The Invisible Hand


Analyzing the efficiency of Dubai Financial Market is essential to understand how the market has been performing since it was established and what acts take place there. This research investigates how large investors in Dubai Financial Market use rumors to manipulate stock prices, specifically, rumors surrounding President Bush’s visit to the UAE in Jan, 2008 and the subsequent effects. The results show that the outcome of the rumor was that the stock prices initially increased but then declined significantly after Bush generating losses of 30 billion dirhams to some investors and profits for other investors. The analysis of these results shows the effects of the rumor, and two possible explanations concern the role of large investors. 


Judging the rate of development of a country is accomplished by considering how the country is growing in terms of its economy. An effective means to measure how wealthy a country is by having a look at the statistics of its average level of income and average standard of living and how are they changing over the years. These two growth determinants are, however, determined by the outcomes of different markets in the country. For example, the labor market specifies how many employees or workers are demanding jobs in the country and how many firms are willing to hire people in an overall view of the level of employment in the country. Moreover, if firms wanted to hire people who ask for higher wages, then firms do not have a choice other than paying higher wages. This simple explanation describes how the market for labor works and how wages are determined by firms and workers. Thus, this outcome from the market of labor is reflected in the average level of income in the country. Another example of markets is financial markets which impact the country’s wealth by affecting the wealth of its individuals. Financial markets deal basically with transferring money from one person who has excess money and no investment opportunities to another who has investment opportunities but lacks excess money to invest. In this case, both of them will head to financial markets to either lend or borrow. The lending/borrowing process differs among financial institutions, depending on their nature. One type of financial market is the stock market. In a stock market, stocks of different companies are traded between buyers and sellers after they have been initially issued and sold by the companies themselves to generate money for various projects that these companies are planning to do. Investors who did not get the chance to buy the stocks when they were first issued can buy them now but at a relatively higher price that is determined by the performance of the company and therefore the buying and selling transactions in the market.

However, this process is often manipulated with, resulting in less efficient outcomes from financial markets. Dubai Financial Market is one of the fast developing financial markets in the world in a fast growing economy. Therefore, analyzing the efficiency of Dubai Financial Market is essential to understand how the market has been performing since it was established and what acts take place there. We should study how the prices are changed and determined in the market and so how large investors in Dubai Financial Market use rumors to manipulate stock prices, specifically, rumors surrounding President Bush’s visit to the UAE in Jan, 2008 and the subsequent effects.

Literature Review

People need markets to buy and sell goods and services that they require in their daily activities. In the old days, people used commodities like gold and silver to run those daily buying and selling transactions.  As the world evolved, its economy evolved to meet the increasing demand for a medium of exchange that could be carried around easily. That was when paper currency was invented. “Paper currency has the advantage of being much lighter than coins or precious metal, but it can be accepted as a medium of exchange only if there is some trust in the authorities who issue it. It is used to measure value in the economy,” says Mishkin (2007, p.53). However, it has been hard for a person to go sell his house or farm or any of his assets, whether for a commodity or for a paper currency, for a more liquid asset to perhaps invest this money somewhere else or even provide his daily needs. This need created a new role for markets as they became a place where people can meet to borrow or lend money, not to just buy and sell goods.

Frederic S. Mishkin, the Alfred Learner Professor of Banking and Financial Institutions at the Graduate School of Business in Columbia University and the Research Associate at the National Bureau of Economic Research, explains that markets in which funds are transferred from people who have an excess of available funds to people who have a shortage are called financial markets. Miskin also mentions that financial markets such as bond and stock markets are crucial to promoting greater economic efficiency by channeling funds from people who do not have a productive use for them to those who do. He also states that well-functioning financial markets are a key factor in producing high economic growth, and poorly performing financial markets are one reason that many countries in the world remain desperately poor. He adds that activities in financial markets have direct effects on personal wealth. When dealing with financial markets, some important terms must be defined such as securities, stocks, and bonds. “A security is a claim on the issuer’s future income or assets. A common stock (typically just called a stock) represents a share of ownership in a corporation. It is a security that is a claim on the earnings and assets of the corporation. A bond is a debt security that promises to make payments periodically for a specified period of time,” according to Mishkin (p.3).

