the bullish market. Besides the late August scandal, there have been a number of other occasions when the authorities have had to step in. In June, several local banks reportedly offered loans of 12 times their cash stakes in the Aabar initial public offering (IPO), leading to the offering being 800-times oversubscribed.
The central bank countered by fining the banks and implementing a new IPO law that required companies to have a proven track record before listing on the market. There have been few IPOs since then, and it remains to be seen how effective the new rules will be.
Yet in all of these cases the regulator has been largely reactive and not pro-active when trying to tighten the screws. In fact, most of the practices that are now drawing condemnation have been going on for years.
As recently as 2004, reports show that banks were loaning as much as 50 times their actual cash stakes, until the central bank encouraged them to stop the practice. When the authorities came down on the banks in June, the decision not to name and shame could have been a warning shot - that though these practices were tolerated in the past, they won't be anymore.
Market manipulation, additionally, has been prevalent for some time now. In a market that boasts less than 30 listed companies, it isn't hard to change the face of things with a few large trades.
"A lot of what we have seen on the market in the past is manipulation," one local market analyst told OBG. "People who want to sell post a large sell order, which leads to a lot of people dumping stock... It is difficult to nip something like this in the bud."
The authorities might not want to either, as they are loath to restrict the growth of a booming market. However, regulators also know that they have to continue to refine rules to make the DFM a respectable place of business in the eyes of international observers.
One of the most difficult problems the regulator faces is the current huge liquidity in the market. At the moment, people have far too much money and too few places to put it. Large-scale market manipulation is easy when investors can pour huge amounts of cash into stocks. Banks also have little to fear with loaning large amounts of money for IPOs that are almost guaranteed to attract plenty of eager money.
With such huge liquidity also comes the risk of inflation, which is already hitting the market hard. Some analysts argue that the central bank hasn't done enough to curb the overvaluation of stocks and that asset price inflation is going to be a major hurdle in the coming year.
The key seems to be getting more regulation in place. From the actions of authorities this summer, it is clear that they won't hesitate to clamp down in areas where they have been lax in the past. However, these problems are the tip of the iceberg if the central bank doesn't get more aggressive in implementing new governance. If the DFM continues to be controlled solely by market forces - with the occasional disciplinary action by the regulator - the market might be in for some future trouble, if and when the liquidity starts to ebb.