The appetite to bring short selling to the local equity markets is growing across the Gulf with heads of the key exchanges calling for their introduction over the past few weeks.

Jeff Singer, chief executive of Nasdaq Dubai, has said the market needs to take the next step and introduce rules for short selling.  

The Abu Dhabi bourse is also ready to introduce short-selling and the Saudi Stock Exchange (Tadawul) is eager to introduce the instrument, although it is meeting resistance from a regulator that is wary of alienating the local investor population.

A traditional suspicion of the product, which is often perceived as un-Islamic has hampered its introduction. The suspicion has been exacerbated further by the role that short-selling played in the financial crisis. The UAE’s Securities and Commodities Authority had been on the verge of approving short selling at the end of 2008, but the plans were subsequently put on hold.

Regional stock markets have an inherent advantage given that they hold the shares bought by investors, unlike in the West where they are held by brokerages. This would enable the regulator to better monitor who is short selling and prevent market abuses.       

With regional markets continuing to suffer from negative sentiment and low trading volumes, short selling would help boost liquidity by enabling investors to profit from a fall in the value of shares and therefore encourage them to keep trading.

It would also encourage international institutional investors to enter the market who complain that there is currently no means of hedging against a falling market. 

Short selling plays a crucial role in keeping markets healthy and active during periods of financial stress and its introduction could only be a positive move for the region.