Top equities headhunter throws cold water on huge bonus increases in 2018

Traders
and clerks shout orders on the floor just moments after the Fed
announced interest rate news in the Eurodollar Futures Pit at the
Chicago Mercantile Exchange.
Tim
Boyle/Getty

• An industry report from consultant Johnson Associates
  earlier this week said stock traders were likely to see a big
  bump in their year-end bonuses in 2018.
• Not so fast, said a top equities headhunter, who argues
  that bonuses for most traders won’t come close to that
  level. 

Wall Street stock traders got
some welcome news Monday.

A
closely watched industry compensation report from
consultant Johnson Associates said bonuses were expected to rise
across finance, with equities professionals set to reap the
largest increases — up 15% to 20% from 2017.

That would be a breath of fresh air for a business that has been

steadily contracting in recent years, including an especially
dismal run in 2017 when clients sat on their hands and volatility
laid dormant.  

Not so fast, says a top equities headhunter. 

Traders banking on 20% increases to their bonus pools may be
sorely disappointed, according to David McCormack, founder and
CEO of DMC Partners, an
equities focused recruiting firm. 

“I hate to throw cold water on
such compelling analysis but if you read that report and you work
in equities, please don’t expect your comp to be up 20%” year
over year, McCormack
wrote in a LinkedIn post Tuesday. He added that even two of
the top performing equities shops, JPMorgan Chase and Morgan
Stanley, wouldn’t beef up bonus pools by 20% “in their wildest
dreams.”

What gives? 

Volatility jolted back to life in
2018 and equities revenues have surged, totalling $34.6 billion
through the first three quarters at the top global firms,
according to Bloomberg data. That’s a 16% increase from the $29.7
billion over the same period in 2017, and a 14% increase from the
$30.4 billion reported in the same period in 2016. 

But there are some caveats to the
healthy surface level figures, as the gains weren’t evenly spread
across banks or equities product lines.

In earnings calls this year, many
banks have called
out performance from their derivatives and
prime finance teams.

Some stock trading operations

made a killing on the volatility spike in February
— especially derivatives teams that were positioned to
capitalize on the CBOE Volatility Index spike — as well as from
subsequent bouts of market turmoil in March and more
recently.

Hedge funds have also been
active, so the business of providing them with loans and other
services, known as prime brokerage, has been robust as
well. 

Electronic or algorithmic stock
trading has also done well, but that’s a commoditized business,
McCormack noted, and inherently involves less staff in favor of
machines and lines of code.

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The gains in traditional stock
trading for clients via humans, known as cash equities, have been
more measured. That business was up 7% through the first half of
the year at the 12 largest firms, compared with 35% for
derivatives and 17% for prime, according to the most current data
from industry consultant Coalition. 

This more human-intensive and
less sexy equities business line has in recent years been
overlooked and underinvested in, which McCormack says has been
mistake. 

“Most banks have made ‘cash’
their red headed step child, which is unfortunate and a mistake
as all these high margin businesses – derivs, prime, electronic –
only work with a ‘cash’ engine,” he said in the post, adding that
that if “your client franchise isn’t strong, the other stuff
doesn’t perform.”

Some traders will see 20% bumps come bonus time —
some even 50%, McCormack said. But that will be highly
individualized and specific, rather than a rising tide across the
field. For every trader pulling in $1.5 million — the outlier —
there are hundreds that will draw $450,000.

“I believe most people will be
disappointed in comp, meaning it will be flat,” McCormack wrote.
“Flat is the new up, equities will subsidize other business areas
this year and that’s the nature of the beast.”

The only area where compensation will be in a “different zip
code” is derivatives, and even then “not everyone will benefit.”

And of course, derivatives has been one of the hottest hiring
sectors of the year. Many of the star traders who brought in tens
of millions in profits during the VIX spike
parlayed that performance into a job at a new firm — meaning
they likely would have already been well-compensated for the
healthy bonus they sacrificed by leaving. 

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