A survey by Market Intelligence specialists, Acuiti, commissioned by Avelacom, the global connectivity and IT infrastructure provider for the financial services industry, has found that in their efforts to stabilise trading revenues, proprietary trading firms are overwhelmingly interested in trading new emerging markets.

Overall 85% of senior proprietary trading respondents are interested in trading emerging markets and 74% are expecting to start taking market data or begin trading on a new emerging or frontier market over the next 12 months.

Avelacom plans to use this data to ensure that as it increases its Points of Presence (PoPs) and enhances its fiber backbone across Asian, Latin American and Indian markets in line with market requirements, shown in the survey.

China is highlighted as the country of most interest with 56% of respondents planning to connect or take market data from an exchange in China over the next 12 months for the first time. India is also flagged as of particular interest for 52% of respondents, albeit it with additional barriers to entry as a result of difficulties in accessing onshore markets via an international GCM.

Saudi Arabia is also attractive, driven in part by Saudi Arabia’s stock market, Tadawul, launching its derivatives market in August with plans to launch futures and options contracts in the coming 12-24 months. In South America, Brazil and Mexico were highlighted as key markets of interest.

Firms point to two key reasons for considering entering new emerging markets – diversification (65% of respondents) and arbitrage opportunities (62% of respondents).

Both reasons are driven by the tendency of proprietary trading firms to experience significant highs and lows, with months of extreme success followed by very challenging months.

The report highlights that this “polarisation of month-to-month revenues has been exaggerated by the spread of Covid-19 and the associated volatility, but reflects similar patterns in 2019 and presents a challenge to proprietary trading executives running businesses with large fixed costs.”

Emerging markets are the key driver of contract volume growth in derivatives markets, creating natural opportunities for proprietary trading firms.

However, while the benefits are clear, firms also state significant barriers to entry including:

• Lack of provision of access from clearing providers (62% of respondents). This is also the most cited reason a firm has actually been prevented from joining a new market.
• Cost of IT infrastructure deployment at an exchange (59%)
• Uncertain regulations (57%)
• Cost of market data (46%)
• Lack of understanding of market rules (38%)

Commenting on the report, Aleksey Larichev, CEO of Avelacom, said: “Proprietary trading firms have long sought diverse revenue sources and the growth of derivatives markets in emerging market is an opportunity for them to diversify their trading and access arbitrage opportunities, particularly at times when established markets are quieter.

“Avelacom is responding to this demand by providing a ready-built infrastructure, new connectivity options and market data solutions for financial institutions that want to expand geographically.”

Will Mitting, founder and managing director of Acuiti, said: “Our survey found very strong demand from proprietary trading firms to trade emerging and frontier markets. Over the past decade, companies like Avelacom have made it far easier for firms to enter new markets and brought down the cost of access. Such firms are likely to see increased business in the medium and long-term from international proprietary firms as they take advantage of simplified regulations, increased trading hours and a growing technology infrastructure.

“While 18% of respondents said Covid had made them more likely to trade EM, 66% said that their wanted to increase exposures regardless of Covid, demonstrating the fundamental interest in EM. Most of the top 100 fasted growing established contracts are also in emerging markets.” 

Methology: latency sensitive proprietary trading firms based in Europe, APAC, North America.

The full survey can be found here.