Commentary

Tim Quast
Traders Magazine Online News

We're All HFTs Now

In this guest commentary, author Tim Quast looks back at the history of HFT and how the market has evolved to where many firms now fit the definition of high-frequency trader.

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May 5, 2009

No Dancing on the Street

Brokers see smaller bonuses, less cash

By James Ramage

Also in this article

A new compensation survey shows what traders and executives at the largest Wall Street banks already knew: Their payout fell significantly for the 2008 bonus season. The survey's figures also showed that the stock portion of bonuses handed out to traders greatly outstripped the cash portion, according to Options Group, a global executive search and strategic consulting firm based in New York.

To be sure, many firms continue to pay their trading pros bonuses in stock that is deferred over three years. But in some cases, firms have "locked up" the stock portions for up to five years, according to Michael Karp, chief executive of Options Group.

And there were even cases in which the cash portion was deferred, he added. To view the survey, please use the link below. 

Cash equities position traders saw their bonuses drop between 25 and 30 percent from the year prior, the Options Group survey showed. Bonuses for the bulk of cash equity sales traders and research sales fell 25 percent over the same period.

 

Debt Effect

"These numbers don't look as horrible as the banks actually performed, but the bottom line is that a lot of that bonus income is deferred," Karp said. "Some of the stock component could be 90 percent of the person's payout. That's never happened before."

Compensation has fallen across the industry as investment banks, laden with highly toxic debt instruments, took billions of dollars in losses in 2008. The losses drastically affected firms' bonus pools--regardless of the fact that equities traders were busier than ever with record volumes in 2008.

The survey, of course, only applies to traditional investment banks and does not include the traders and executives at variable compensation firms, who are paid on their production. These firms offer payouts of between 25 and 50 percent of the business that sales traders generate.

Michael Karp, Options Group

  

While global investment banks have long paid bonuses in both stock and cash, the balance had largely tilted toward cash, Karp said. That changed as the toxic debt began to amass on banks' balance sheets.

A senior trader at a Wall Street firm two years ago saw a stock/cash bonus ratio, on average, of around 40/60, or at worst 50/50, Karp said. This past bonus season it was closer to 70/30 for a senior position.

 

Sharp Cuts

That's really changed the dynamic for a lot of people," Karp said. "It's obviously made them a little bit more antsy, because they're concerned about the company's stock. Is it going to be at $15 in three years, or is it going to be at $150? It's hard for a lot of people to make that judgment."

At Goldman Sachs, bonuses across the firm dropped 65 percent, on average, according to spokesman Michael DuVally. For senior members of the firm, however, bonus cuts were even sharper.

Brokerage Compensation Survey