Hardly a month goes by these days without news of a new IPO on a Middle East stock market. Saudi Arabia and the UAE continue to garner the lion’s share of these, but other countries are not far behind. New economic and political visions supported by high oil prices are reshaping the region’s capital markets for the better.

The Middle East capital markets can be viewed through different prisms, and the “hub and spokes” model is one appropriate vantage point.

At the core, the center, are the three capital market institutions, forming the hub: the regulator, tasked with enforcement, reform, and development of the market; the stock exchange, where trading in listed securities, mostly shares, takes place; and the depository, where ownership of securities is registered and where financial obligations of brokerage firms are settled.

Three main spokes are attached to this hub: issuers of securities – companies listed on stock markets; investors – both retail and institutional; and, financial service providers – mainly brokerage firms executing buy and sell orders for clients, the investors.

Documenting the evolution of the brokerage industry in the MENA region is yet to be undertaken in a meaningful scale by academics and financial historians but when such efforts commence they will undoubtedly highlight the varied stages of development that the region’s capital markets went through, impacting the emergence, operation, and success of brokerage firms.

As was the case in many frontier and emerging markets, the Middle East capital markets developed as part of the efforts of governments to catalyze economic growth. As such, stock markets emerged as government owned entities and not the result of private sector initiatives, as in Western economies. This has influenced the frames of reference of capital market stakeholders in the region.

The fact that a financial service provider, a brokerage firm, is transacting listed shares for its clients on a government owned financial space in the Middle East imbues brokerage behavior with certain beliefs, some of which may not stand the test of time – permanency of financial good times is one of them.

Broadly speaking, the Middle East capital markets witnessed three peaks, as reflected in the rise and fall in market capitalizations and trading values on the region’s exchanges.

The first wave was in the mid-to-late 1990s and ended with the bursting the global IT bubble around 2000. International investment funds were trading listed shares in the region, on the stock markets that existed at that time.

The second wave gathered pace in early 2000s and culminated with the global financial crisis in 2008/9. Most of the region’s exchanges were up and running during this period, and prime brokers and global custodians substantially increased their coverage of the region’s capital markets, serving international investment funds.

The third wave began a few years after 2008/9 and went into hiatus with the onset of the Covid 19 pandemic.

Russia’s invasion of Ukraine, new global geopolitical realities, high oil prices, and new economic and political visions in several Middle Eastern countries are all contributing to a fourth wave of capital market activity that promises to surpass, in investment volumes and market and product development, the previous three.

This fourth wave will not impact all economies in the region equally. Some countries have neglected their capital markets and some have not fully developed them. These will not enjoy the same fruits of economic prosperity as others that have learned to utilize stock exchanges as engines for economic growth.

So, where do brokerage firms stand in all of this?

As the saying goes, rising tides lift all boats, and brokerage firms in the Middle East, large and small, all witnessed the blessings of the first three capital market waves that impacted the region since the mid 1990s. And many of them today expect to partake in this fourth one. But this fourth wave heralds a paradigm shift in the region’s capital markets, not the mere onset of another phase in a financial cycle.

Another unreasonable assumption that some brokerage firms in the region have is that their respective governments will come in to save the economic day. This is no longer a fiscally feasible proposition. Indeed, astute governments in the region are focusing their efforts on increasing private sector competitiveness, regionally and internationally, rather than acting as spenders and investors of last resort.

Will there be enough local trading activity to sustain the old brokerage business model of relying solely on the buying and selling of local shares for local retail clients? This is doubtful, for more than one reason.

Astute brokerage firms in the region are redefining themselves as financial service providers, with diverse service offerings, diverse client segments, and varied geographic coverings under their corporate umbrella.

The three-pronged strategy of an expanded brokerage service, asset management, and corporate finance advisory may not be appropriate for each and every brokerage firm, given financial resources, but diversifying revenue streams should be a guiding light going forward.

Brokerage services can be offered to local, regional and international retail and institutional clients. Some of these clients require the brokerage firm to have, or have access to, equity research capabilities. For example, fiduciary responsibilities and insider trading regulations make it difficult for international investment funds, and increasingly regional funds, to take positions in listed securities without research support.

In addition to going after clients in other countries, local brokerage firms may wish to consider offering the world to their local clients, be they retail or institutional – a development the region’s capital markets have been witnessing for several years now. However, the more of a gatekeeper the local broker is, the smaller their bite size will be. And with the increasing ability of regional and international trading platforms and applications to offer services directly to local investors, the more gatekeeping becomes a moot service.

To diversify revenue streams, a brokerage firm may offer clients asset management services. Capitalizing on its client base, a broker may offer discretionary or non-discretionary asset management services, and look into setting up investment funds to attract AUMs from existing and new clients, both retail and institutional. Investment funds can also be set up by the firm itself or in partnership with other players in the region, and can be open-ended or closed, and listed on one or more of the region’s exchanges. Examples include mutual funds, REITs, and ETFs.

As brokerage and asset management services in the Middle East get commoditized over time, their fee structures and revenue streams will follow suit, becoming less flexible, and with size of assets under management playing a major role in the success of the business.

Corporate finance advisory services complement brokerage and asset management. The client networks offered by the asset management and brokerage business lines allow the advisory practice to tap into both deal flow as well as funding sources.

Advisory services may include intermediating funding for startup and SMEs for expansion or restructuring situations; advising companies on raising growth capital via private equity investments, corporate bonds, convertible bonds, sukuks, and syndicated loans; advisory on IPOs to private or family companies, as well as depository receipt issuances for the regional and international listings of public shareholding companies; corporate restructurings and turnaround services; and supporting M&A transactions by providing alternative scenarios for capital structures.

As the current inventory of IPO-able private firms and state enterprises in the region begins to shrink, and as the need to come up with new and innovative ways to securitize revenue streams in listable and tradable equity and debt products increases, brokerage firms in the Middle East may wish to consider how to disaggregate increasingly obsolete business models and re-aggregate them, on their own or with expanded partnerships and alliances, in ways that better serve the economic growth and prosperity of brokerage firms, investors, and listed firms.