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January 3, 2011

Sellside Can Expect Payout Shrinkage

By John D'Antona Jr.

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  • Sellside Can Expect Payout Shrinkage

Traders of equities can expect to see bonuses fall significantly this year, due to lower volumes and new legislation after the financial crisis.

Carlos Mejia

Traders in the client-facing side of the business--traders and sales traders--will see an average drop of 20 to 30 percent in their bonuses this year.

By comparison, prop traders are expected to get walloped--down a staggering 50 to 60 percent for 2010. This compares with the 15 percent year-over-year gain prop traders saw in 2009, according to Options Group, a New York-based global executive search and consulting firm.

"Dodd-Frank and the Volcker rule made a lot of prop trading strategies obsolete," said Carlos Mejia, a partner at Options Group. "Across the equity space, prop desks are unwinding positions."

Mejia said the dismal prop trading payouts are the result of several factors, beginning with the enactment of the Dodd-Frank Act and the Volcker rule. The Dodd-Frank Act impacts executive pay and overhauls the financial system. The Volcker rule was designed to curtail proprietary trading by preventing U.S. banks from using their own capital in trades. The rule effectively outlaws prop trading, blowing up that line of business for banks.

Also, as desks fold up, there are fewer higher-paid senior traders left. This leaves lower-paid junior traders to complete the desk's shutdown. A lot of the best talent, Mejia said, has already left for greener pastures.

Traders have also said prop desks have suffered as a result of lower volatility and fewer trading opportunities.

"I don't think it was a very good second half for trading overall, just not enough intraday volatility," said one prop trader. "All of the market moves seemed to happen overnight, limiting the opportunities for us intraday guys. The action from 10 a.m. to 2 p.m. this year was pretty nonexistent. That's a big chunk of the day with not much going on."

As a result of the shutdown of these desks, many traders are finding new homes at hedge funds or private equity firms such as KKR, Blackstone and Moore Capital, which hired several Citi traders, Mejia said. These firms are not subject to the Volcker rule and Dodd-Frank, which puts them beyond the purview of regulators. They also offer attractive payouts.

But prop traders aren't the only ones who can expect smaller bonuses. According to executive compensation data firm Johnson Associates, equity traders overall can expect year-end bonuses to be down 20 to 25 percent from 2009's lofty levels. Options Group's Mejia said this drop could lead to more job changes in early 2011 as bonuses are paid.

"From a recruiting standpoint, firms will be able to pick off a lot of talent," Mejia said. "There will be mispricing of star talent based on the lower compensation."