Oct. 25 (Bloomberg) -- The Istanbul Stock Exchange may complete as many as 28 initial public offerings this year and needs to attract more investors to keep up with economic growth, Chief Executive Officer Huseyin Erkan said.
The exchange’s 24 IPOs so far this year have already topped last year’s total of 22, the most since 2000 when there were 35, Erkan said in an interview on Oct. 21 at Bloomberg’s New York headquarters. He expects another three or four through the end of December. The exchange is reviewing 10 applications, while more companies are “waiting in the wings and are trying to find the best timing,” Erkan, 53, said. More will come to market as the global economy becomes less “distressed,” he said.
As part of the expansion of Turkey’s capital markets, aimed at supporting the growing economy, the country must develop more homegrown institutional investors in addition to attracting foreign funds, Erkan said. Turkey’s gross domestic product expanded 8.3 percent in the quarter that ended in June, the highest rate among the 30 largest European countries and almost three times Germany’s growth rate of 2.8 percent, according to data compiled by Bloomberg.
“The investors already in Turkey are staying in Turkey but everybody is very hesitant about going into new markets” because of uncertainty about Europe’s debt crisis, Erkan said. “We expect that with some improvement in the international situation, it will help Turkey get a lot more flows. Turkey sells itself because the economy here is quite vibrant.”
Europe’s Debt Crisis
Greece’s deteriorating finances have threatened to send that country into default, rattle the banking system and tip the world economy into recession. Standard & Poor’s warned this month that France may lose its top sovereign credit rating. European leaders made progress this past weekend in talks aimed at resolving the crisis, sending stocks higher globally today.
Turkey’s pickup in IPOs may be on track to outpace global growth in initial offerings. At least 1,395 IPOs have been completed worldwide so far this year, an 11 percent increase over the same period last year. In the U.S., the number of IPOs completed decreased 31 percent in the third quarter from the year-earlier period as slumping stocks and high volatility made it difficult to go public, and only three IPOs have been completed since the beginning of September.
The ISE National 100 Index declined 14 percent this year through Oct. 21, less than the main gauges in Russia, China, India, Taiwan, Brazil and Argentina, Bloomberg data show. The Turkish economy is rebounding after it contracted 4.7 percent in 2009 amid the global financial crisis that began the prior year. It grew 8.1 percent in 2010, the data showed.
Attracting Foreign Capital
Attracting foreign capital is a “chicken-and-egg situation,” the ISE executive said. Large companies in Turkey are reluctant to go public if foreign investors aren’t ready to buy their shares, while those institutions stay on the sidelines if they don’t see new investment opportunities, Erkan said. ISE has about 360 companies.
Foreign asset managers and institutions hold about 63 percent of Turkish companies’ free float, or shares available to be bought and sold by investors, Erkan said. At the end of 2007 they held 72 percent, according to a 2008 study on the country’s capital markets. The reduction is due largely to the drop in value of bank shares such as Turkiye Garanti Bankasi AS and Akbank TAS, not to a selloff of Turkish securities, he said.
While Turkey’s regulators allow non-commercial banks, brokers and venture capital investment trusts to run funds, more needs to be done to boost that segment of the market, Erkan said. The country’s investment funds manage the equivalent of 4 percent of Turkey’s GDP, while many European countries average between 30 percent and 40 percent, he said. He urged foreign banks and brokers to offer Turkish investors new investment products and services, distributed through domestic banks.
The Turkish government should also consider tax incentives to spur the domestic asset management business, he said.
The Istanbul exchange, which was formed in December 1985 and began trading the next month, will introduce options on equities as soon as regulators allow it, Erkan said. ISE also wants to trade options on ISE indexes, he said. Futures on the ISE 30 can currently be bought and sold only on the Turkish Derivatives Exchange. ISE has an 18 percent stake in TurkDex.
The ISE plans to offer institutions and proprietary traders new electronic tools and services common in other countries to increase volume and interest in Turkey’s equities marketplace.
The exchange will cater to high-frequency and algorithmic traders by building twin co-location sites that allow firms to place their computers near those that match orders at the exchange, Erkan said. This is important to brokers and trading firms that want to reduce delays in processing data from the exchange and buying and selling shares. The sites will be ready by the end of 2013, he said.
The ISE, like BM&FBovespa SA in Brazil, the Korea Stock Exchange, Tokyo Stock Exchange Group Inc. and others, is seeking to get more orders from proprietary firms and high-frequency traders. Exchange executives say volume from these firms benefits investors by lowering their trading costs and enabling them to buy at lower prices or sell at higher levels.
The Istanbul exchange is building a new trading engine to match orders faster across more asset classes by the end of 2012, Erkan said. ISE’s 70-member investment-technology group may double in the coming months as work on the system expands, he said. ISE currently has about 500 employees.
This follows several changes ISE made to its regulations last year to spur confidence in the market and align its rules with those of most European nations.
ISE began allowing users to cancel unexecuted orders in October 2010. It stopped publishing identification information about the broker-dealers who executed trades since that revealed too much information and led to what he called “manipulative” strategies aimed at triggering buying or selling by other investors. ISE also halved the minimum tick, or allowable price change for orders to increase cost savings for investors.
ISE also plans to develop a market for block trades to replace its current system and appeal to institutions, Erkan said. The venue, which will be ready by mid-2012, will compete with dark pools that trade Turkish shares in other countries, he said. Dark pools are private venues that don’t display bids and offers publicly. The planned system may match orders at the midpoint between the best bid and offer or permit users to negotiate with one another between those prices, he said.
“Being a late starter helps us a lot,” Erkan said. “We don’t want to make the same mistakes some countries have made” in how they trade securities and encourage competition. He said he doesn’t have a model market on which ISE’s rules are being based. “Turkey is growing at record levels,” he said. “Turkey has different conditions.”
--With assistance from Melike Ayan, Leon Lazaroff and Lee Spears in New York. Editors: Joanna Ossinger, Nick Baker
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