Dramatic consolidation is on the horizon as margins are squeezed and costs increase. The 110-strong group of Turkey’s broking community has long been recognised as over-populated and some reduction took place after the country’s economic collapse in 2002. But the numbers are likely to dwindle further before the survivors can expect to make money. According to Mahmut Kaya of Garanti Securities: “Most of them are doomed to become history because there is not a lot of return on commissions. If you are a good customer, you will get a 50% rebate on your commission charge. If a broker has sufficient scale of business then he can sustain a certain level of profitability. But if he has a small operation and is obliged to make refunds, then he is in trouble. A lot of them are on the brink of collapse.”
Consolidation inevitable
Consolidation seems inevitable as commissions are cut to the bone. While brokers are required to levy a charge of 0.2% of any transaction, they are also allowed to issue a rebate to the client to a maximum of 75% of the commission. According to Belma Ozturkkal, the general manager of Koc Securities, the smaller firms are being stretched to breaking point: “It is getting harder and harder to compete in the Turkish market. Most of our competitors compete on commission, but commission rates for the high volume clients have come down tremendously, and that will push the market towards consolidation. Once that has finished, a minimum commission rate should be established.” Ms Ozturkkal says her firm resists giving rebates, arguing that customers understand that high quality research is costly.
While the market buzzes with rumours of imminent consolidation, some firms take a more robust view. Ahmed Erelcin, general manager at HSBC Securities, says: “The small firms can reduce their costs very rapidly and cut their operational activities so they can continue as a shell company for some time. When the markets boom again, they will be back in business.”
Main players
Observers say that all but 20 of the broker firms are close to dormant, while many deal solely on behalf of their family owners. The top 20 brokers are linked to banks and other institutions and they command the majority of the exchange’s broking business. One estimate suggested that the top 10 brokers account for some 60% of the market turnover.
These top 10 are showing an ability to develop new products not evident in recent years in Turkey. For example, a number of the top 10 have set up a consortium to launch an exchange rated fund, which will be a unit-based product tracking the ISE30. The market expects the fund to interest both retail and institutional customers. According to HSBC’s Mr Erelcin: “You will buy your exchange rated fund and then, to hedge your position, you will invest in an index future and you will have a square position.” The exchange rated fund is expected to have the market to itself for some time, but the consortium of brokers launching the fund say they will keep their commissions low to ensure a successful launch. Mr Erelcin notes: “We will keep the fees very competitive to ensure we make it a success story so that other specialised funds of a similar nature will follow.”
New products
Istanbul’s stock exchange will benefit from this and other new products. For example, private pension funds have opened up in Turkey as a result of a change in law at the end of 2003. Pension fund managers now manage some Turkish Lira 70 trillion (approximately $50m). While this is regarded as a ‘milestone’ in the markets, the pensions industry accepts that progress on this front is likely to be slow as employees are not required to make pension contributions. The sector will accelerate as existing life policies are converted into pension policies. Mr Erelcin says: “This is a very important starting point in the Turkish capital markets. The existence of sizeable pension portfolios will add to the stability of the markets in the long-term and also help the development of the capital markets, both in terms of market capitalisation and volume. The market will grow as the state security system increasingly relies on the private pension business.”
Growing activity on the Istanbul exchange is being facilitated by dramatic technological improvements. The exchange’s manual system has been replaced with a market infrastructure where all orders are matched automatically on the floor in a very transparent system. Brokerage houses have an electronic order processing system and are able to access the Istanbul Stock Exchange server through a remote access programme to place orders automatically, both from the floor and from branches. Internet customers have this same access to the system and HSBC says it is approaching straight through processing. Mr Erelcin adds: “Turkish banks have the capacity to execute equity transactions and mutual fund sales at their internet sites, call centres and ATMs. Turkey has an unusually active trading environment for American Depositary Receipts and Global Depositary Receipts due to its historic settlement and custody difficulties and local brokers say this trade exceeds that of trade in the underlying equities.”
Confidence rises
As the prospects for the Istanbul exchange become rosier, the authorities are getting more confident about their ability to launch and maintain a futures and options market. The volatility of Turkey’s economic conditions, in particular its persistent high interest rates, has precluded the setting up of a viable market in complex areas such as futures. But Koc Securities’ Ms Ozturkkal says this exchange would benefit the equities market, and stimulate professional investment.
“Futures products are essential for the Turkish markets, both for hedging and for speculation purposes. The stock market would grow more healthily, with greater volumes and less volatility. Institutional investors and hedge funds would feel more comfortable investing in the Turkish markets if these kinds of products were available. But the authorities have only recently started to show an interest in futures markets.” She says turnover on the Istanbul stock exchange can drop as low as $100m in a day, although it has also reached peaks of $1bn.
Although training courses have been initiated in using futures and options exchanges, brokers are not holding their breath waiting for a launch. This is because the regulators are being extremely cautious in announcing a date. They do not want to repeat the experience of two years ago. A foreign exchange futures market was launched, but never took off because of an absence of hedging instruments of an extended maturity.
Confidence in Turkey’s economy, and in the strength of its capital markets is much greater now than then, and the possibility of progress much more assured.