In its growing economy, the establishment of financial markets in the UAE was essential to support this growth and be part of it. The first step was by establishing the  “Emirates Securities and Commodities Authority (ESCA) by virtue of Federal Law number 4 of 2000 on February 1st” (“Dubai Financial Market,” n.d, ¶.1). The Dubai Financial Market website (n.d.) says that ESCA is the regulatory body, which oversees and supervises the work of the markets and their participants. It is financially and administratively independent, having all the necessary control and executive powers to exercise its tasks. The DFM website says that it is based in the UAE capital and reports to the Minister of Economy and Commerce. Dubai Financial Market (DFM) was established under ESCA as a public institution having its own independent corporate body according to the website. DFM is operating as a secondary market for trading of securities issued by public shareholding companies, bonds issued by the Federal Government or any of the Local Governments and public institutions in the country, units of investment funds and any other financial instruments, local or foreign, which are accepted by the ESCA.

The market commenced operations on March 26th of the year 2000, by listing shares of seven companies: Emaar, Union Properties, Dubai National Insurance, Dubai Islamic Bank, Emirates Bank International, Emirates Insurance and Dubai Investments (Dubai Financial Market, n.d.). As the market was established and the seven companies were listed, brokers were needed to smooth the buying and selling of shares among investors. For that purpose, ten brokers joined (DFM) on the same day of the establishment of the market which are “Al Sharhan for Shares & Bonds, Shurooq for Shares & Bonds, National Bank of Abu Dhabi, National Bank of Dubai, Emirates Bank International, Dubai Islamic Bank, Mashreq Bank, Emirates Commercial Center, Union National Bank and First Gulf Bank” (Dubai Financial Market). According to the DFM website, two more companies, MashreqBank and Shuaa Capital, listed their shares on DFM on April 1st and April 8th, respectively, until the DFM Board of Directors was established with 6 members on May 30th.

Financial markets are the soul of the economy and contribute to the wealth of the country and its residents, and so does the DFM in the UAE. Dubai Financial Market plays a major role in raising the standard of living of the country’s residents by providing them with many opportunities to invest the excess of their money and gain return on it. The increase in investments by local residents and the attraction of foreign investments are the main reasons behind the central positions that Dubai and the UAE occupy in the GCC region in terms of the rate of growth and standard of living of their residents.


The information in this research was found by using the Meta search in the library homepage using the keywords “Dubai Financial Market” and “Stock Market”. The first keyword was beneficial in finding the main website for the Dubai Financial Market that is, which was used in documenting the history of the establishment of the DFM and to allocate information about the first companies and brokers that were listed in the market. Stock prices that were analyzed before, during, and after Bush’s visit to compute its results on the market and the economy were found by buying Al-KHALEEJ newspapers from the location of the newspaper in Sharjah.


Rumors are one of the methods that are used to manipulate stock prices and are spread by word-of-mouth. “When stock prices go up, investors attribute their profits to their intelligence and talk up the stock market. This word of mouth enthusiasm and glowing media reports then can produce an environment in which even more investors think stock prices will rise in the future. The result is a positive feedback loop in which prices continue to rise, producing a speculative bubble, which finally crashes when prices get too far out of line with fundamentals,” says Mishkin (p.174). They may have a negative impact on stock prices such as in Dubai Financial Market and therefore affect the economy in an undesirable way. One rumor that was spread in the UAE and affected stock prices, and its originating source cannot be traced, was that Bush’s visit to the UAE would encourage trade between the UAE and the USA which would evolve to include more fields beside the oil trade. The rumor was expected to encourage people to buy more stocks increasing the demand on them and so bidding their prices up. This positive effect was anticipated to persist in the DFM market if the market was as efficient as it is expected to be. Unfortunately, the effect was only a temporary one, and the stock prices increased at first before they decreased in a dramatic way. Table 1, following in Appendix A, shows the change in the closing stock prices of several companies in Dubai Financial Market before, during, and after Bush’s visit (Stock Prices).

In the charts in Appendix B we can notice that the stock prices first increased during and after the visit by two days before they decrease after that from the 17th of January to the 22nd of January except for Tamweel which increased on the 22nd. The increase at first may be explained as due to people believing the rumor and buying more stocks, which drove the prices of the stocks up on the 14th of January. The increase in prices motivated small investors who had bought some stocks already, and small investors who had not bought yet started buying stocks, and these buyers increased the prices to those shown above on the 16th of January, by buying more stocks since the rumor seemed to be true. However, the increase did not last, and the prices decreased on the 17th of January. The 17th was a Thursday and was the end of the five days of transactions in the markets. Over the weekend investors got the chance to go over their strategies during the previous few days, but the stock prices kept declining on the 21st and 22nd of January. (See Appendix B).

