Internet shopping has yet to take off in the Middle East, but online trading is another story, with banks and brokerages scrambling to set up platforms to tap into the surging demand for the service.
In the last few years, online trading (OT) has started to flourish in the region, with institutions in Egypt, Palestine, Saudi Arabia, the UAE, Kuwait and Lebanon getting in on the act where people can trade, at the click of a button, in stock markets, foreign currencies, securities, futures and options.
The sector is growing at such a rate that major OT players like Mubasher, which started in Saudi Arabia and expanded into Dubai and Abu Dhabi, then the rest of the Gulf, has plans to go global by entering the African, Indian, Indonesian, Iranian, US and European markets.
“We started with 300 subscribers in 1999, and went to half a million in 2008, so it’s a boom,” said Mohammad Jamal, business development manager of Mubasher. “We will maybe reach a million or more subscribers by the year end,” he added.
The attraction of OT as opposed to the traditional form of dealing directly with a broker is to cut out the middleman, save on transaction fees, and be able to immediately monitor and make transactions.
“Users save a lot, and know more about their investments. There also used to be a lot of misbehavior among brokers,” said Jamal.
Saving on Labor
The advantage for institutions is less staff and fewer brokers, as some 4,000 Merrill Lynch brokers in the USA found out recently when they were laid off due to the surging popularity of OT.
“In 1996 we had 50 financial brokers, and today just one or two brokers can do around the clock shifts,” said Walid Abou Sleiman, CEO of Aksys Capital, a Lebanon-based foreign currency brokerage.
For larger institutions, OT has allowed them to expand into other areas. Egyptian financial giant EFG-Hermes, for instance, has been able to enter the retail market by going online, as well as expand its footprint in the MENA region, initially with OT in Egypt, and now also in the Emirates.
“We’re going vertical and horizontal, trying to have an online team in every country that allows everyone to trade in different markets. We are also trying to get people in the UAE market into Egypt, and vice versa, as well as increasing percentage here,” said Mamdouh El Baz, regional director of online trading at EFG-Hermes.
Lebanon’s Arab Finance Corporation (AFC), which has developed the AFC BeirutTrader, the first OT platform that is providing for investors direct market access to the Beirut Stock Exchange (BSE), is also optimistic that their recently launched system will be a boon for Beirut.
“The AFC BeirutTrader has been designed to cater to the needs of private and institutional investors as well as fund managers and gives a powerful tool to investors wishing to trade in the BSE,” said Tarek El-Ahdab, manager of AFC. “There is a general move towards OT globally and it is only natural that investors interested in the Lebanese market be given the possibility to trade online.”
For institutions like Aksys Capital, OT has enabled the firm to rise above the country’s political and economic instability through an online platform open to anyone worldwide for financial currency trading that has liquidity provided by major global players Citi Group, Deutsche Bank, the Royal Bank of Scotland, UBS, and Bank of America.
“Before OT the FX market was restricted to the big players but today, with technology, anyone can have access,” said Abou Sleiman, adding that out of the $3 trillion in foreign currency trading worldwide, OT accounts for over $60 billion.
Competitive systems
With OT platforms not necessarily restricted to one domestic market, but rather regional and increasingly global ones, competition between platform providers is tough and getting tougher. In Dubai, over 100 brokerages have opened up in the last four years, with some 60% having electronic capability. In Egypt, EFG-Hermes is competing with nine other players, although the company, along with Al Arabia Online, dominates 90% of the Egyptian market, according to El Baz.
In Saudi Arabia, the region’s biggest economy and where OT is at its most developed, 350,000 of Mubasher’s half million subscribers are from the country, and Mubasher handles more than 50% of all OT transactions and volume. “Last year, of all IPOs in Saudi 80% took place online, either through the website, via mobile phones, or at ATMs,” said Jamal.
The challenge for OT service providers is therefore to offer the best online platform that is easy for clients to use, offers multiple trading options and client specific tools, as well as being informative. Companies are consequently teaming up with international programmers, in the case of Aksys Capital with Ireland’s Squared Financial Services, while other OT platforms were developed in conjunction with, or actually for, local bourses, which was the case for Mubasher in Riyadh and AFC in Beirut.
And aside from buying and selling online, subscribers can also trade via their mobile phone, watch line prices and ticket rates. Nonetheless, improvements need to be made said Jamal. “At Mubasher we’ve done a lot of R&D, and will introduce advanced smart ordering features like algorithmic orders and, where orders take place according to your strategy, automatic trading and profit capabilities.”
OT providers are also scrambling to offer timely and informative analysis on financial markets to offset the region’s lackluster media coverage of financial markets.
“These are not established markets and there is a total lack of financial reports, information may be skewed, and not enough information for people to make wise decisions,” said Adam Kaye, center manager of the Online Trading Academy in Dubai. Indeed, millions of Saudis were stung when the Tadawul stock market plunged in 2006 — a fall which was blamed on, among other things, excessive speculation and insufficient knowledge of the risks associated with trading.
“The way people use OT could be dangerous,” said Sami Akhras, general manager of AFC. “You can get in and out within a few minutes, and they could be a catalyst for trading more than they should. People are under the impression it is an easy way to make money.”
As a result of such associated risks, Kaye said technical analysis and real-time charting is key.
“Everyone is trying to come up with a better mousetrap, but it’s not really working. The charting is the problem, and the greatest thing people are aware of is charting capabilities for markets — it’s still not developed to the point it is in the US. Reuters has MetaStock, and they are the leaders of global availability, but Mubasher is feeding to Reuters for the region, so Mubasher has a big edge over everybody else,” he pointed out.
Such an edge, said Kaye, could lead to the possibility of an oligopoly by a few online brokers, recounting how at a conference on OT Mubasher, the last company to address the audience, said that everything other OT companies had in the pipeline Mubasher had already done.
“Mubasher have created an amazing system and can replace 80% of small brokers in the region. The future is mega-brokers,” said Kaye.
Not all agree on such a future however. “I don’t think there can be a monopoly, as the backbone behind all this is IT, so you have to develop a good system. The feed is crucial and it comes from the banks,” said Abou Sleiman.
Market hindrances
With such rapid expansion, regulations in many countries are still not up to speed. Jamal said money transfers were an issue, with countries having different rules and regulations. Equally, settlement days differ, with Saudi Arabia doing so on the day, whereas in Egypt it is three days after.
“Egypt is doing this on purpose. It is a mature bourse and an investor market, not a trader market where people speculate. They want to lessen the effects by imposing day plus three to have only serious traders,” said Jamal.
In the Emirates, commissions are levied on OT transactions, a minimum of $20 one way.
“You have to make $40 first before counting your own money, and this can only be done if you have a very considerable amount. So if it’s less than 20,000 AED ($5,450), commissions will eat you, so you need 100,000 AED ($27,200) to make it,” said Kaye.
The solution to this, he added, is for universal standards that can be applied to all bourses and financial markets across the region.
The region’s dollar-pegged currencies are also hindering the growth of foreign currency OT, but if the GCC moves towards a common currency and de-links from the greenback, Abou Sleiman thinks there would be a surge in currency speculation.
Despite such obstacles and drawbacks in the mid-term, as Jamal put it, “online trading is the future.”
