RIYADH, 4 July 2005 — Price discovery and market manipulation can be compounded if trading is dominated by big players and/or large trades. Data show that even while trading has increased tremendously in the Saudi stock market in the past few years, big players continue to dominate. In 1995, there were 291,742 transactions (or “tickets”) involving 117 million shares valued at SR22.3 billion. By 2004, the number of transactions had increased over 45-fold to 13 million, involving 10.3 billion shares with a total value of SR1.8 trillion! Nowadays, more transactions take place in a month than it used to in a whole year back then.
However, despite the large increase in trading, the average size of each ticket remains very large. In 1995, the average ticket involved 401 shares with a value of SR79,615.
By 2004, the size of the average ticket increased to 773 shares valued at SR133,177. This is over three times the Kingdom’s per capita GDP in 2004, thus putting the stock market outside the reach of many ordinary citizens. In the last ten years (1995-2005), the size of each transaction has averaged 917 shares valued at SR124,000.
The large size of each trade and dominance of big players can create problems related to: (1) price discovery, (2) market manipulation (3) volatility of share prices, and (4) inability of small investors to invest in the stock market.
Large trades are often the vehicles used by unscrupulous people to manipulate stock prices. The issues are highlighted by the large daily intraday swings in the Tadawul index compared to established global stock markets.
The fact that trading continues to be dominated by big players while the supply of shares is limited (only 76 companies trade) also supports our view that the market is trade-driven, rather than fundamentals-driven. It also suggests that big players are turning over their shareholdings through share churning and sector rotation in order to make trading profits.
The key to reducing the dominance of big players is to empower small investors. Of course, it will be difficult to change existing shareholding patterns, but there are two solutions going forward: (a) allowing more and more initial public offerings (IPOs), while ensuring that small investor can participate in them fully, and (b) increasing the role of mutual funds.
In this context, the Capital Markets Authority (CMA) has helped by setting maximum limits and/or a small minimum limit on the number of shares that an investor can subscribe.
As a result, over half the Saudi population participated in the Bank Albilad IPO. Since listing, Albilad shares have been among the most actively traded ones, with an average ticket size (SR26,000) significantly smaller than the market average. Among other recent IPOs, SADAFCO and Etihad Etisalat also show the emergence of small investors. Their average ticket sizes in May were SR8,000 and SR54,000, respectively. In fact, these new listings have brought the average ticket size in 2005 (ytd June) down to 340 shares valued at SR102,000.
(Khan H. Zahid is chief economist and vice president at Riyad Bank. He is based in Riyadh.)
