Trading Bonuses: What Can You Expect To Bring Home This Year?

With the credit crisis battering fixed-income desks and quantitative hedge funds, Wall Street traders are going to see their bonuses shrink in 2007 as firms recover from the turmoil in sub-prime mortgages and position their desks for 2008.Equity trading bonuses will probably go up five-to-ten percent, while fixed income trading is going to be down about 10 percent, according to a report by The Options Group, a global executive search and strategic consulting firm. Overall, bonuses will decline up to five percent as a reflection of the severe decline in stock and credit markets during July and August, the report said.

Last week's third quarter earnings reports by Wall Street's top firms Bear Stearns, Goldman Sachs, Lehman Brothers and Morgan Stanley, shed light on the losses from the mortgage collapse but could bode well for bonuses since it showed that the top firms could weather the storm.

"It shows that big brokerage firms in New York are seeing falls in fixed income but equities is kind of making up for it," says Eric Moskowitz, director and head of the compensation and consulting practice at The Options Group in New York.

"The trend clearly on the domestic side of the fixed-income derivatives business - for those trading CDOs - is that people are going to get hit and hit hard for 2007, comments Gustavo Dolfino, founder and CEO of WhiteRock Group. In early 2008, Dolfino predicts there's going to be a comeback in areas of fixed income that involve simple, basic securitization of traditional corporate credits. He's also predicting high demand for high yield and bankruptcy traders who can trade private debt as well as distressed debt and bankruptcy credits. A lot of the bonus dollars are going to the proprietary trading side including both distressed debt and high yield debt, adds Dolfino.

So what will the top performers earn in 2007? Listed stock traders will receive negligible bonuses, while OTC traders in small cap stocks will get up to $5 million, estimates Dolfino. Equity derivatives bonuses will range anywhere from $500,000 to $5 million. In fixed income, cash traders will get up to $2 million and in derivatives, given the credit crunch, they're get maybe up to $2 million, he says.

Commodities traders could see increases in bonuses by about 10-to 15 percent, says Options Group's Moskowitz. Equity derivatives traders will do fine, says Moskowitz who estimates they'll receive increases of 10-to-15 percent, but "credit derivatives are still a mess," he says, adding that traders of credit derivatives can expect to receive a 10-to-15 percent drop in their bonus paychecks.

But Dolfino sees high demand for credit default swaps in emerging markets, particularly in Asia and Latin America. Asset managers are using these instruments for not only speculation purposes but also for hedging purposes, he notes.

Even though spreads have compressed tremendously in cash equities, with the trend toward electronic trading, compensation could be higher since each trader is handling more volume, notes one brokerage executive. "You may have a smaller amount being paid to all traders but each individual trader could easily be making 10 or 15 percent more this year on the cash equity side just because there are fewer traders handling more volume," comments Jim Morrow, COO at Capital Institutional Services (CAPIS), an agency brokerage firm.

"OTC equity traders will do a little bit better than fixed income traders since a lot of the money that was chasing yields on the fixed-income side is now going back to chasing equities," says Dolfino. On the listed side, however, sales traders are a dime-a-dozen, but block traders who can still move large blocks, are still in demand, he says.

Hedge funds that suffered losses in the sub-prime meltdown can also expect less generous bonuses. "Absolute compensation levels are going to be down simply because of performance issues," comments Roger Ehrenberg, former CEO of DB Advisors LLC, a hedge fund subsidiary of Deutsche Bank, who is currently president and COO of Monitor110. "The rock star traders and portfolio managers at hedge funds are all on percentage deals where they get a percentage of the profits," explains Ehrenberg. "This has been a tough year for certain strategies. The pay offs are going to be down," he says.

The Job Market: Demand for Quantitative Skills

Because of the credit meltdown and losses at the bigger firms, the skill set is also changing. "More traders will need to better define, quantify and manage their risk exposure. Given the lax underwriting guidelines, a lot of those traders have blown themselves up, the firm and the family with them," says Dolfino.

While there already have been layoffs in the structured fixed income market, Dolfino says that senior producers are going to be hit the hardest because of the leverage coming out of the market. Going forward, more experienced traders, especially in the structured credit world, will work for less money, says Dolfino. Traders in junior positions who can do hybrid trades - equity or fixed income, cash or derivatives or a combination thereof - will still have a role to play to especially on the corporate side as it pertains to high yield and distressed debt, says Dolfino.

Since most Wall Street firms make money through their proprietary traders, the question is how will traders generate profits under tighter guidelines? "They need to define and quantify the nature of risk and not just shoot from the hip, as most traders are known to do," says Dolfino, adding, "It's tougher, more commoditized and more regulated market."With the credit crisis battering fixed-income desks and quantitative hedge funds, Wall Street traders are going to see their bonuses shrink in 2007 as sell-side firms recover from the turmoil and position their desks for 2008. Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio