Eleven brokerages in the UAE have either shut down this year or are in the process of closing, while many others are looking to join up with other companies as difficult market conditions persist, the Emirates Securities and Commodities Authority (ESCA) said yesterday. A brokerage is required to notify ESCA when it is closing in order to give clients time to settle their positions and close out their accounts if they choose.
It is unclear what a closure will mean for individual investors as brokerage firms in the UAE are custodians of shares in addition to being brokers. Three brokerages closed last year. There are 91 brokerages operating in the Emirates, although communications that brokerages have had with the regulator suggest the number is likely to shrink. "Volumes have significantly dropped, leading to a drop in revenues from brokerage firms, making it difficult for 91 brokerages to compete with each other," said an ESCA official, who was not authorised to speak publicly.
Trading volumes have fallen sharply since June 2008, when investor interest in the UAE was at its peak during an extended economic boom. Since then, the Abu Dhabi and Dubai bourses each have lost almost half of their value. Trading volumes have also fallen by more than half. On the Abu Dhabi Securities Exchange, the average trading volume this year has been about 66 million shares, compared with 149 million last year.
On the Dubai Financial Market, average daily volume has dropped to 202 million from 425 million. Those trends - fewer trades and shrinking market capitalisations for listed companies - are a bad combination for brokerages as they result in lower commissions. Making matters worse is that at the moment ESCA does not have procedures in place for mergers between struggling companies that want to consolidate in order to survive.
"We just underwent a merger. It was difficult. There are a lot of policies and procedures that are not written down, so firms have to go ahead with it on a customised basis between themselves," said Saad al Chalabi, an institutional trader at AlRamz Securities in Abu Dhabi. AlRamz acquired Invest AD's brokerage unit, National Financial Brokerage Company, at the end of last year. Without that legal mechanism in place, many brokerages under financial pressure choose to shut down. The ESCA official said that the agency had prepared a draft procedure on administering mergers between brokerage companies, including protections for investors, and that it would be presented to the ESCA board of directors soon.
Mr al Chalabi said: "There are too many brokerage companies in this country. Some have been losing money every month. It's not new. They are just finally closing down.". @Email:halsayegh@thenational.ae