(Bloomberg) -- Trading volumes of Saudi equities have unexpectedly surged this year in a big boost to the stock exchange operator Saudi Tadawul Group Holding Co.

The average daily value traded on the Tadawul has climbed to 8.9 billion riyals ($2.4 billion), up 68% from 5.3 billion riyals in all of 2023, according to data compiled by Bloomberg. That’s a “major positive,” according to Citigroup Inc. analyst Rahul Bajaj.

“A large part of the 60%+ jump could be attributable to the full launch of high-frequency trading but also more active participation in the exchange by investors,” Bajaj wrote in a note on Thursday. He expects the trend of higher volumes to largely continue in 2024, with a gradual further increase in 2025 to 2026.

Saudi Arabia has been growing its capital markets and looking to attract more foreigners, pushing for more companies to go public and offering different products such as options and futures. The rise of high-frequency trading — a type of algorithmic trading whereby a large numbers of orders are executed within seconds — is a big boost to liquidity on the exchange. 

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“This overall positive momentum is encouraging for one of the largest emerging markets,” said Ali El Adou, head of investment structuring at Aditum Investment Management Ltd. “Enhanced liquidity should deepen the market further and facilitate greater inclusions in the emerging markets indexes.”

Average daily traded volumes are a key source of earnings for the exchange. As a result, Citi’s Bajaj increased his revenue expectations for Tadawul from 2024 through 2026 by between 25% and 30%. He also boosted his profit-after-tax estimate by between 30% and 50%. 

Saudi Tadawul Group’s shares are up 47% this year amid optimism about volumes, but the analyst is retaining his sell/high risk rating of the stock. It is still the “most expensive major exchange globally,” he said. The exchange operator trades at more than 60 times forward earnings, far above peers like Deutsche Boerse AG and London Stock Exchange Group Plc, and at a premium to the benchmark Tadawul All Share Index, which trades at 18 times forward earnings.

“While part of this premium could be justified, we still believe there is more downside risk to the name near-term,” Bajaj said.

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