Around 50% of prop trading firms are considering moving operations out of European markets due to Mifid complexity, Acuiti report finds

The new report found that only 12% of respondents polled believe that the new regulatory regime correctly reflects the prudential risks firms pose.

Almost half of proprietary trading firms are considering the move out of the EU or UK to avoid regulatory hurdles, according to the report, which also found that a quarter of the firms are looking at potentially giving up their Mifid II licenses and exiting European markets altogether.

The Acuiti Proprietary Trading Management Insight report found that the potential moves stem from a need to mitigate the impact of European regulation from the Investment Firms Prudential Regime (IFRD). The burden it represents is putting “significant” pressure on the firms’ ability to compete in the market, said the report.

IFRD was introduced in 2021, designed “to introduce a lighter touch capital and governance regime for Mifid II investment firms who would otherwise have been subject to the regime designed for banks”. Yet, since then, proprietary trading firms have reported exceptionally high capital requirements and substantial governance burdens.

The survey found that 92% of respondents had seen an increase in their reporting requirements, and almost 75% said their capital requirements had also increased. Additionally, only 12% believed that the new regime correctly reflected the prudential risk their firm posed to the market.

Acuiti likens the situation facing the propriety trading firms to the Sword of Damocles, where participants risk one of two options – either an annual “squeeze” that could become too great for some, or reaching the cliff’s edge when exemption expires.

Proprietary trading firms currently represent around 50% of daily liquidity on European markets, therefore, should they give up their Mifid II licenses and cease to trade within them due to the regulatory obstacles they face, there is potential for a “severe” impact to market liquidity, said the report.

Despite a recent reduction in the volatility of global markets, the report also found that overall just 41% of respondents are optimistic about the next three months – the lowest since Russia invaded Ukraine in Q1 2022.

Will Mitting, founder of Acuiti highlighted the shockwaves sure to reach Brussels and relevant European regulators as a result of these findings, and stressed the importance of the results: “Proprietary trading firms provide a vital service to capital markets providing liquidity and lowering execution costs and spreads for end users. The disproportionate impact of IFR/D and other rules that have been automatically applied to Mifid II investment firms is resulting in an unsustainable regulatory burden for firms”.

The report is based on Acuiti’s quarterly survey which considers responses from its Proprietary Trading Expert Network which is made up of a global group of 120 senior proprietary trading executives (produced in partnership with Avelacom).