Trading Firms See Opportunity in Interest Rates: Survey

Unsurprisingly perhaps, given the raft of central banks shifting monetary policy after a long period of stable rates, prop trading firms in the latest Acuiti Insight Report see the most potential for profit in interest rate derivatives markets – that said, liquidity remains a concern.

Other markets of interest included energy, equity options and commodities, which had “significant potential” according to the 100 trading executives surveyed, while just under half saw opportunity in cryptocurrencies.

Despite the opportunity in interest rates, respondents raised concerns over liquidity in European markets, it was seen to have deteriorated most in Gilts contracts, with 38% noting this trend. Respondents also 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.

Also unsurprising, given the volatility in markets, the survey found that 2022 was a very strong year for proprietary trading with a third of the network reporting a “very good” or “exceptional” year. That said, cost bases grew for most firms in 2022 with staffing and market data fees rising at the fastest pace.

Other findings are that TradFi 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, and passive liquidity schemes, such as speed bumps, have generally been seen as positive by the market.

“Proprietary trading firms [form] the majority of Avelacom’s client base and it is heartening to see our clients reporting that they have had a strong year,” says Alekey Larichev, CEO of Avelacom, which co-produces the report.

Meanwhile, Ross Lancaster, head of research at Acuiti, says, “2022 was a strong year for proprietary trading firms and the macroeconomic environment points to another strong year in 2023. 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.”