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Proprietary trading firms see the most potential for profit in 2023 in interest rate derivatives, but liquidity is a growing challenge in the market, the latest Acuiti Proprietary Trading Management Insight Report has found.
The report, which is based upon a quarterly survey of the Acuiti Proprietary Trading Expert Network, a group of over 100 senior proprietary trading executives from across the globe and produced in partnership with Avelacom, found that listed interest rates was the asset class that respondents believed had the most potential in 2023.
Energy, equity options and commodities were also seen as having significant potential. Just under half of respondents saw opportunities in crypto currencies despite the significant price declines and market turmoil experienced in 2022.
However, despite the opportunity in interest rates, members of the expert network raised concerns over liquidity in European markets. Liquidity was seen to have deteriorated most in Gilts contracts, with 38% of respondents noting this trend.
Members of the expert network pointed to increased incentives for proprietary trading firms and higher retail participation in the market as the two main potential solutions to grow liquidity in rates markets.
Other findings in this report include:
- 2022 was a very strong year for proprietary trading with a third of the network reporting a very good or exceptional year.
- Cost bases grew for most firms in 2022 with staffing and market data fees rising at the fastest pace.
- Trad Fi prop firms that trade crypto are taking out default insurance and reducing the number of exchanges they trade on in the wake of the collapse of FTX.
- Passive liquidity schemes, such as speed bumps, have generally been seen as positive by the market.
Aleksey Larichev, CEO of Avelacom said: “Proprietary trading firms the majority of Avelacom’s client base and it is heartening to see our clients reporting that they have had a strong year. Understanding their sentiment and mood towards particular asset classes and markets helps us to anticipate and develop our network infrastructure accordingly and be first in providing best-in-class low latency solutions that they require across all markets. In 2022 we extended our presence in the Middle East, Asia Pacific, and Latin America to provide more opportunities in most asset classes, including cryptocurrency.”
Ross Lancaster, Head of Research at Acuiti, said: “2022 was a strong year for proprietary trading firms and the macroeconomic environment points to another strong year in 2023,” says. However, while interest rates provide significant opportunities this year, concerns around liquidity are growing. This is particularly acute in the UK where the number of options market makers has fallen dramatically in recent years.”
Download full report here.
