Strike 1 – Turkey FX Suffers Decline in Trade Volumes

Turkey, one of the most bullish markets for FX since the late 90's has suffered its first major hit in declining volumes, this comes as a surprise as the 70 million populated nation regulated FX in 2011 and saw cumulative increase in volumes over the last 9 months.

The Turkish Brokers Association of Turkish Brokers (TSPAKB) received trade volumes for the month of August from 14 of the 15 registered brokers. Volumes for August were Turkish Lira 101.726.547.309 which is around $56 billion (in current USD TRY conversion), brokers hedged volume was TL 58.879.041.940,69. May figures were reported at 126,869,583,940 TL which was a 77% increase from April’s number of 71,264,455,633 TL. In dollar terms, the volume represented 70 yards of trading vs 39.2 in April.

Volatility was a driver of volumes in 2011, overall 2012 has been poor for FX brokers especially institutional players like Reuters and EBS. Hüseyin Gürsöz, CEO of Meta Financial Consulting believes the Turkish market is still far behind in terms of technology, he says “investors prefer foreign companies to trade; existing brokers are not as capable and clients are not satisfied with them”.

The results reinforce the overall declining volumes in regional and global FX centres, however Integral Menkul saw record trading volumes in August. Kıvanç Memişoğlu, CEO of Integal Menkul, a leading broker in Turkey says “although the Turkish Forex market volumes retracted from 138.6 billion TL in March to 101.7 billion TL in August, we, as Integral Securities made our all-time record volume in August with 27.5 billion TL. Since the actual retail market size is approximately 100 billion TL, Turkish Forex market volume is consolidating around that number once again”.

Turkey was given a positive boost by rating agency Moody's (31st October) which saw the main stock index reach a new high. The main 100 index of the Istanbul Stock Exchange (İMKB) hit a historic high yesterday at 71.717 points.

The Turkish Lira is trading a 1.7912 against the greenback.

Turkey is home to a diverse range of investors who trade in margin FX and gold, although there are many retail investors Kivanc believes there are a couple of high volume professional traders who were holding back during August which also affected the overall decline in volumes.

The number of regulated FX brokers has been expanding gradually, initially the CMB authorised seven players, then 4 more were added and recently another 4 entities making the total to 15. Forex Magnates is aware of another regional bank which recently acquired status as a full market maker under Capital Markets Board (CMB) and will announce its status (launch) in the coming months.

Pinar Ünal, Editor at FOREXTRAVIEW, a FX traders educational magazine in Turkish language, believes education is another factor affecting the low volumes, the FX regulations took a long time to apply and during the implementation many potential clients lost interest (novice traders), she believes brokers and the wider have to re-educate investors about the benefits of trading in the FX markets. She says “in turkey the number of educated traders is too low. The traders are unconscious about the market, that’s why we are publishing a forex magazine for Turkish customers. Our aim is to educate people in Forex Trading and let them know about the market”.

The Turkish banking crisis (2001- 2002) was a major blow for the country’s economy; however in hindsight if we look at the financial sector as a whole the market has progressed significantly during the last decade. With a pro-business/ Europe government; Turkey has been managing to fight back against the earlier banking crisis and the global recession. TurkDEX, the first private financial exchange was set up in 2005. The new bourse offers a wide range of products including; gold, currency futures and soft commodities, and boasts daily volumes of around $2-3 billion. "The financial sector is opening up and we are getting access to a wide variety of products that can be used to hedge and manage risk", says Nezihe Ozis, a FX trader based in Istanbul.

The Turkish market plays a significant role in the contribution to global volumes, the figures for August are a sign of concern as the market may have already reached maturity, firms that started offering FX since the regulations (no prior experience) could be hurt the most, as acquiring new clients (cost per account) is both costly and time-consuming, the CMB has set the bar high for Turkish based brokers with capital adequacy at a whopping $4million (above EU standard) and leverage restricted to 100 to 1. "The Regulations in Turkey are much tougher than those in well-regulated markets such as UK and Australia", says Ahmet Ünal Founder of FOREXTRAVIEW.

TurkDEX is being heavily promoted as a premier executing venue for foreign and domestic investors; the exchange reached a total trading volume of over $263 billion in 2011, and now boasts 99 members. The fees are modest for broker members, exchange transaction fees:

• 0.004% of monthly transaction value for equity and currency contracts,
• 0.003% for physically delivered currency contracts and
• 0.001% for all the other contracts.

Exchange transaction fees are calculated and charged on a monthly basis.

Can Turkey position itself as a major FX hub? In the interbank market TRY is traded offshore. Can TurkDEX and the new wave of domestic FX brokers create a new phenomenon, watch out for Ottoman FX! On the other hand it will be interesting to see how the market unfolds, there is talk that the market will start consolidating and only the top 10 brokers will continue to offer FX services in the next 12 to 18 months.

Ahmet concludes “the Turkish FX market is congested and there are too many brokers for the number of clients that can be served”.