Proprietary trading firms – or ‘prop traders’ – have had to deal with much in recent years, including cost pressures, regulatory change and fast-paced changes in technology. Prop trading has faced increasing regulatory scrutiny and is now subject to a highly complex set of rules.
Prop trading involves trading in financial instruments or commodities as principal, using a firm’s own capital. While some view this as risky, for traders it can be very lucrative.
Algorithmic trading and high frequency trading (HFT) continue to re-shape markets. Benefits include increased liquidity, narrower spreads, reduced short-term volatility, wider participation in markets, and the means to obtain better execution of orders for clients.
But MiFID II also highlighted its risks. For example overloading trading venues with large volumes, or of algorithmic trading generating duplicative or erroneous orders or otherwise malfunctioning. Trading systems can also overreact to market events which can exacerbate volatility. And algorithmic trading techniques can, like any other form of trading, be open to market abuse.
The regulatory landscape for prop traders
MiFID II significantly narrowed exemptions for prop traders. All market makers (including those who are active on the derivatives market) and those proprietary trading by means of direct electronic access to a trading venue, were now subject to a licence obligation under MiFID II.
MiFID II has imposed additional requirements on algorithmic trading. Trading venues are required to carry out tests of algorithms and have various systems and controls in place, including systems to limit the ratio of unexecuted orders to transactions and be able to slow down the flow of orders.
How Bovill helps proprietary trading firms
We work with a range of proprietary trading firms – from long-established prop-trading desks to start-ups – to manage their compliance burden.
- Authorisation – we help new proprietary trading firms, from concept to licensing.
- Global footprint – we help established proprietary trading firms grow their global presence, by helping them to navigate emerging risks across different jurisdictions. We have offices in the UK, US, Hong Kong and Singapore.
- Compliance support – we partner with proprietary trading firms to meet their local compliance obligations, through ongoing compliance advisory, implementation support, focussed compliance reviews, and short-term resourcing.
- Market abuse – proprietary traders have complex needs when it comes to market abuse. We help them to develop market abuse risk assessments, establish effective controls, and calibrate and implement surveillance solutions.
- ICAAP - we can review your ICAAP and ensure that it meets the regulatory requirements.