Survey Finds Crypto, Rates, as Biggest Opportunities for Prop Shops

Perhaps unsurprisingly given the volatility in one and likely increased activity in the other, a new survey finds that proprietary trading firms see the most opportunity in cryptocurrencies and interest rate markets, as well as in equity options.

The survey, part of Acuiti’s Proprietary Trading Management Insight series, which was launched last year, was in association with Avelacom and compiled from anonymous submissions in Acuiti’s network. It also analyses cost increases late in 2021 and the outlook for the next three months in addition to the opportunity det for prop firms, as well as contains the Avelacom Exchange Growth Index, which tracks exchange activity and highlights the best performing new futures and options contracts.

Unsurprisingly given the spreads quoted and volatility in these markets, the report finds that crypto presents “enormous opportunities” thanks to continued interest from both retail and institutional investors. This was in spite of recent falls in the value of many cryptocurrencies and uncertainty over the regulatory outlook.

Respondents saw the most opportunity across all asset classes in North America and APAC. The opportunity in the latter was seen mostly in mainland China and on HKEx while in North America firms saw the most potential for growth in 2022 on the CME and equity options markets.

There is a divergence in the report on FX markets, for while they do not appear to be on manual traders’ radars, which may be surprising given the historical link between FX volatility and trend and interest rate divergence, algo trading firms saw heightened opportunities. Overall though, FX was seen as the lowest opportunity set in the survey, with just 12% seeing huge potential (it was roughly the same in metals) compared to percentages above 20% in other asset classes.

Away from the opportunity set, the report finds that prop trading firms are also planning significant investment in 2022 with algo trading tools, co-location infrastructure and market data technology the most common targets for investment. This follows cost increases reported in market data and exchange fees, a response that exceeded the number of firms reporting costs rising from investment or bringing on new staff.

Perhaps unsurprisingly again given what seems to a period of very high demand for staff, only 5% of respondents saw reducing headcount as the biggest opportunity to increase profits in 2022. The deployment of new strategies was far and away the most popular answer with almost 70% citing that path.

The report also cites a “growing divergence” in the importance of latency to prop trading firms with a reduction in importance for second tier algo firms and an increase for traditionally less latency sensitive hybrid firms. Significantly there was an increase in importance in latency to point and click firms, traditionally not focused on speed, the survey finds. Latency is also growing in significance across the trade cycle with firms pointing to increased importance in market data and risk management in addition to the traditional focus on execution.

“We asked executives whether latency was becoming more important for their trading strategies,” explains Will Mitting, founder of Acuiti. “We found that, while for ultra-low latency firms, speed remained central to their strategy as you would expect, it is becoming less important for second tier algorithmic trading firms. This is an interesting trend with regards to investment and the importance of latency. These firms appear to be investing more in being smarter than faster. Conversely, we found that latency was becoming more important for point-and-click and hybrid firms, who have traditionally not invested heavily in low-speed trading infrastructure.”

Aleksey Larichev, founder and managing director of Avelacom, adds, “We have spent the last two years investing heavily in our crypto market infrastructure, which is vindicated by this finding that crypto is seen as the biggest opportunity for professional, proprietary traders in 2022. Our partnership with Acuiti helps us to forecast these changes in global markets. Also, the significant investments planned by proprietary trading firms in 2022 into network and co-location infrastructure are a positive sign of the market’s maturity.”