Borsa Istanbul is the cornerstone of Turkey’s plan to become an international financial centre, and its new trading platform, Bistech, is the foundation upon which the stock exchange’s transformation is being built.

Founded in 2013 to integrate all the different exchanges in Turkey around the Istanbul Stock Exchange, Borsa Istanbul is defying the current bad news coming out of Turkey. Since the beginning of the year, despite a wave of terrorist attacks and instability in its Kurdish southeast, the main BIST100 index was up around 12% by mid-March

Continued investor appetite in spite of the instability helps to explain the recent rallying of stocks, but the picture would be incomplete without mentioning Bistech, the new trading platform that the bourse migrated to in November and which has already proven its worth, contributing to a 39% year-on-year increase in equity trading volumes in January. Developed in partnership with Nasdaq, Bistech replaced Borsa Istanbul’s 22-year-old trading platform with state-of-the-art software that executes orders in under 100 microseconds, minimises session interruptions and can process over 100,000 orders per second. 

Bistech provides Borsa Istanbul with the technological base to increase trading, but also with the ability to sell similar technology to other stock exchanges in the region. That is because, together with the trading platform, the bourse purchased intellectual property rights, source codes and re-sales rights from Nasdaq, and is planning to “make the technology it develops scalable and then use it in the 25 countries of Eurasia”, the stock exchange tells bne IntelliNews in an email interview.

“Borsa Istanbul is helping to position Turkey as a global leader [by] implementing standard technology and processes that... decrease barriers of entry or foreign investors and increase the attractiveness of the market,” Lars Ottersgard, Nasdaq’s vice president, said about the new platform when it was launched in November.

The CEO of Borsa Istanbul, Tuncay Dinc, added that Bistech would “not only transform our exchange, but the whole capital market” by allowing the simultaneous trading of single stocks, debt instruments and derivatives in multiple languages and currencies, and offering pre- and post-trade services and risk management.

The platform is still a work in progress; the November migration transferred equity trading to Bistech, with the remaining instruments to be transferred throughout 2016. Dinc’s hope is that Bistech will help pave the way for Borsa Istanbul’s long-awaited IPO by increasing trade volumes – and the bourse’s value – ahead of the floatation.

The IPO would be the culmination of a three-year transformation process at the majority government-owned bourse, which began with its transformation into a joint stock company three years ago. Having undergone “vertical and horizontal integration” of the various exchanges under its umbrella, since 2013 Borsa Istanbul has been focusing on building strategic partnerships with institutions like Nasdaq and the European Bank for Reconstruction and Development (EBRD) in order to “strengthen and increase the value of the bourse” ahead of the IPO, the stock exchange says.

To cement the new partnerships, Nasdaq and the EBRD purchased stakes of 5% (with option to increase to 7%) and 10% in Borsa Istanbul respectively, and the latter is now courting funds from the “US, UK and the Gulf countries” for similar pre-IPO deals.

Foreign adventures

As well as foreign investment in the stock exchange itself, Borsa Istanbul is looking to attract more foreign money into Turkey’s capital markets. Foreign investors accounted for some 60%, or $5.3bn, of the investments in IPOs between 2010-2015 and for some 62%, or $56.2bn, of overall equity portfolio holdings, but there is obvious room for growth. With a market capitalisation of $206bn and an average daily trading value of $970mn in March, Borsa Istanbul has its work cut out if it wants to rank among the 20 leading stock exchanges in the world to reflect Turkey’s position in the global economy.

The bourse acknowledges it has some way to go to achieve this, and has been hard at work to persuade companies to list. “We are aware that foreign investors are looking for big IPOs. For this purpose, we organise visits to companies to promote going public. The fact that only 17% of the top 500 industrial enterprises [in Turkey] are listed points to the huge potential for growth,” Borsa Istanbul says.

After peaking at 27 IPOs in 2011, public listings stagnated in 2014 and 2015, prompting the bourse to visit some 800 companies to persuade them to go public. “Some 20% of them have said they would include an IPO on their agendas in the coming three years,” Borsa Istanbul writes, “so we expect to see an increase in [listing] volumes compared to 2015”.

