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As regional equity markets experience a period of summer turbulence, Gulf regulators are stepping up efforts to repair a reputation for insider trading and market manipulation.
To improve transparency, the Saudi Capital Markets Authority last week started to disclose the names of shareholders who hold more than a five per cent stake in listed companies.
This revealed the fact that several government agencies are leading holders of Saudi stocks.
One of these institutions, the Saudi Public Investment Fund, owns 377 billion Saudi riyals ($101 billion) of shares in 18 companies.
Way of life
Other regulators are moving against insider trading and market manipulation to level the informational playing field for foreign investors.
The impulse for current regulatory zeal came in 2006, when markets across the Gulf crashed. In Saudi Arabia the stock market lost more than half its value - about $500 billion.
"It becomes a political liability when millions of your citizens lose their money," says Beshr Bakheet, head of Bakheet Investment Group in Saudi Arabia.
Gulf equity markets are dominated by retail investors who trade on rumours rather than company performance and, because of family ties and interlinked board memberships, market abuses are rife. "It's a way of life here," says a senior banker in Bahrain.
Market manipulation is a particular problem in the Gulf, bankers say. Wealthy individuals are common and there is a plethora of illiquid small-cap companies that are easy to move.
"It's fairly common for gangs of guys to get together and decide to move the market for a particular share," says an investor who, like the banker, asked not to be named.
The practice has created vested interests against which it is hard to act.
In 2006, the Saudi government was blamed for not doing enough to protect smaller investors and the CMA was subsequently given additional teeth. "It is now striking fear into the hearts of many investors," a Dubai-based investment banker says.
The authority recently fined Saudi Chemical Company 100,000 Saudi riyals for leaking a profits number to the market before officially disclosing it.
It has closed internet chat rooms where insider information and rumours were disseminated. "When you have four million small fund managers in the country, rumours play an important role," Bakheet says.
Daunting task
While Saudi Arabia, as the region's biggest stock market, gets the most attention, insider trading is reputedly more common elsewhere.
Qatar is in the middle of a bull market where "every man and his dog" is playing the exchange, according to a Bahrain-based banker.
In Kuwait, the market is dominated by the board members of financial companies, which make up eight of the 15 biggest listed stocks.
In the UAE - one of the most international and institutionalised stock markets - insider trading is more difficult.
A system of individual national investment numbers allows regulators to cancel deals that might constitute insider trading. The regulator is also said to be warning off bands of market manipulators.
But the Saudi CMA and its counterparts face a daunting task because rumour-driven trading is entrenched.
"It's a pattern of behav-iour over generations, and it's a bit harsh to expect it to change in the course of less than a generation," says an Abu Dhabi-based lawyer.
Saudi Arabia's disclosure rule is an improvement, but determined investors can find ways around it through shell companies and agents.
"Once one loophole closes, another one opens," Bakheet says.
Given the pace of development, observers say it is easy to forget that the Gulf exchanges remain, at best, emerging markets and market abuses have proved difficult to stamp out in developed markets.
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