Proprietary trading firms, buoyed by an optimistic outlook for the year ahead, are investing in trading new asset classes, particularly fixed income, with government bonds top of the list.
The Q4 2023 Proprietary Trading Management Insight Report, produced in partnership with Avelacom, is based on a survey of the Acuiti Proprietary Trading Expert Network, a group of senior executives at more than 100 proprietary trading firms.
The report considers what firms are expecting over the year ahead, as well as where firms are planning to invest. The report also outlines how rising costs from exchanges are impacting proprietary trading firms.
Despite ongoing geopolitical uncertainty and stubborn inflation in several core markets, proprietary trading firms are looking ahead to 2024 with optimism, the report found, with 67% of the Expert Network predicting a good year next year, with 19% anticipating a well above average year.
However, optimism about business performance fell this quarter to 49% of respondents being either quite or very optimistic from 58% last quarter. The percentage of respondents that were pessimistic doubled from 10% to 20%.
Firms that were predominantly algo but not ultralow latency anticipated the best year, with 93% anticipating a better than average year compared to 36% of ultra-low latency firms.
The positive sentiment is feeding into investment budgets with investment going into most areas of technology. Overall, 63% of respondents predicted a higher than average investment budget in 2024, down slightly from last year when it stood at 68%. Algorithmic trading tools, connectivity to new markets, market data and improving latency/connectivity to existing markets were top of the shopping list for firms.
For firms investing in trading new asset classes, they were most likely to be expanding into fixed income, with cash government bonds the most likely area of expansion. Second was firms looking to expand into equity options, with energy a close third. A small number of firms were planning to develop crypto trading or FX.
In terms of expansion in the asset classes firms were already trading, FX was the area that firms were most likely to be expanding, a significant reversal on last year when it was the asset class the fewest firms were seeking to expand in.
Around a fifth of respondents were planning to decrease their coverage of cash equities, three fifths of whom were based in the EU, signalling a “worrying trend”, the report noted, in a market already suffering from poor liquidity.
Nine in 10 respondents reported an increase in fees paid to exchanges over the past five years with over a quarter experiencing increases of more than 50%. As such, proprietary trading firms are looking to regulators to take action to address the rise in market data fees.
Looking at the the long-term impact of IFR/D, which will significantly increase capital requirements on most proprietary trading firms, almost all firms surveyed thought it would have a negative impact, with almost half predicting a reduction in the number of proprietary trading firms and a third believed that it would reduce the amount of balance sheet that market makers can deploy to listed markets.
© Markets Media Europe 2023
