Following a previous report which found a noteworthy percentage of firms were debating a potential move out of Europe due to a need to mitigate the impact of Mifid, a recent Acuiti report has found that the UAE comes out on top for firms considering alternatives.
In May, the quarterly Acuiti Avelacom survey found that around 50% of prop trading firms were considering moving operations out of European markets due to complexity around the Investment Firms Prudential Regime (IFRD). In addition, in the same findings, a quarter of the firms were reportedly looking at potentially giving up their Mifid II licenses and exiting European markets altogether.
In the latest report, 23% confirmed they would not consider a move, however of those who were, the latest report delved deeper into exactly where these firms are considering relocating to.
When asked about the shift of operations to outside the EU if IFR/D was not reformed, 17% of those surveyed responded that they would most likely move operations to the UAE. This was closely followed by 15% who highlighted Singapore as the most attractive location.
The next most popular option was the US with 11% confirming they would most likely move there. Australia and Switzerland were also highlighted, with a lesser 3% of respondents citing those jurisdictions. Both the US and Switzerland were popular amongst lower latency trading firms, said Acuiti.
Aleksey Larichev, co-founder and managing director of Avelacom, said: “In times of subdued volatility, proprietary trading firms are looking for ways to trade profitably. […] We are helping many clients access markets around the world, with the lowest possible latencies, in order to help them find new opportunities”.
Since IFRD was introduced in 2021, prop trading firms have reported very high capital requirements alongside governance burdens despite the fact that it was 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”.
The most recent Acuiti report suggests that these requirements are set to reach potentially ruinous levels.
Elsewhere, last quarter the report found that, despite a recent reduction in the volatility of global markets, overall just 41% of respondents were optimistic about the next three months.
Looking at the most recent findings, the first half of 2023 has proved “challenging” for prop trading firms, said Acuiti, which highlighted “the back of a drop in volatility, rising costs and increased regulation”.
When asked to compare year-on-year, 61% of the surveyed firms reported that 2023 had performed worse, with 49% of these respondents going as far as to say that overall it had been worse than an average year.
The main factor according to the survey was down to the lack of volatility so far this year, as compared to 2022. When questioned further, 51% of respondents cited volatility, or lack thereof, as either a ‘significant’ or ‘critical’ challenge – a marked increase from the 4% which claimed so this time last year.
Read more: Volatility trading picking up traction as the market pegs it as a future core strategy
“After an exceptionally volatile six months in the first half of last year, it is no surprise that proprietary trading performance has dipped during 2023. However, it is encouraging that sentiment is rising among managers of proprietary trading firms, which suggests that the second half of the year might bring a reversal in performance,” said Ross Lancaster, head of research at Acuiti.
The report looked deeper into the performance of each respective business across different regions throughout H1 2023 and found that when it came to trading on exchanges, Asia came out on top as the most profitable region.
According to the report, strategies traded on Asian exchanges performed best, with almost 40% of those surveyed labelling the region “very profitable”. In contrast, European and UK exchanges were found to have been the least advantageous.
Read more: Derivatives and FX trading revenue decline offsets otherwise solid Q2 for Euronext
Acuiti highlighted the decrease in year-on-year volumes at exchanges Eurex and Euronext (according to FIA data) as examples, going on to discuss the challenging liquidity which was a key challenge according to prop trading firms in Europe – with the current environment having made it hard to take advantage of price movements.