Prop Trading Firms and the FX Market: What Are the Trends for 2024?

In a proactive move signaling confidence in the financial markets, prop trading firms across the globe are gearing up for a substantial uptick in their foreign exchange (FX) trading activities and increased investment budgets in 2024. The catalyst for this development lies in the findings of the latest Acuiti Proprietary Trading Management Insight Report, unveiled just last Monday (13th).

Key Findings

The report, a collaborative effort with Avelacom, draws insights from a comprehensive survey of senior executives from over a hundred proprietary trading firms. The overarching narrative is one of a sector on the cusp of significant growth. 

According to the report, 45% of FX trading entities are poised to significantly enhance their presence in the asset class, with a notable interest in equity options. The landscape for 2024 appears bullish, with a downward trend observed in cash equities, particularly in Europe, where a significant fraction of firms plan to reduce their exposure.

Aleksey Larichev, the Managing Director at Avelacom, emphasizes the report’s revelation that proprietary trading firms are eager to invest in improving their connectivity to markets, including exploring new ones. This diversification is further evident as firms set their sights on the cash government bond markets, showcasing a strategic move to broaden their trading spectrum.

Intriguingly, the report indicates that a substantial 63% of these firms are ready to allocate above-average resources toward advancements in algorithmic trading, market access, and data acquisition. This forward-thinking approach underscores the industry’s commitment to staying competitive and optimizing current trading setups.

Market Dynamics and Expansion Plans

Acuiti’s July research pointed out a growing trend among traders and proprietary trading firms looking toward Asia in search of new markets. This strategic shift aligns with the sector’s pursuit of fresh opportunities and signifies a recognition of Asia’s increasing prominence in the global financial landscape.

Furthermore, Acuiti’s October report suggests a noticeable consolidation trend in the FX prime brokerage industry, particularly within hedge funds. The study highlights growing concerns among fund managers about adverse changes occurring in the sector, indicating a need for adaptation and strategic positioning.

Challenges on the Horizon

While the report paints a promising picture of growth and diversification, it doesn’t shy away from acknowledging challenges that proprietary trading firms are set to face. One significant hurdle is the strain of rising exchange fees, which are exerting pressure on the range of markets and products firms are willing to trade. Notably, nine out of ten survey participants reported a rise in exchange fees over the past five years, with nearly all those not facing higher fees primarily or exclusively involved in cryptocurrency trading.

Will Mitting, the Founder of Acuiti, emphasizes that rising exchange costs are increasingly burdensome for many firms, leading them to trade fewer products and markets than they would if fees were lower. This issue underscores the importance of addressing fee structures to promote a more expansive and diverse trading environment.

Additionally, the report points out the low awareness among firms regarding the EU’s impending Digital Operational Resilience Act, set to take effect in 2025. This lack of awareness raises concerns about potential compliance implications for the firms, emphasizing the need for proactive engagement with regulatory changes.

Optimism Amidst Challenges

Despite the challenges, the report provides a positive outlook, particularly regarding the industry’s preparedness to navigate volatility. Acuiti’s July research highlighted traders and proprietary trading firms’ inclination to ride the waves of volatility, especially in the most volatile markets where the highest activity is observed.

Aleksey Larichev adds that this reflects firms’ plans to expand and optimize their current trading setups, portraying a market in good shape and working diligently to stay competitive.

Conclusion

As proprietary trading firms brace for the challenges and opportunities that 2024 holds, the insights from the Acuiti Proprietary Trading Management Insight Report shed light on a sector in flux. The bullish trends in FX trading, the strategic diversification into new markets, and the commitment to technological advancements showcase a resilience and adaptability within the industry. However, challenges such as rising exchange fees and impending regulatory changes emphasize the need for a proactive and flexible approach to navigate the evolving landscape successfully. As these firms position themselves for growth and innovation, the next chapter in the story of proprietary trading in 2024 promises to be dynamic and transformative.