Despite the slowdown in equity issuance, Turkish companies are increasingly raising capital through corporate bonds, the stock exchange adds, with corporate debt issues “jumping to over $29bn in 2015 from almost nothing... As Turkey gets used to [a] low interest environment and the private sector looks for alternative financing sources, the corporate debt segment will continue to flourish.”

In addition to approaching companies directly, Borsa Istanbul has devised other means to woo them, including waving the fee for IPOs and launching a venture capital platform in October 2014 called ListingIstanbul to attract “foreign companies to list on Borsa Istanbul”. The platform is “a pre-IPO catalyst that will lead to more IPOs in the coming years”, the bourse says. 

In the meantime, the EBRD’s purchase of a 10% share in Borsa Istanbul in December should help boost “confidence in the potential of the stock exchange and the Turkish economy as a whole,” the multilateral lender says. Having vowed to provide technical assistance for the IPO, the EBRD is bound to help the stock exchange fulfil its regional ambitions as well through its network of investments in the Moscow Exchange (5.2% share), the Bucharest Stock Exchange (5%), the Zagreb Stock Exchange (5%) and SEE Link, a regional order-routing system that it supports.

“We welcome Turkey’s ambition to transform Istanbul into a dynamic hub for internationally significant financial services. With Borsa Istanbul as the catalyst for development of the Turkish capital markets, we believe that our partnership is a logical step towards fulfilling this ambition,” EBRD vice president Phil Bennett said at the time of the acquisition.

Nevertheless, investors should not hold their breath for Borsa Istanbul’s IPO before the end of 2016, for negotiations with strategic partners to increase the stock exchange's valuation promise to drag on.  Besides, preparing for an IPO takes at least 12 months, and more often 15 months according to Noel Edison, director for insurance and financial services at EBRD. 

Shifting priorities

Sevin Ekinci, economist and founder of the Istanbul-based Ekinci Economics Consulting, says that while Borsa Istanbul’s technological transformation and tie-ups with the likes of the Tehran Stock Exchange, Qatar Stock Exchange and Nasdaq are welcome, she worries that a change in government priorities as stability in the country and wider region deteriorates could derail the best efforts to turn Istanbul into "a finance centre just like New York, Tokyo and London", as President Recep Tayyip Erdogan stated in 2013.

In the latest Global financial centre index published by the Qatar Financial Centre (QFC), Borsa Istanbul fell by three spots in the ranking to 47 out of 84 capital markets, lagging nine positions behind the regional leader in Central and Eastern Europe, the Warsaw Stock Exchange. “Previously, making Istanbul a financial hub for international investors was an important aim of the AK Party government, especially in the years before 2011,” Ekinci tells bne IntelliNews. “However, the geopolitical situation of the world has changed since then… consequently the priorities of President Recep Tayyip Erdogan changed.”

“There is a huge benefit for global finance and the world economic structure and international security that Istanbul becomes a financial hub. Nevertheless, for this to happen Turkey needs to get rid of the political problems, like the ethnic, religious splits in the country and restrictions on press freedom,” she adds.

Wolfango Piccoli, co-president of the London-based Teneo Intelligence, thinks that Istanbul’s chances of becoming an international financial centre were almost non-existent from the very start given fierce competition from other cities. “Moreover, there was never a clear comprehensive plan – the whole idea was mainly aspirational and part of the 2023 wish-list of the ruling government for the centennial of the republic,” Piccoli tells bne IntelliNews.

According to Piccoli, the deterioration of the democratic foundations of the country as well as the security risks due to the high frequency of the terror attacks also diminish the city’s credibility for becoming a finance centre for international investors. “The worsening of the business environment, the raising concerns about the rule of law and the limited interest by large financial institutions towards Turkey in these days... mean that Istanbul has zero chance to become a truly international financial centre,” he says.

Edison, however, is more optimistic about Istanbul's prospects as a regional financial centre. “We expect some form of consolidation or regionalisation of the stock exchanges and post trade services in a number of markets in Central and Eastern Europe, and size will make a difference. In this regard, Borsa Istanbul is well positioned to contribute to this next phase of development in the region," he concludes.