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“They Won’t Get What They’re Expecting” – Why Wall Street’s Star Traders Are Going To Get ‘Shafted’ Come Bonus Season


The S&P 500 has officially fought its way back to the record highs, but all those investment bankers and traders who got a taste of what it was like during the pre-crisis days earlier this year, when global banks’ sales and trading operations suddenly became profit centers, likely won’t be getting as big of a “taste” as they probably expect when the Holiday bonus season arrives.

As BBG points out in a new story, just because they saved the firm’s bottom line last quarter, doesn’t mean they’ll be getting the personal windfall they feel they deserve (a 30%-50% higher than last year’s paltry comp). 

Citing commentary from a handful of Wall Street vets, Bloomberg reported a sad fact of life that this generation of traders is about to learn the hard way. And that is: when S&T hit it out of the park during a “good” year, traders are rewarded. But outperforming in a bad year gets you jack squat.

What’s worse, traders who have been working since shortly after the crisis have never before seen results like this, since centrally planned, Fed-backed markets have robbed brokers of much of the volatility that typically accompanies the traditional process of price discovery. But in an era when asset prices are hopelessly distorted, assets really only move one way.

For the stars, hedge funds will be waiting in the wings, ready to scoop up the best talent.

Bank traders who saved their firms’ bottom lines in the first half of 2020 are facing a reality of the pandemic: Record revenue won’t mean record bonuses, with most businesses facing declines of 10% or more. Even bond traders are likely to find year-end rewards don’t line up with the cash they generated, as firms face loan losses and pressure on costs.

“If your division hits the ball out of the park for the year – you’re probably better off when that happens in a good year for the overall firm,” said Bonnie Schindler, principal at Compensation Advisory Partners. “Fixed-income traders may feel a bit unlucky having that great performance this year.”

That message has been percolating in recent weeks – visible in fresh projections by Wall Street compensation consultants such as Schindler. They see traders who slogged through years of sedate markets now facing the prospect of having their big payoff tempered by tough times in other parts of the business. Deal advisory and lending operations are struggling. Banks are trying to avoid firings and dividend cuts.

It’s enough to frustrate star traders, leaving them vulnerable to poaching by hedge funds willing to pay more.

Everybody else is likely bound to be disappointed…

“People who have taken compensation hits over the years are not going to see the increase they’re expecting,” said Michael Karp, chief executive officer of recruiter Options Group, who predicts more defections by managing directors who run teams. “That’s where there will be a lot of discontent.”

…especially after last year’s bonuses were lean across the street, as banks were hammered by the return to zero interest rates. While the bonuses will certainly be an improvement, as the chart below shows.

Thanks to the new Fed credit facilities and the central bank’s decision to buy up corporate bonds, fixed income trading contributed the biggest increase to last year’s profits.

But while most fixed income traders probably hope to see bonuses of up to 50% or more, most will probably only see 30% or so, according to one well-regarded consultant.

Equities traders at major U.S banks largely succeeded in navigating the most tumultuous markets in a generation as the pandemic triggered lockdowns in March and sent stocks swooning, only to later rebound. But that performance was soon overshadowed by fixed-income trading. Federal Reserve intervention in credit markets helped banks arrange a slew of fundraisings for desperate companies, giving those traders ample chances to buy and sell newly issued bonds.

In the second quarter, traders at three top fixed-income trading houses – JPMorgan Chase & Co., Citigroup Inc. and Goldman Sachs Group Inc. – generated about $10 billion in additional revenue. The windfall helped keep JPMorgan and Citigroup profitable despite massive loan-loss provisions.

Fixed-income traders may see their year-end bonuses jump 25% to 30%, according to Alan Johnson, founder of compensation consultant Johnson Associates. Yet those traders are likely to expect increases of 50% or more, he said.

“They’re going to be paid somewhat less than their results on an isolated basis,” Johnson said. “They will be disgruntled.”

Already, some top fixed-income people have made the jump to the hedge fund world. Most funds generally underperform, and the market chaos of the last six months was responsible for its fair share of fund blowups, but the biggest and best-performing funds have their pick of the litter.

Yet by early July, billionaire Steve Cohen’s Point72 Asset Management poached Goldman’s repo trading chief, Alex Blanchard, and the head of the bank’s U.S. government bond trading team, Andrew DiMaria.

Traders who jump to hedge funds can pocket compensation more proportional to their outsize profits. While many hedge funds have struggled to outperform the markets this year, some – including Citadel, Balyasny Asset Management and Millennium Management – are widely seen as having the strength to make targeted hires of rainmakers.

Are Wall Street’s “star traders” really getting screwed here? While many might be tempted to complain about “carrying the firm on their backs”, they should probably think twice, or at least keep quiet: since more often than not over the past decade, that shoe has been on the other foot.

Plus, with the Fed pumping an endless flood of liquidity into markets, it’s not like these traders had to really work that hard for their money. Anybody who disagrees can try throwing in an application at DDTG.