Garanti Rising to Record ’Knocks Out’ Exotic Short-Sellers

Investors who bet that shares in Turkiye Garanti Bankasi AS (GARAN) would decline using an exotic trading instrument called a “turbo certificate” suffered losses today as it led the stock exchange to a new record.

A turbo certificate on Garanti issued by Erste Group Bank AG (EBS), with Erste’s Istanbul unit serving as market maker, was “knocked out” today, according to a filing with the Istanbul Stock Exchange. The certificate hit a preset barrier price of 9.75 liras as Garanti, the bank that’s Turkey’s most valuable company by market value, rose to an intraday record of 9.8 liras at 9:59 a.m. in Istanbul.

“Everybody who is shorting Garanti is at a loss,” Erkan Kilimci, chief executive officer of Istanbul-based Erste Securities, said in a phone interview today. An investor who purchased the certificate on the day of issue on Nov. 8 under the EGAPA ticker would have lost 85 percent of the investment, as Garanti stock rose 15 percent in the period, Kilimci said.

The barrier serves as a stop-loss in turbo certificates. Erste defines the instruments as “securitized derivatives that are based on the performance of an underlying asset or gauge.” When the price of a security hits the barrier, the trade is immediately closed, according to a presentation by Erste, which says it’s the sole issuer of such products in Turkey.

Investors betting on price volatility may prefer to invest in warrants, while those who bet on the direction of equities or gauges choose turbo certificates, Kilimci said. Some investors are using them to bet on a correction in Turkish equities, he said.

Turkish stocks gained 53 percent last year after a 22 percent decline in 2011. Their dollar-based gain of 61 percent in 2012 was the world’s second-best among major indexes behind the main equity gauge in Venezuela.

Garanti rose 0.4 percent to 9.68 liras at 2:37 p.m. in Istanbul today, bringing its two-day gain to 4.5 percent. The main ISE 100 index also rose 0.4 percent to 79,928.75 after earlier breaking the 80,000 threshold for the first time.

To contact the reporter on this story: Taylan Bilgic in Istanbul at tbilgic2@bloomberg.net

To contact the editor responsible for this story: Gavin Serkin at gserkin@bloomberg.net

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