The key to deepening the market lies with institutional participation, particular

ly from foreign entities. Foreign institutions have the potential to reduce vola
tility in the market by buying when stocks are undervalued and withdrawing when
valuations become stretched. Their focus on research also tends to discourage bu
bbles from developing and, by promoting more rigorous scrutiny of the market, he
lps to improve corporate governance. Granted, sudden inflows or outflows of fore
ign ―hot money can destablilise markets, such as during the 1998 Asian crisis—but by
and large foreign institutions, particularly pension and mutual funds, are seen
as a positive force.
Foreign investors have been impressed with the CMA’s reform agenda and its willing
ness to enforce such reforms. Yet many remain hesitant in the face of unanswered
questions, such as the degree of counterparty risk that swap arrangements entai
l, and whether foreigners will be allowed full access to the market in the near
term. Looking at the broader market, many foreign institutions would like to see
an end to the deliberate under-pricing of IPOs given the instability that these
sales tend to impart to the market.
If the CMA continues to push through its reform agenda, and full foreign investm
ent is allowed into the exchange, then the market should become more stable, pre
dictable and transparent. This, in turn, should help to convince more local firm
s to list on the exchange, particularly if bank credit remains at a premium. Cur
rently, many of the family-owned firms that have resisted listing have done so p
recisely because of the greater scrutiny that this might entail. Over time, it m
ight be possible to create a virtuous circle whereby listing, and the transparen
cy that this entails, allows firms to raise capital cheaply on the Tadawul, ther
eby encouraging additional firms to list.
Generational pressures may also encourage more firms to list. Those of the young
er generation who may be reluctant to become involved in managing the family bus
iness tend to view listing as an efficient and profitable way to liquidate their
holdings. This trend has become a new feature of other emerging markets, partic
ularly those in Latin America.
The Tadawul’s evolution into Saudi Arabia’s primary centre for raising corporate cap
ital will clearly be a long-term process. But assuming that full foreign investm
ent is allowed, and surveillance and enforcement continue to be tightened, the T
adawul has the potential to become both the main market for Saudi corporate fina
nce and an important agent of corporate and economic change.

Millions of Saudis lost considerable sums in the stock market crash. Mindful of
their distress, and to prevent any repeat, the CMA was quick to articulate a thr
ee pronged strategy: increase the size and, most importantly, the depth of the m
arket; improve transparency and disclosure; and clamp down on insider trading.
There has been a crackdown on insider trading
A crackdown on the insider trading is needed.A lack of transparency tends to go
hand-in-hand with insider trading. The CMA has stepped up its surveillance and p
rosecution of this practice.In 2007, the regulator introduced a new trading syst
em that has enabled it to track trades and individual traders far more rigorousl
y than previously. Nearly 400 cases of suspected market manipulation have been i
nvestigated by the regulator, approximately 30 of which are currently going thro
ugh the court process. Several high-profile market participants have been public
ly convicted and fined, and one has even been imprisoned.