Middle East equity markets are being tested by a new bout of geopolitical volatility, and not all of them are responding the same way.

Trading data from the weeks following the February escalation shows a clear split. Larger, more established markets such as Saudi Arabia and Israel have absorbed higher volumes and sustained activity, while smaller venues have seen liquidity thin quickly.

For buy-side traders, the takeaway is less about volatility itself — and more about which markets can still function when conditions deteriorate.

“When markets are stressed, what really matters is not whether volatility rises - it always does - but whether liquidity stays accessible,” explains Matt McLoughlin, consultant and former head of trading at Liontrust. “That’s where you see which venues have truly matured.”  

Saudi Arabia and Israel Hold Up Under Stress

Data from BMLL’s Vantage platform shows that since the outbreak of hostilities on February 28, volatility has increased across all Middle East equity markets, as expected. But liquidity outcomes have diverged sharply.

Saudi Arabia and Israel stood out in the initial period after escalation. On‑exchange notional traded in both markets rose materially in the immediate aftermath of the conflict, alongside a jump in overall trade count. In Israel, average trade size declined while activity surged - a classic sign of heightened volatility attracting opportunistic flow and smaller trades. 

By contrast, Saudi Arabia saw both notional traded and average trade size rise (by 32 percent and 108 percent, respectively), suggesting institutional block activity alongside elevated retail participation. “That’s unusual in a volatility spike,” says McLoughlin. “Normally, people fragment risk. In Saudi, you’re seeing enough confidence in market structure and liquidity that big trades are still getting done.” 

This confidence is underpinned by years of infrastructure investment and internationalisation. Saudi Arabia’s inclusion in global indices, expanded foreign investor access, and deep domestic participation have transformed Tadawul into a venue capable of absorbing stress.

UAE, Bahrain Under Strain

Elsewhere, the picture is more fragile. Dubai and Bahrain experienced sharp declines in notional traded and trade count in the days following the escalation, while Abu Dhabi also saw reduced activity. Dubai trade count fell 55 percent in the 10 days following the start of the conflict, while Bahrain saw notional traded fall by 56 percent and Abu Dhabi by 37 percent. 

Nazed Mannan, senior product manager at BMLL, cautions against over interpreting short windows, but says the direction of travel is clear. “In smaller markets, even modest shifts in participation can translate into large percentage moves. What matters is that liquidity thinned quickly where international confidence was more tentative.”  

Bahrain’s fall was the steepest, reflecting both its smaller base and heightened sensitivity to geopolitical risk. Dubai’s decline appears driven by a combination of regional proximity, investor caution,and temporary market closures, rather than structural weakness.

International Investors Stay Engaged

Despite the conflict, international engagement has not disappeared. In the strongest markets, it has intensified.

McLoughlin notes that passive, hedge fund, and quant strategies have all become more active in in the region over the past 18 months ‑ a trend that has not reversed. “As liquidity grows, it attracts more sophisticated players. And once those players are connected, they don’t just walk away at the first sign of volatility.”

Mannan adds that order book data shows depth holding up far better in the largest venues. “Israel and Saudi both show stronger top‑of‑book resilience. That’s exactly what buy‑side traders care about when markets move fast.”  

Even in the more affected markets, however, hedge funds and institutional players have voiced support. In March, Millennium CEO Jean-Luc Roghe issued a note to staff confirming that: “We continue to see strong long-term potential for [Dubai] as a regional ,” while Hudson Bay Capital Management CEO Sander Gerber told Bloomberg that the UAE “will remain a core destination for long‑term investment and talented professionals.”

A Real-World Test of Market Structure

While geopolitical conflict is clearly negative, it has also functioned as a real‑world stress test. The ability of markets such as Saudi Arabia to handle higher volumes, greater volatility, and sustained foreign participation reflects years of investment in market infrastructure, transparency, and regulation. 

“The irony is that periods like this are when credibility is built,” says McLoughlin. “Developed markets have been through these cycles many times. The Middle East is now proving it can do the same.” 

What’s Next

Looking ahead, volatility is unlikely to abate in 2026. But the direction of travel for Middle East markets - deeper liquidity, broader participation, and greater structural resilience - remains intact.

Saudi Arabia looks set to consolidate its position as the region’s anchor market, while Israel continues to attract tactical and quantitative flow. Smaller venues will need to focus on transparency, investor access, and depth to sustaininternational interest.

For buy‑side traders, the lesson is clear: the Middle East is no longer a single risk bucket. It is a differentiated landscape - and in periods of stress, differentiation is where opportunity lies.