Volatility is a Good Thing…Until it Isn’t

The latest SGX Global Market Sentiment Index Report, published by Acuiti in association with Singapore Exchange, finds that derivatives market confidence, which was so high in Q1, has drifted lower in Q2 – but remains elevated – as the reality of an uncertain geopolitical world hits home.

In the Q1 survey, business confidence among prop firms, hedge funds, asset managers and the sell side, rose strongly on expectations of deregulation in the US and increased market volatility, however the reality of that volatility seems to have dampened enthusiasm a little. The report notes that “concerns are growing in some areas of the market – particularly in Europe, and among asset managers and hedge funds – regarding the extent and unpredictability of US government policy”.

It is notable that while volatility is generally seen as a good thing for traders, the events in early April associated with the “Liberation Day” chaos in markets, saw many firms struggle to make money, especially systematic hedge funds. Even a separate Acuiti report found that while the majority of prop firms made money, a notable minority did not in the carnage of those first few weeks of the quarter.

The global sentiment index dropped to 74 from 78 in Q1, but remains above the average of the last seven quarters of 67.6. Sentiment was highest among sell-side clearing providers (84 from 81 in Q1), many of whom experienced record daily volumes during the early April volatility. Prop trading firms, whose revenues are also more closely correlated to volumes, also reported elevated levels of optimism (81 from 77), while asset managers (77 to 69) and hedge funds (74 to 61) saw confidence fall. Sell side execution confidence fell from 84 to 81.

Unsurprisingly, the report finds that sell-side firms did well amidst the volatility, thanks to record volumes, but it also notes that confidence is very high thanks to expectations of higher interest rates for longer.

The US administration’s policies are already creating a divide in markets, with European firms seeing a fall in confidence from 81 to 73 in Q2, while those in the US rose from 82 to 89. An uneven regulatory playing field is highlighted as a big concern for European firms, although it is likely that European regulators will respond to US actions in a similar fashion to how they have on tariffs – what price globalisation of markets?

A third theme of the report, crypto adoption, finds Institutional participation in crypto derivatives trading is expected to rise as more traditional, regulated exchanges launch digital asset products. For the sell-side, regulatory uncertainty remains the biggest barrier to adoption, while hedge funds cite the lack of trusted, regulated venues as a major challenge.

Traditional derivatives markets address many expectations of the critical hurdles faced by firms considering crypto trading in Asia, including alignment with local regulatory frameworks and improved operational efficiency. Only about 12% of institutional firms are currently engaging with digital assets, suggesting that the next wave of institutional adoption may take longer than previously anticipated, the report observes.