By Andrew Torchia

DUBAI (Reuters) - The Nasdaq Dubai exchange began trading single-stock futures on shares in some of the United Arab Emirates' biggest companies on Thursday, a step towards drawing fresh money into UAE equity markets.

A lack of hedging opportunities has frustrated foreign and institutional investors in the UAE, where short-selling is restricted. As a result, some have asked investment banks to design over-the-counter options for individual stocks.

Nasdaq Dubai's standardized, exchange-listed futures, or agreements to buy or sell shares at an agreed price on a future date, are cheaper to trade and more transparent, giving investors a clearer idea of price direction while helping UAE regulators monitor derivatives activity affecting stocks.

Trade was thin on Thursday as only a small number of investors entered the futures market on its first day, but market participants said the trading system was working smoothly. Shuaa Capital <SHUA.DU> is market-maker for the futures.

"We don't expect big volumes in the first few days or weeks but it's a process of education - volumes will increase in coming months as investors become familiar with the futures," said Racha Alkhawaja, head of institutional coverage at Mena Corp Financial Services, one of the brokers for the futures.

The exchange is initially offering futures on seven stocks accounting for almost half of traded value in UAE markets: Aldar Properties <ALDR.AD>, Arabtec <ARTC.DU>, DP World <DPW.DI>, Dubai Islamic Bank <DISB.DU>, Dubai Parks and Resorts <DUBA.DU>, Emaar Properties <EMAR.DU> and Etisalat <ETEL.AD>.

A total of 1,636 futures contracts, each providing exposure to 100 underlying shares, traded on Thursday, Nasdaq Dubai said. In one trade, five October contracts traded in Aldar at 2.765 dirhams, exchange data showed, while the underlying stock rose 0.7 percent to 2.78 dirhams.

With the exception of Kuwait, Gulf Arab stock markets have been slow to introduce futures and options. Nasdaq Dubai originally launched equity derivatives in 2008, but this coincided with the global financial crisis and trading failed to gain critical mass. Activity petered out after 2011.

In May 2014, however, international index compiler MSCI upgraded the UAE to emerging market status, attracting a new inflow of foreign capital.

Hamed Ahmed Ali, chief executive of Nasdaq Dubai, told Reuters last month that the exchange aimed eventually to develop futures based on UAE stock indexes as well as single-stock futures on shares of other countries in the region.

(Editing by David Holmes)