Istanbul Or Bear? Large Institutions Begin To Eye Turkey As Next Destination For HFT

Turkey, being a large country which is situated in a geographically strategic position for companies which operate in the financial sector, has generated interest among retail FX firms over the last three years, subsequent to the Turkish government applying a regulatory framework whose quality surpasses that of its immediate neighbors.

With a developed financial markets economy, Turkey conveniently straddles Europe and Asia, and now that the influx of retail FX and technology companies to the region has calmed down somewhat, it is becoming apparent that the age of the high-frequency and proprietary trading desks may be not too distant, driven by a wish for such firms to offer high-frequency trading (HFT) facilities to an Eastern European client base.

Investment bank, Renaissance Capital, an institution which has carved out a reputation for its focus upon emerging markets, has announced today that it intends to provide electronic trading services which are aimed at allowing participants to directly access markets in Turkey, focusing not just on equities but also derivatives.

According to a Financial News report today, the company intends to establish pre and post-trade services, which include institutional trading functionality such as clearing, settlement and prime brokerage services in addition to market access.

Jeff Wilkins, Managing Director of ThinkLiquidity, considers the move toward Turkey to be a viable move for HFT firms such as Renaissance Capital. He conveyed his view to Forex Magnates today that, "HFT is very prevalent in Turkey and there is massive sell side interest constantly looking to capitalize on the massive volumes generated out of the country. This is a great move by Renaissance and I am sure others will follow."

Turkey Avoids Europe's Disdain For HFT

Whether it is worth the investment in such infrastructure is perhaps a moot point, however with Turkey not yet included in membership of the European Union, companies showing an interest in providing an HFT or proprietary trading environment for the benefit of not only domestic clients but those in other surrounding countries could do well to bear in mind that the European Union has demonstrated a degree of disdain for HFT, and is working on rulings which could scupper any advantages which otherwise would make it a viable method of trading.

Germany's BaFIN was among the first of the regulators to stipulate how HFT can be conducted, and just last month the European Parliament itself issued a draft dossier with an initial outline of the proposals to curb all HFT activity, with widespread acceptance from politicians and member states. Should North American authorities impose the Volker Rule, part of the Dodd-Frank Act which seeks to outlaw proprietary trading, the case for seeking pastures new appears stronger.

Whilst Forex Magnates has become aware of the growing interest within Turkey to step up the pace and open its markets to a worldwide audience now that it is able to compete in terms of market structure, technology and governance, sentiment within the industry appears mixed.

One particular institutional FX company based in London does not share the enthusiasm displayed by Renaissance Capital. A spokesperson for the company explained to Forex Magnates that, "Proprietary trading or funds does not really matter. These methods employ the same type of strategies, they are just different vehicles, therefore it is not something of particular interest."

An interesting perspective, bearing in mind that Britain's government began exploring the possibility of imposing a tax on HFT transactions this summer.

The Tech Factor

The Borsa Istanbul venue, which is Turkey's major national exchange based in the nation's capital of Istanbul, provides many institutional services across all asset classes, having strengthened its armory by engaging in strategic partnerships with Western companies, a particular example having been the alliance with NASDAQ OMX in July this year, in order to prepare for implementation of Risk Management , clearing and market surveillance ability across all classes.

More specifically, Borsa Istanbul acquired the country's derivatives exchange Turkdex, completing its ability to cater for many tradable assets, with PFSoft's ProTrader platform having been integrated during early 2012.

With these factors in mind, Turkey appears well placed to perform the role within the EMEA region that Australia performs in the APAC region, with Australia's regulator welcoming HFT and recognizing dark liquidity as part of the financial landscape, participants from Asia are welcome within Australia's well-organized and structured FX industry to make use of algorithmic and high-frequency practices.

In terms of technology, a good quality infrastructure with low latency and reliable connectivity to venues will need to be in place in order to attract major HFT and algorithmic trading companies.

It is clear that financial technology and infrastructure firms are well aware of this, as explained to Forex Magnates today by Fraser Bell, Managing Director of BSO Network Solutions. "BSO has access into the Turkish market place, connecting the major Financial Services globally - via Ethernet low latency solutions," said Mr. Bell.

"With our local knowledge, leading edge technology the Turkish market is a major focus for BSO in 2014," he concluded.

Whilst infrastructure and network speed is vital in order to ensure HFT participants continue to operate in a specific region, platform provision consideration must feature and in this respect there are some matters which must be borne in mind.

Ilya Holeu, Managing Director of Spotware Systems, pointed out to Forex Magnates that, "Turkey is an interesting country to examine in terms of high-frequency trading and other expansions in the financial and global markets."

Mr. Holeu likens the market to the growth experienced in other regions, but with more advanced regulatory oversight. "We've seen the popularity of HFT grow across many Middle-East and Gulf states, and it would be no surprise should Turkey continue to counter EU calls for tighter regulation," he continued.

Quality Of Technology Could Be Driven By Demand

As far as the actual quality of the infrastructure is concerned, Mr. Holeu considers that, "Turkey's infrastructure is probably not yet up to standard for institutional-level HFT, but if that continues to improve and regulation laws are favorable, it could certainly become the new hub in the region for major financial players."

With platforms like cTrader, there's no concern about infrastructure, as our main servers are hosted in the same location as other major banks, ECNs and aggregators, and Turkish traders are connected to our service through one of our many geographically dispersed proxies," he concluded.

New York-based FX technology specialist Brandon Russell, CEO of SCS, concurred with Mr. Bell in detailing to Forex Magnates that, "There is an established set of Any dealings that I have had with that area have been under the assumption that the underlying tech was good enough to sustain the projects being worked on and that has proven true to my knowledge as I have not had any negative reports."

Such sentiment from within the industry indicates that the future bodes well for Turkey's viability as a new haven for market participants with an emphasis on HFT, which could increase should Europe show further hostility toward the practice.

Whether other companies follow the footsteps of Renaissance Capital by tapping into Turkey's trading environment will be a matter for assessment post-entry, and with increasing interest in the entire FX ecosystem in Turkey becoming apparent, Forex Magnates is planning a conference in Istanbul during the second quarter of 2014.

Watch this space.