Turkey: The Grand Bazaar

In a bid to get up to speed with the global markets, Turkey is taking steps to attract more algorithmic and high-frequency trading in the region—and foreign investors are already showing interest.

A rule change introduced on October 8 by the Istanbul Stock Exchange allows unconditional intra-session order cancellation, meaning clients can directly cancel or decrease orders without any intermediation from local executing brokers, whereas previously, cancellations required intermediation by the local exchange brokers on behalf of their clients. Now, orders pending in the exchange’s stock market trading system may be cancelled one-by-one, in full or in part on an order-by-order basis. The Istanbul exchange charges a fee of 0.025 basis points (bps) for each cancelled order. The one caveat to the rule change, however, is that it does not apply to quotation orders entered for securities traded with market-making methods on the exchange’s collective products market or its warrant market. The new rules also mean the Istanbul Stock Exchange will also operate a fully anonymous market with the buyer or seller’s information withheld until the end of the trading day. In addition to this, the tick size has been significantly decreased. Previously, spreads between price ticks stood at five cents, which has now been decreased to one cent, bringing it in line with Europe.

High-Frequency Trading
Fusun Hacieyupoglu, director of sales and trading at Turkish investment bank Deniz Investment, says the change in rules will increase the volume of high-frequency trading, especially by foreign investors, an important consideration given that foreign ownership on the exchange currently stands at 68.8 percent. “Although high-frequency trading was taking place before the rule change, it was localized and mainly confined to native players—the majority of market participants were hesitant because of the obstacles in terms of tick sizes, order cancellation and issues surrounding anonymity,” Hacieyupoglu says. Now, banks that had been reluctant to allocate money for such trades on the Turkish equity markets are testing their strategies and order types—and interest is rapidly increasing.

“In terms of potential problems with high-frequency trading, one of the most significant obstacles is technical infrastructure incapacity. The exchange infrastructure is quite old—it’s not even compliant with the FIX messaging protocol,” Hacieyupoglu says. However, the Istanbul Stock Exchange is working to update it so it can be better-equipped to handle the increased flows, which are anticipated with the introduction of high-frequency trading.

Murar Iman, director of international trade at YF Securities, Turkey’s first brokerage house, identifies an additional factor that continues to hinder adoption of high-frequency trading—the fact that the Turkish stock market closes for a 1.5-hour lunch break every day, with the exception of the Turkish derivatives market. “Although the other issues inhibiting uptake of high-frequency trading have been dealt with, the extended trading break will continue to arrest development of high-frequency trading. However since all the changes so far implemented have been undertaken with the aim of bringing the Turkish market in line with global norms, I think it is highly likely that by this time next year the Istanbul Stock Exchange will have a continuous [trading] session, running straight through from the morning to evening.”

While Turkish market players remain sanguine about the potential for negative consequences resulting from high-frequency trading, their occidental counterparts are more circumspect. Western firms offering algorithmic trading in Turkey, for example, are keen to emphasize both the fact that they do not offer high-frequency trading and also that one does not necessarily lead to another, says Philippe Guillot, head of trading and execution at CA Cheuvreux, a European equities broker. “It’s important to make the distinction between algo trading and high-frequency trading—algorithmic trading uses computer algorithms to facilitate trade execution, but these tools don’t change anything in the way the order is implemented. If your goal is to send the same clip every 30 seconds then it is better to use an algo, rather than a human repetitively pressing on the same button. It’s akin to traveling from Paddington to Liverpool Street station—you can take the bus, the tube or walk. The end result is the same but the execution speed is different.”

But Bob McDowall, research director of TowerGroup Europe, says he is skeptical about the likelihood of high-frequency trading taking off in Turkey. “High-frequency trading requires deep liquidity,” he says. “Turkey has half-a-dozen stocks that have deep liquidity but I don’t think that it opens itself up to high-frequency trading. Also, I think the authorities would be sufficiently politically sensitive not to encourage speculation. Although Turkey is a secular state, it would be alert to criticism of potentially damaging financial market practices being imported from the West. So I don’t see algo trading as a prelude to widespread high-frequency trading—I see it as a prelude to more efficient and lower-cost trading.”

All Change
What is certain is that the changes have made the trading environment friendlier to Western firms, an important consideration for Turkey, which is highly reliant on foreign investment in its markets, says Serkan Aran, manager at IS Investment, the investment banking arm of IS bank, the largest private bank in Turkey. “The foreign share of the Turkish markets remains high—even during the worst of the crisis it didn’t decrease significantly. The lowest point was around 60 percent, at the moment it hovers close to 70 percent, and it can go as high as 80 percent. Foreign investors don’t have problems holding Turkish equities because, although there isn’t an over-the-counter (OTC) options market in Turkey, investors can write call and put options in London.”

Rob Broadman, CEO of ITG Europe, says that making the exchange more friendly to foreign investors will have positive knock-on effects for local investors. “Lowering the implicit and explicit costs of dealing in Turkish equities will make their equities more liquid, increase turnover and, ultimately, probably reduce the cost of capital,” Boardman says. “Additionally, some Turkish companies are listed as American depositary receipts (ADRs) on foreign exchanges and these changes will make a domestic listing more tenable. It’s part of Turkey being able to argue to an issuer that its market is credible, very Western, and isn’t a deterrent to investing in a particular listing,” he says.

Axel Pierron, senior vice president of US consultancy, Celent, says: “Both in Europe and Asia we’re seeing a revision of market regulations because a lot of the extant rules were designed to protect local investors. That kind of protectionism is no longer a viable strategy—the exchange world is a global battlefield now. The days where exchanges were local utilities driven by the growth of the home market are long gone. Therefore regulatory frameworks are evolving to meet the expectations of the international investor.”

Broadman agrees that appealing to international investors is imperative. “Along with our competitors we held off from integrating Turkish equities into our suite until now. We worked with our Turkish partners to lobby the Istanbul Stock Exchange and the Capital Markets Board and made it clear that this was a key change to bring their market into the 21st century. We argued that these changes made it easier for Western investors to participate in the market and to a bourse that’s always had a high percentage of foreign ownership—that’s an important consideration.”