As bourses around the region struggle to recover from a trio of negative forces ? the ongoing correction, war in Lebanon and the summer lull ? the Iraq Stock Exchange (ISX) has its own problems. ?The market is in a downturn,? says Walid Sharif, executive manager of the Iraqi Association of Securities Dealers. ?Stocks have reached a minimum value. Some companies are trading at their book value. It?s ridiculous, but understandable at the moment.?

Trading continues twice a week at the exchange, despite the ongoing security situation and investor uncertainty. About 150 people crowded the trading floor in late August, a fall from highs of 700 market participants in 2005. Average daily trading value stood at about $500,000 in late August, down from $1 million in previous months on volumes of about 300 million shares. The drop has been attributed to Iraq Securities Commission action in early August that barred 22 of the 93 companies listed from trading due to non-compliance with reporting rules.

?A large percentage of trading is in private banks,? says Sharif. ?In the old days, it was the industrial sector. Now, there?s been a shift in the equation. More people are trading in the private sector and the banking sector is attractive.? Shares in market pillar Dar al-Salam Investment Bank traded at ID 7.1 ($0.005) on 21 August, with 8.2 million shares changing hands.

The bourse has come a long way from its formation two years ago, built on the remnants of the government-run Baghdad Stock Exchange. The government still retains shares in 30 companies, with stakes of less than 25 per cent. On the first day of trading in June 2004, only 15 companies were listed. Since then, new companies have joined and the bourse has relocated from its temporary home at Al-Mansour Hotel to its own building.

Crucially, the bourse is preparing to introduce electronic trading, which will allow for same-day trading and reduce the scope for irregularities. Today, it can take up to three weeks to sell a stock as the investor waits for the share certificate to arrive. It takes even longer if the seller is based outside Baghdad, perhaps months, and longer still if they are based in Syria or Jordan.

Further regulatory change is needed if the exchange is to take off. Key is the removal of barriers to foreign investment. Non-Iraqis are barred from trading on the exchange and there are other obstacles to investment, including a prohibition on foreign ownership of land. ?Iraqis don?t find stocks attractive as they don?t understand the numbers,? says Sharif. ?Expatriates would like to trade on the ISX but they are not given the chance. Stocks are bought and sold with local money and the market needs an inflow of capital for it to boom.?

Legal change A new investment law is being drafted, as well as securities legislation. ISX chief executive officer Taha Ahmed Abdulsalam would like to see regulations in place that require companies to consult the market if they intend to raise capital.

Companies must halt trading for 45 days while they increase their capital, and Abdulsalam is anxious they do not do it at the same time. He is also keen that banks and investment companies develop portfolios to invest in the market and that the central bank permits lending to investors to buy shares.

But it is not all gloomy. Two hotels, Al-Mansour and Al-Sadeer, are expected to stage initial public offerings of shares in September, which would signal a tentative rise in investor confidence in the market.