Dubai: Much has been written about whether GCC stock exchanges will, and should, consolidate.

The topic is a perennial favourite among media commentators. It is also of great interest to me, as for the past year and more I have spent much of my time helping to plan and execute the only such consolidation that has so far been decided on.

This is the outsourcing by Nasdaq Dubai of its equity trading functions and other key processes to Dubai Financial Market (DFM), following DFM's acquisition last month of two thirds of the shares in Nasdaq Dubai. The outsourcing is due to take place next month subject to regulatory approval.

It is not for me to say whether this consolidation should be followed by others in the GCC. That call, quite naturally, is for the owners of those exchanges to make.

Political considerations will come into play. But my own experience has taught me valuable lessons about the practicalities of consolidation and the underlying business logic that can provide a compelling case for carrying it out.

First, consolidation comes in many different forms. Consolidation of ownership is one, but on its own this can have little practical impact. Far more significant is operational consolidation of the kind being carried out between Nasdaq Dubai and DFM. All trading, settlement, clearing and custody functions for Nasdaq Dubai equities are to be outsourced to DFM systems.

Other types of consolidation include a merger of listing rules and centralisation under one regulator. Nasdaq Dubai and DFM are not, under current plans at least, going down this route. Each exchange is, for the best of reasons, retaining its separate rules and its separate regulatory framework, which in the case of Nasdaq Dubai is provided to international standards by the Dubai Financial Services Authority (DFSA).

Second, consolidation of any kind is not a simple process. Some commentators write as though all it takes is a phone call between chairmen and hey presto!, a full merger is unveiled the following week.

In reality it takes many months of painstaking work behind the scenes to converge IT systems, business recovery plans and staffing requirements, as well as ensure that the best interests of investors, brokers and issuers are taken care of.

Third, the business case for consolidation can be overwhelming. This is particularly so in a region such as the GCC, in which eight stock exchanges handle a relatively small market capitalisation of about $700 billion (Dh2.5 trillion). This is just five per cent of the total listed on two exchanges in the US, Nasdaq and NYSE, and 20 per cent of the total listed on the Tokyo Stock Exchange in Japan.

In the case of Nasdaq Dubai and DFM, there are clear synergies in using one trading platform instead of two and likewise in consolidating clearing, settlement and custody functions under one roof.

The exchange sector is a classic example of an industry in which scale confers an advantage on large organisations. Both operationally and technically, the resources of many exchanges are able to handle far larger volumes of trading and other activities than they actually do. Consolidation makes sense as its efficiencies can be passed on to customers in the form of lower costs and greater focus.

Practical terms

However the advantages of consolidation can go much further. The new structure being created in Dubai will make it much easier, in practical terms, for regional retail investors to trade Nasdaq Dubai equities. This is because they can use exactly the same procedure, revolving around an Investor Number that is common to both exchanges, for their trading.

The "look and feel" will be the same. This will bring the critical mass of DFM's more than 500,000 retail investors together into one market with Nasdaq Dubai's institutional investors, most of them based outside the region and including many of the world's leading fund managers.

Each group will provide valuable liquidity to the other. The resulting diversified investor base will be unique and will act as a catalyst for further regional capital markets development centred on Dubai. These will include the growth of Nasdaq Dubai's equity derivatives market and introduction of new asset classes.

The retention by both markets of their own listing rules will give the new structure valuable flexibility. Issuers can choose either the DFM model or the Nasdaq Dubai model. The latter includes a minimum initial public offering free float of just 25 per cent, which is the lowest of any exchange in the GCC, and a bookbuilding process that allowing the owners of a company to receive the full market value of their shares on listing.

Where consolidation is well conceived and executed, the sum of the exchanges that are linking up becomes much greater than their parts when they are separate. This is certainly the case with Nasdaq Dubai and DFM. Time will show whether the same logic applies to other regional exchanges.

The writer is chief executive, Nasdaq Dubai. Views expressed here are his own.