JEDDAH, 15 October 2007 -- The Saudi Capital Market Authority (CMA) will launch on Oct. 20 the much-awaited new rules that will govern trading on the Tadawul stock market. Among the salient features of the new system is its ability to significantly boost the capacity for processing trades.

In its latest monthly bulletin, the Riyadh-based Jadwa Investment said that the daily transaction would rise to two million from the current level of about 800,000, and has the flexibility to be upgraded further. Additionally, the new system makes it possible to introduce trading in products such as bonds and sukuk and to offer entirely new products such as exchange traded funds.

The new system contains improved features that will facilitate the operation of the exchange and provide greater transparency.

New data issued by Tadawul showed that investor confidence has yet to recover since the collapse in share prices last year. Despite 20 new listings over the first three quarters of this year and a similar number of share splits and rights issues increasing the number of shares available, the average daily volume of shares traded is down by nearly 19 percent compared to the same period of last year.

The average daily number of transactions is down even further, at 25 percent. Agriculture and insurance were the only sectors that experienced an increase in trading volumes over the first nine months of this year. Both of these sectors are favored by speculators, though the bulk of increase in the insurance sector can be accounted for by the new IPOs, it said.

Latest available data from Tadawul showed that its trading for the month until Oct. 1 registered a volume of 3,123,234,852 valued at SR148.51 billion, whereas the volume reached 11,030,576,531 with a value of SR515.96 billion in the latest quarterly results. In the last trading week before the market closed for the Eid holidays, transaction volume reached 435,442,177 with a cumulative value of SR20.05 billion.

Under the new system, three types of trading orders will be processed: market, limit (at which the purchase or sale price is predetermined) and hidden. Hidden orders are orders that are so large that if they are conducted in one go, they would distort the market. They are typically placed by institutional investors. Hidden orders are broken down into tranches that can be a minimum of one-fourthousandth of the size of the total order. Once one tranche of the order has been executed, a new tranche with new terms would automatically be allowed by the system for processing.

GCC investors were permitted to trade in shares in Saudi financial service companies on Sept. 25. The CMA has urged Tadawul to treat GCC citizens and Saudis equally, reported the Saudi Press Agency. CMA said in a statement that in lifting the remaining restrictions on GCC citizens, they will be subject to the rules and conditions that are applied on Saudis in the ownership and exchange of stocks in the market.

Citizens of Qatar, Kuwait, Bahrain, Oman and the UAE had been allowed to invest in Saudi stocks except for banks and other financial services.

Saudi Arabia forbids other foreigners, except those who reside in the Kingdom, from investing directly in the market, though they can invest through funds.

Since the announcement on Sept. 26 that the new system will be introduced, the TASI has fallen by nearly 3 percent. Jadwa Investment said "we believe that the prospect of stricter oversight has worried many speculators, causing them to withdraw from the market and pushing down share prices."

However, Jadwa stressed that the "new system should have come as no surprise to the investor community as both the CMA and Tadawul have been talking about it for more than a year."

Jadwa attributed the decline to "some speculators and day traders" that "have pulled out of the market as they believe that the new system is more capable of tracking down attempts to manipulate the market than the current one," adding that "smaller capitalized stocks favored by speculators have performed far worse than large companies since the new system was announced."

The new system is linked with a host of peripheral electronic systems which handle other relevant processes such as market control and supervision, reconciliation and clearing and market information.

It was developed with Nordic stock exchange operator OMX, a leading provider of information technology systems for financial markets. Investment subsidiaries of commercial banks, brokerages and providers of market information have taken part in a successful series of pre-run operating tests, Jadwa said.

Jadwa bulletin further noted that in anticipation of large inflows from the rest of the region, the banking sector share index climbed by 1.5 percent on Sept. 25, before falling back in line with the rest of the market over subsequent days.

It said that since the instruction from the Council of Ministers to the CMA to prepare the market for opening to GCC investors, the banking sector has outperformed the TASI all-share index by around 4 percent. The strength of the Saudi banks makes them attractive to GCC investors.

Al-Ahlia became the 14th insurance company to be listed on the stock market this year on Oct. 6. As with all the others, its shares recorded a substantial gain (of 607.5 percent) on the first day of trading.

Insurance company shares have become favorite of speculators, and as a result, their share prices have been highly volatile. Excluding NCCI, which has by far the largest market capitalization in the sector, volatility is more extreme. By Oct. 8, only six out of 105 companies listed on the stock exchange had released their interim financial statements for the third quarter of this year.

All, except one, Tabuk Cement, showed continued earnings growth for the third quarter and for the nine months ending Sept. 30, albeit at a slower pace than in previous years. The cement company's CEO blamed the decline on poor sales.

© Arab News 2007