A deal could fuel an already stellar rally this year in United Arab Emirates (UAE) stocks, adding much-needed liquidity and closing the gap with heavyweight Saudi Arabia, currently the region's biggest player.
"We would welcome a merger with ADX as this would boost trading volumes, while at the same time deliver significant cost savings," Jaap Meijer, director of equity research at Dubai-based Arqaam Capital, told CNBC.
Rumors of a merger have circulated for several years, but have so far failed to bear fruit due to valuation disputes and rivalries.
However, Reuters reported on Wednesday that J.P. Morgan Chase and First Gulf Bank had been chosen by Abu Dhabi to advise on a possible tie-up, while Dubai had picked Citigroup. Neither emirate provided official confirmation.
"It will cement the fact that our markets are moving from the recovery mode started last year, to a full growth cycle, for years to come," Mohammed Ali Yasin, managing director at NBAD Securities, said.
Dubai Financial Market (DFM), the only listed stock exchange in the Gulf region, shot up on the news, closing 14.7 percent higher. The market as a whole climbed, particularly in the last two hours of trade, and closed at its highest level in almost five years.
CNBC learnt from sources involved in the merger talks that an announcement was likely be made this year, but the tie-up process itself would take longer. They asked not to be named as they were not authorized to talk with the press.
As of Wednesday, it remained unclear how some of the challenges involved in the merger would be resolved.
"The very high valuation of DFM is an obstacle, in our view, for the merger," Meijer said.
Meanwhile, the UAE's third biggest exchange, NASDAQ Dubai, did not appear to be part of the deal. It has been linked with tie-up discussions in the past however.
All three of the exchanges were recently upgraded from frontier to emerging market status by index compiler MSCI, after being in the running for reclassification for half a decade. The merger could further underpin the UAE's long-term ambition to be the first in the region to claim developed market status.
(Read more: World's top performing frontier markets)
DFM is majority-owned by holding company Borse Dubai, and its stock value has doubled this year in a market that is one of the top performers in the world. Bourse Dubai also holds a 33.3 percent stake in NASDAQ Dubai and a 20.6 percent stake in the London Stock Exchange.
In turn, Borse Dubai is one of several entities held by the Investment Corporation of Dubai, the Emirate's investment arm.