US proprietary trading firms have fallen behind their European counterparts, thanks in large part to reduced volumes in US options markets.
This disparity comes amid a wider slowdown for proprietary trading firms in H1 2024, despite conditions improving on H1 2023. The findings are drawn from Acuiti’s Proprietary Trading Management Insight Report, which also looked at buy-or-build considerations, headcount, and the role of India in firms’ future prospects.
Ross Lancaster, head of research at Acuiti, said: “After stellar years in 2020 and 2021, performance for proprietary trading firms has been more challenging over the past two years.
“However, new markets are providing firms with opportunities and overall the environment remains positive compared to the mid-2010s. And with growing uncertainty around the US election results in November, 2024 still could turn out to be a very good year for the market,” Lancaster adds.
The quarterly report is based on a survey of the Acuiti Proprietary Trading Expert Network, a group of senior executives at more than 100 global proprietary trading firms. The latest report found that, while 47% of firms reported better business performance than in H1 2023, less than a third said that H1 2024 has been better than an average year.
Firms cited regulation, a lack of volatility in the market, and competition for fills, as the top three challenges in H1 2024. Regulation has steadily climbed the list of challenges over the past three years – it was cited as a significant or critical challenge by a third of firms in H1 2022 and, most recently, by more than 55%.
Competition for fills has risen from 15% of firms citing it as a major challenge in H1 2022 (and 20% last year) to just over half of firms this period.
Because proprietary trading revenues are highly dependent on underlying trading volumes, muted growth in some key markets has impacted these firms.
Market conditions have also favoured ultra-low latency and predominantly algorithmic firms, with almost 40% of ultra-low latency and predominantly algo firms reporting a better than average H1, compared with just 15% of firms with lower latency or more manual trading strategies.
Further insights
India has been a fast growing market for proprietary trading firms, with 16% of firms already trading in India. Of those that weren’t, 43% were planning to start trading at some point. Of those already trading, just 7% said it was very easy to connect and start trading compared with 14% who said it was very difficult.
The major challenge that firms faced was in understanding local rules. However, firms also reported challenges in dealing with local regulators. Connectivity and colocation set-up was said to be quite challenging, while finding a local lawyer and broker was straightforward for most firms.
On hiring plans, respondents said they are planning to increase the level of hiring of trading staff, developers and risk management compared to last year, with other areas remaining broadly in line with 2023. Almost 90% of firms are planning hires in trading with 75% planning to hire more developers. This compares with 63% and 69% respectively in the same study last year.
On the question of whether to buy or build front office software, the survey found that just under a fifth of proprietary trading firms that outsource their trading screens to an independent software vendor (ISV) are currently planning to build inhouse systems. Of those that build their software inhouse, 27% previously worked with an ISV. All firms that chose to build in house said that control over development was the key reason for doing so.
The move towards in house development would see the percentage of proprietary trading firms that develop systems inhouse rise to above 40%. Currently, just under a third of proprietary trading firms develop their front-office trading screens inhouse with the vast majority of those that outsource working with 3 or fewer vendors.
Aleksey Larichev, CEO of Avelacom, which partnered with Acuiti on the report, said: “As competition increases, firms are driven to equip themselves with better strategies and technologies. The report highlights that algorithmic firms using latency-sensitive strategies have performed better, illustrating the importance of keeping up with market changes.”
Looking ahead, sentiment among proprietary trading firms about business performance over the next three months fell back this quarter but remained high. Overall, 66% of the Expert Network were either very or quite optimistic about the coming quarter. However, 8% were pessimistic, compared to no respondents last quarter. In addition the number of very optimistic respondents dropped from 24% to 14%.
©Markets Media Europe 2024
