DUBAI: A drive for tighter regulation of Saudi Arabia's stock market may help to break the hold of short-term speculators on share prices, making the market more attractive to local and foreign institutional investors.
This week the Capital Market Authority, operating under a new chairman, announced a series of measures designed to reduce the volatility of shares, make them harder to manipulate and improve the quality of listed companies.
Authorities have tried in the past to lift the market's tone, with limited success. Currently over 90 percent of daily trading on the Arab world's biggest stock market, which has a capitalization of about $ 400 billion, is conducted by retail investors rather than institutions, officials say.
Because such investors often chase short-term gains in low-priced shares that are easy to manipulate, prices can become very volatile and money is sucked away from blue-chip companies that deserve to be more highly valued. This hurts the market's role as a stable source of funds for corporate investment.
The CMA's initiatives this week suggest it is making its strongest effort in years to change that pattern, fund managers and analysts said.
"The new management of CMA has started their work to enhance the market overall — expect a few more changes," said Mohammad Omran, an independent financial analyst in Riyadh. "These initiatives will try to organize the practices in the market and move it away from illegal and speculative trading."
If successful, the reforms could make the Saudi market more welcoming to foreign as well as local institutional investors. At present foreigners can invest only via a small number of exchange-traded funds and swap arrangements; Riyadh has for several years been preparing to permit direct investment, though it has not set a date for implementation.
Stock market reform also has political implications. After the Arab Spring uprisings elsewhere in the region, the government is spending billions of dollars to ease social discontent by cutting unemployment and poverty. Stronger capital markets could stimulate the private sector and create jobs.
The move against speculation appears to have backing at the top of the government. Custodian of the Two Holy Mosques King Abdullah appointed Mohammed bin Abdulmalik Al-Sheikh, previously an executive director at the World Bank, as chairman of the CMA in February.
Al-Sheikh has worked at US law firm Latham & Watkins in Riyadh; the firm said he had nearly two decades of experience representing sovereign wealth funds and government bodies in Saudi Arabia, and that his law practice focused on mergers and acquisitions, capital markets and project finance.
Last week Al-Sheikh told reporters that with other government bodies, the CMA was developing a strategy to promote institutional trading on the stock market, and was disappointed by the current "high levels of speculation" in shares.
"The CMA should put a limit on this manipulation to safeguard investors. We are currently trying to address this issue," he said.
On Sunday, the CMA announced stocks would be limited to price swings of 10 percent on their first day of trade, as opposed to the unlimited movement allowed previously. A 10 percent daily limit is already applied after listing day.
By slowing the ascent of newly listed stocks, the new rule may give institutional investors, which tend to have longer-term horizons, more time to buy into them.
"This is a step towards a more sophisticated market — the price of the IPO will hold more value,” said Tariq Alalaiwat, international sales manager at NCB Capital. “Usually, books are more inflated than they need to be, and people buy into loss-making companies for a quick buck.”
The new rule might end debacles such as the case of National Medical Care Co., which listed on March 13. It rocketed to an intra-day high of SR 200 from its initial public offer price of SR 27, but ended its first day at SR 122 and by March 31, had slid back to SR 72.
On Monday, the CMA said it was discussing with industry participants a proposal to calculate a stock's closing price using the average in the last 15 minutes of trading, weighted by volume, instead of simply the last trade. This would make it harder for traders to manipulate the closing price.
The CMA also proposed sanctioning listed firms if their accumulated losses exceeded 50 percent of their capital. The current regulation sets a threshold of 75 percent.
Earlier this month, authorities signaled they were serious about such standards by ordering the delisting and liquidation of Saudi Integrated Telecom Co., a relatively small and new firm which had struggled with losses for months.
Share price movements since Sunday suggest some investors are worried by the CMA's policy. Small-capital and insurance stocks, which are often favored by speculators, have dropped; Al-Ahlia Cooperative Insurance Co. plunged its 10 percent limit on Monday and by the same amount on Tuesday. The sector's index lost 12.3 percent in the last three days.
The overall stock market has not suffered much, however, suggesting other investors see benefits in the reforms. The main market index fell 1 percent between Sunday and Wednesday.
Alalaiwat said that in the long term, retail investors would be forced to become more intelligent in their stock picks, rather than simply chasing shares that appeared to have entered an uptrend.
"These new regulations will calm down the market and people will have to start picking stocks with fundamental value."