Why a ‘Reddit revolt’ is unlikely in the Middle East
https://arab.news/wyuhe
Could the kind of mayhem that hit US markets last week make an appearance in the Middle East?
It is an important question, because markets in Saudi Arabian and the UAE have been keen to offer the kinds of sophisticated investment instruments common on Western markets — including short selling, which was the root cause of the “Reddit revolt” in America last week.
An army of US small investors banded together on the Reddit chat site to buy shares in a concerted attack on the “short-selling” strategies of some of the biggest investors. That had some notable wins, even if they are likely to prove temporary.
The question financial policymakers in the Middle East have to consider is whether they want all of the paraphernalia of Western investment culture, including the kind that led to the wild gyrations we saw on Wall Street last week, and which some analysts are suggesting could be the beginning of a market crash.
In Saudi Arabia and the UAE, all the ingredients are already there, to some degree. It took the authorities in Riyadh, Abu Dhabi and Dubai longer to get round to it, but short-selling is now allowed on these markets.
Another essential ingredient for the kind of mayhem experienced by US markets is a developed social media network activist investors could use, which is plainly present in the region.
The final prerequisite for the US chaos was a big hedge fund industry using short-selling techniques both as a money-making investment strategy, and as a way to influence corporate behavior.
The region has not developed such a sophisticated hedge industry, and is only just beginning to master short-selling techniques, market participants say.
But there was a striking example of the shorters’ power and potential to impact regional markets directly in the case of NMC, which was brought down by shorting to a state of effective bankruptcy — though of course the shares were quoted in London.
The final prerequisite for the US chaos was a big hedge fund industry using short-selling techniques both as a money-making investment strategy, and as a way to influence corporate behavior.
Frank Kane
The critical element for the “Reddit revolt” was the presence of an army of day traders organized on internet chatrooms and with access to brokerage facilities to enable their transactions.
When the Tadawul allowed trading last year in the options and derivatives that make short-selling possible, it went out of its way to stress that it was aware of the potential for disruption and losses these activities could lead to.
Different margin requirements are in place for small investors, the Tadawul stressed. The settlement terms and custodian arrangements on the Riyadh market make stock borrowing a much more tightly controlled process than in the West.
Saudi market policymakers calculated that the beneficial effects of shorting — mainly in terms of injecting essential liquidity into markets and making them more efficient — outweighed the downsides. Shorting was a practice viewed as reducing the volatility of financial markets.
Would that view change now that we have witnessed an investor insurrection by an organized army of day traders who dared to take on the hedge funds?
Probably not, for a number of very good reasons.
Small investors in the Middle East, like anywhere else, are keen to act on market-moving information. Investment professionals say that informal groups of active investors, communicating via pre-social media era messaging systems, were a factor in the gyrations of regional markets in the 2005-6 period of volatility.
But it is difficult to imagine that a group of concerted counter-culture investors like the Reddit rebels would be allowed to operate for long in the region, where there is zero tolerance for any activity that could be regarded as detrimental to national economies.
The authorities — both financial regulators and communications watchdogs — would step in sharply if there was any risk from organized social media of the kind of volatility seen on Wall Street markets.
On the bigger picture, It seems unlikely the day traders’ revolt will lead to a market crash, as long as other fundamentals remain undisturbed. A few hedge funds have got their fingers burned, and maybe more will follow, but there will be no tears for them from most people.
- Frank Kane is an award-winning business journalist based in Dubai. Twitter: @frankkanedubai
