- Wall street traders, especially those in fixed income, have had a blowout year, with many desks at least doubling last year’s performance in the first half of the year.
- But traders expecting a giant pay increase are likely to be disappointed, and bank execs are already managing expectations, according to several industry headhunters.
- In part, that’s because banks are hoarding capital to brace against future loan losses and poor performance in struggling business lines. Bonus pools will be smaller and spread thin.
- But the optics of paying big bonuses when much of the country is suffering is a consideration as well, headhunters noted.
- “People within fixed-income sitting there thinking their heyday or glory day has arrived because they’re up huge and this is their year to get paid, they should manage their expectations, and not get their hopes too high,” Michael Nelson, a managing director with executive search firm Quest Group, told Business Insider.
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Traders have been earning record-breaking scores for Wall Street’s largest banks, which typically translates into substantial increases in compensation when bonus season rolls around.
But there’s nothing typical about 2020. Headhunters that work with bank executives and their traders say employees are getting burned out while working remotely, and firms may not be able to pay up enough come bonus season to hold onto top talent.
Facing a gloomy economic outlook across the country and bracing for billions in loan losses, bank executives are already tempering bonus expectations for their securities divisions — especially in fixed income, currencies, and commodities (FICC) — which have seen stellar performance and helped keep banks profitable.
“People within fixed-income sitting there thinking their heyday or glory day has arrived because they’re up huge and this is their year to get paid, they should manage their expectations, and not get their hopes too high,” Michael Nelson, a managing director with executive search firm Quest Group, told Business Insider. “Banks are going to be very frugal with this trading windfall.”
Amid the market chaos this spring, and the resulting rebound, the surging volatility and stability provided by the Fed has helped produce stellar trading results for the first half of the year.
Revenues at the top-12 banks have grown four-fold in US Treasuries and equity flow volatility, and more than doubled in foreign exchange, emerging markets, investment-grade, high-yield, and residential mortgage-backed securities, Amrit Shahani, the research director at Coalition, told Business Insider.
At JPMorgan Chase, for instance, trading in the second quarter accounted for $9.7 billion in revenue — an all-time firm record.
Leading the way was the fixed-income unit, where revenues doubled compared with last year. Equities revenues jumped 38%, thanks in large part to its equity-derivatives franchise, where the global flow derivatives team finished the first half of 2020 with more than $700 million in revenues, nearly three times as much as the roughly $250 million the group earned in all of 2019, Business Insider previously reported.
The rest of the big-5 US banks have produced blowout numbers as well, primarily in fixed-income trading, adding up to a grand total of $33.4 billion in trading revenues, the most since the first quarter of 2010, according to the Financial Times.
Why trader comp will get squeezed
Wall Street banks usually reward employees based on the amount of business they’ve driven for the firm, which is why a robust six-figure base salary can look small in a hurry for outperformers earning multiples of that in their annual bonus. Even in unspectacular years, top traders can earn millions.
But traders expecting the blowout performance in 2020 to correspond to a giant pay increase may wind up disappointed.
A trader who doubled or quadrupled their profit-and-loss performance from last year is not going to see their bonus increase at the same rate, several executive recruiters who cover the industry and speak with management told Business Insider.
Traders having successful years will see a modest increase in pay, but “should they get paid up 6x for being up 6x in P&L? No way,” another fixed-income recruiter added.
The reasons are manifold, and bank execs are already guiding downward with regard to bonus pools, the recruiters said.
Banks are squirreling away tens of billions in capital to brace against the economic fallout from the coronavirus. A report this week from Accenture estimates US banks will ultimately set aside as much as $320 billion for credit losses in 2020.
Moreover, other business lines have struggled amid falling interest rates and sleepy M&A activity.
This means a smaller bonus pool to go around, and banks will likely take a longer-term view in spreading it among staff.
Completely gutting compensation in other units that are struggling in 2020 would all but welcome defections and jeopardize the success of those businesses beyond 2020. Traders will in effect subsidize other parts of their firms this year.
“They want to pay all these guys, but the money’s not going to be there for everybody. If fixed income is up 40% and the bank is down 18%, what are you going to do?” one of the recruiters said.
There’s also the matter of optics. The public spanking financial firms received after the last crisis for handing out fat bonuses while simultaneously accepting massive bailouts hasn’t faded from memory.
Nine banks that accepted bailout money paid out nearly $33 billion in bonuses in 2008 — including million-dollar bonuses to 5,000 individuals — while losing $81 billion, a report from then-New York Attorney General Andrew Cuomo found, further intensifying scrutiny from lawmakers.
Banks aren’t at the epicenter of distress like they were during the 2008 financial crisis. But they’ve still benefited significantly from government aid, including the Federal Reserve’s pledge to buy government bonds and even corporate debt for the first time, which stabilized markets and helped spur the trading activity that has padded banks’ bottom lines.
Execs are cognizant that much of the country is suffering — there’ve been nearly 50 million unemployment claims in the US during the pandemic — and reports of gaudy bonuses on Wall Street could draw unwanted attention, even if the compensation is merited by Wall Street standards.
Moreover, trading performance in the third and fourth quarters of the year remains a question mark, and already firms have cautioned that trading will likely cool off in the second half. JPMorgan Chase CEO Jamie Dimon warned trading revenues could fall by 50%, a sentiment echoed by other bank execs.
Retention and burnout concerns
The headhunters said it was unusual that firms were managing bonus expectations this early in the year, underscoring the unique dynamic in 2020.
“Why would you ever start to manage expectations in July? But this year apparently you need to,” another FICC recruiter, who wasn’t cleared to speak publicly, told Business Insider. “Normally you don’t. Normally you wait out the next quarter.”
Traders with a track record of strong performance will likely fare better, whereas managers may be reticent to reward individuals who had their first blowout year.
Two headhunters threw out the figure 25% — the increase in bonus non-elite traders may receive despite increasing their P&L statements by double, triple, or more.
Employee expectations may be further complicated by the nature of the pandemic. Some traders are working longer hours at home, waking up at 6 a.m. and sitting in front of their computer trading until 6 p.m., taking few breaks and days off, one of the headhunters said. There’s little in the way of socializing or going out with colleagues to build camaraderie, either.
“A lot of the traders I talk to are getting super burnt out,” the headhunter said.
“They’ll all be up, but if it’s up 25%, people will contemplate whether this is worth doing,” he added.
Banks will have to strike a balance, because the risk in severely undershooting trader expectations is that they could lose talent to rivals.
Some desk heads are fearful they’re not going to be able to get their reports to an acceptable level to keep them from being poached away, the headhunters said.
“It’s a huge recruiting concern from a retention perspective,” the FICC recruiter said. “We’re already seeing people move based on the fact that they don’t expect comp to be there at year end.”
A number of senior fixed-income traders have already switched shops this year, though it’s difficult to pinpoint individual motivations for leaving. Just this month, Deutsche Bank lost its heads of high-yield and investment-grade credit trading — the latest in a flurry of credit-trading exits from the bank this year.
Japanese bank MUFG hired Steven Feinberg, the ex-head of IG credit trading at Deutsche Bank, as well as Mitchell Nadel, formerly the head of Americas macro trading at Morgan Stanley.
In early July, hedge fund Point72 poached Goldman’s top repo trader, Alex Blanchard, a month after poaching the bank’s head of US government-bond trading, Andrew DiMaria. Millennium Management poached MDs in rates trading from Goldman and JPMorgan in May.
If bonus season early next year turns out to be a disappointment, as many are expecting, many more traders could be on the move.
“Most of the traders I speak to regularly are concerned about what comp will look like. I have not heard much, if any, optimism,” one of the headhunters said.
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