Istanbul bourse: ISE banks on technology to strengthen its business

Tuesday, 28 June 2011

With a wave of mergers sweeping the world’s largest exchanges, it is easy to overlook the less eye-catching ambitions of the Istanbul Stock Exchange.

Yet the Turkish bourse, under Hüseyin Erkan, its US-educated chief executive, has quietly been putting in place a series of initiatives that could turn it from a sleepy domestic operator into a regional hub with relationships with other bourses stretching from Egypt to central Asia.

Often, exchanges like to forge ties with their counterparts nearby by agreeing to “dual list” companies already traded on exchanges in their region.

For example, the Johannesburg Stock Exchange is trying to create a “pan-African board”, in which the biggest companies listed on other African exchanges would also have a listing on the JSE, to tap into the much bigger investor base in South Africa.

Mr Erkan thinks the days of dual listings are over, however. They are “becoming expensive, and they don’t make sense any more”.

He is working on developing an “order-routing” system that would enable investors – say, in London – to gain access to Egyptian and Turkish stocks through technology, developed by the ISE that links the Turkish exchange with its regional partners in a new network.

That would save on the costs of that investor having to gain access to each exchange separately, Mr Erkan says.

“On my ‘to do’ list is to make the ISE into a regional hub,” he says.

“We are not interested in getting [company] listings from other countries – we will not be in the business of promoting other countries’ listings on our exchange.

“Instead of taking liquidity away from others, we’d like to increase co-operation through order-routing, so that there is a win-win situation,” Mr Erkan said, when speaking at the Federation of European Securities Ex­changes’ annual convention, in Athens this month.

The ISE would share order- routing fees with the exchanges involved.

The bourse has started building the order-routing system, but will be working with external technology vendors at some point, Mr Erkan says. The aim is to get the project up and running in two years “maximum”.

One reason the ISE is taking the lead in developing its own technology is the control this can give any exchange over its strategy, rather than having to rely on external providers.

“We can’t just sit around and wait for others to serve us. We need the flexibility.

“If we are planning to be a regional hub we need to be in control,” Mr Erkan says.

Meanwhile, there is much still to be done to encourage domestic participation in the ISE, and forge closer ties with TurkDex, a derivatives exchange based south of Istanbul in the city of Izmir.

Mr Erkan seems satisfied with the level of foreign participation in the ISE. Of the 34 per cent of listed stocks that trade freely – as opposed to a majority that do not because of dominant family holdings in the companies concerned – about 65 per cent is traded by foreigners.

The issue, he says, is increasing domestic participation. “I think our visibility is quite good overseas. The issue is with locals.”

Pension funds can often be big drivers of trading in local markets.

In Poland, the Warsaw exchange has attracted a steady stream of initial public offerings as companies have taken advantage of a relaxation of regulations on where and how Polish pension funds can invest.

The same is not true in Turkey, however, and is holding back the IPO market. Mr Erkan says that there is about $10bn in accumulated pension funds in the country “but it’s moving at a slow pace”.

To drum up listings, the ISE two years ago embarked on a series of roadshows across the country, to educate Turkish companies on the merits of raising equity financing. It has already completed 16 of them this year.