The stock prices initially increased and then declined right after Bush’s visit to the UAE possibly as a result of rumor manipulation. The manipulation might have occurred when large investors who owned the stocks at high prices spread the rumor to motivate people to buy the stocks. The increase in demand for stocks occurred when there were fewer large investors with stocks to sell, resulting in the prices going up. Then, the same large investors would demand huge quantities of the stocks that they had held but at lower prices than what they had sold at previously, thus dropping the prices of the stocks since their demand was much larger than the supply of the small investors. The drop in prices caused small investors to panic and sell the rest of their stocks, dropping the prices even further.

Another possibility is that large investors might have bought the stocks at prices that are lower than the prices on the 10th of January. Therefore, they spread the rumor about Bush’s visit to motivate small investors to buy stocks and increase the prices of the stocks by increasing the demand on them. This action gave large investors the chance to make huge profits on some of the stocks, but not all of them because small investors cannot afford to buy all the stocks owned by large investors at such high prices. Then, large investors could have placed fake orders to buy large quantities of stocks but at lower prices to drive the prices down and sell more of the stocks that they own to small investors who believed that the prices would go much higher than the prices they were buying at. This action would still generate profits to large investors but less than the profits generated when they sold their stocks at the high prices. Further more, large investors could have placed more fake orders on the 22nd of January to decrease the prices even more and make it possible for small investors who are still in the market (and thus still believe that the prices would go up) to buy them. Despite the possibility that either scenario is true, the net result of the rumor was a “loss of 30 billion dirhams” (Front Page, AL-KHALEEJ Economical, p.1) by some investors and a profit of “30 billion dirhams” (Front Page) by other investors.


The principle of rumors affecting financial markets was seen to be true when a rumor affected stock prices in Dubai Financial Market. The result was that the rumor that was spread in the UAE society had a negative impact on stock prices and DFM, when it was supposed to have a positive effect. The loss of “30 billions dirhams” (Front Page) might have cost people their houses, their cars, or even their kids’ education, in worse cases if they could not afford it.

The question here is: can the authorities take any action in such cases to avoid such losses? One observation is that the financial authorities may be responsible for alerting the people of such rumors and the credibility of them. However, the financial authorities in the UAE have little power and therefore little action can be taken if any. Also, investors should be more careful when dealing with rumors, especially when they are investing their money in stocks which have volatile and highly sensitive prices. But sometimes those rumors are spread by people who are aiming for their personal gain on the expense of small investors. Those rumor mongers must have been large investors who are important in the economy and their presence cannot be avoided. Consequently, even if the authorities could track the rumor to its source, little action could be taken, and the rich get richer while the poor get poorer. 


Dubai Financial Market. (n.d.). ESCA. Retrieved March 05, 2008, from

Dubai Financial Market. (n.d.). Important dates. Retrieved March 05, 2008,


Front Page. (2008, January 22nd). (Trans. Al Shaali A.J.). AL-HKALEEJ Economical Newspaper

(Sharjah), p.01

Mishkin, F. S. (2007). The economics of money, banking, and financial markets  (8th edition).

Boston: Pearson Addison Wesley.

Stock Prices. (2008, January 10). (Trans. Al Shaali A.J.). AL-KHALEEJ Economical

Newspaper (Sharjah), p.06

Stock Prices. (2008, January 14). (Trans. Al Shaali A.J.).   AL-KHALEEJ Economical

Newspaper (Sharjah), p.10

Stock Prices. (2008, January 16). (Trans. Al Shaali A.J.).  AL-KHALEEJ Economical

Newspaper (Sharjah), p.10

Stock Prices. (2008, January 17).  (Trans. Al Shaali A.J.). AL-KHALEEJ Economical

Newspaper (Sharjah), p.10

Stock Prices. (2008, January 21). (Trans. Al Shaali A.J.).   AL-KHALEEJ Economical

Newspaper (Sharjah), p.10

Stock Prices. (2008, January 22). (Trans. Al Shaali A.J.).   AL-KHALEEJ Economical

Newspaper (Sharjah), p.10


Appendix A

Appendix B