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November 10, 2009

Outflow of Sales Traders Slows

By Peter Chapman

The great migration is over. The movement of sales traders from bulge bracket firms to regional brokerages, boutiques and execution-only shops is on the wane, according to several panelists who spoke at the Security Traders Association's annual conference last month.

"The trend has ended," Alan Hill, chief financial officer at JonesTrading, told attendees at the conference, held at the Phoenician in Scottsdale, Ariz. "It probably worked a little bit, but I would give it a mediocre grade as far as its overall success."

The exodus of sales traders, analysts and others from the large, New York-based broker-dealers was a major Wall Street theme during 2008 as the financial markets imploded. Many high-end traders went to small and midsize firms, causing some to announce that a "new" Wall Street was being born--one less dominated by the bulge bracket.

Traders left of their own volition or were pushed out by their struggling firms. Those who left voluntarily did so out of uncertainty surrounding compensation or their firms' abilities to commit capital to trades, Hill explained. Capital commitment is a key service of the bulge bracket. Without it, sales traders and bulge shops are of less value to the buyside.

"The trend has largely played itself out," said Dan Renouard, chief operating officer of equities at Robert W. Baird & Co. "We and other middle-market firms have had mixed success in hiring folks from the bulge bracket."

Several of the traders speaking on the panel, "The Sell Side Shakeout: Regional and Boutique Firms," noted that the bulge bracket sales trader was not always a good fit with their firms, and often did not bring in any extra business.

Kevin Kruszenski, KeyBanc Capital Markets

Renouard said that it is never easy to tell whether a given buyside firm is trading with a bulge bracket shop because of a relationship with the sales trader or the capital offered by the bank.

Kevin Kruszenski, director of equity trading at KeyBanc Capital Markets, put it bluntly: "The portability of bulge bracket sales trader to middle-market or regional boutique doesn't always equate to new business," he said. KeyBanc did not hire any sales traders during the downturn, the executive added, but did bring on six research analysts--many from the bulge bracket--to build a consumer products group.

Others noted that the skills of the bulge bracket sales trader were not necessarily transferable to their new firms. JonesTrading's Hill said: "You bring them into execution-only shops, but once they get there, they find that what they need to do as far as providing best execution and being a trusted adviser and using the technology ... that is a different job."

Richard Waks, chief executive at agency firm Heflin & Co., said that bulge bracket sales traders have transformed over the years into relationship managers. They are less involved with transactions and spend more time overseeing distribution of the bank's products, acting as a liaison between the client and other groups within the bank and generally keeping everybody happy, he said.

"Along the way, they have become a lot less involved with actually executing clients' orders," said Waks, who previously worked at a bulge bracket firm. By contrast, traders at smaller execution-only shops spend most of their time on clients' orders, he said.

Many of the sales traders seeking new opportunities last year wound up at start-up ex-only firms. Renouard contends it is unlikely that any more will be setting up shop in the near future.

 

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