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December 1, 2012

Bonuses Off for Third Straight Year

By John D'Antona Jr.

The third year was not the charm for equity traders in 2012.

Equity traders can expect more coal in their stockings this holiday season, as bonuses are expected to be down for the third year in a row. Silver lining: 2013 is expected to be somewhat better, industry experts predict.

After a disappointing 2011 bonus pool, cash equity trading professionals can expect yearly bonuses to fall between 5 and 10 percent for the 2012 year, according to forecasts by compensation consultants. Just as in 2011, slumping equity trading volumes and lower commission rates have contributed to the lower payouts.

Carlos Mejia

"This follows a dismal 2011-which was not a very good year to begin with," said Alan Johnson, partner at New York-based consultancy Johnson Associates. "The increase in global equity prices but continued low market volumes impact commission revenues, and that makes year-over-year comparisons look worse than underlying business results."

In 2011, Johnson projected bonuses to be off 20 to 30 percent from 2010's levels. In 2012, Johnson projected bonuses will be down 5 to 10 percent.

"Firms will increasingly manage compensation and other expenses to achieve short-term financial results," Johnson added. Going forward, this favors firms and traders who specialize and are flexible, and firms that keep staffs lean.

In 2011, bonuses dropped in part due to the closing of proprietary trading desks, which was required by Dodd-Frank, as well as slumping trading volumes.

As a result, several brokerage firms, including bulge shop Nomura Securities International and a slew of smaller ones, handed out pink slips or simply shuttered their doors. Even the buyside has had its concerns, watching its service providers downsize or, in some cases, close.

Carlos Mejia, partner at Options Group, another executive compensation and recruiting consultancy, said that 2012 bonuses will be off between 20 to 30 percent for cash equity traders. The reason, he said, was the fact that more firms are shifting more resources and efforts to their electronic trading efforts. Cash trading is just too expensive for many firms.

Electronic trading professionals can expect to see their bonuses shrink only 10 percent in 2012 versus 2011, Mejia forecast.

"Banks want to move things toward the electronic-that is, migrate their resources to the low-touch desk and not the high-touch desk," Mejia said. "Doing this in the current low-volume environment, where commissions are squeezed and profit margins are lower, is not a good recipe for better bonuses."

How does 2013 look?

Volumes are expected to rebound somewhat next year, but not to the level of the heady days of 2008, when more than 11 billion shares frequently got traded every day. While Mejia declined to forecast next year, Johnson said that in 2013 bonuses will be in line with or flat compared with 2012-no further drop, but no increase either.

"I think if we see bonuses stay flat at the current level of 2012, that would be a good year," Johnson said. "When the economy picks up, and someday it should, then bonus compensation will bounce back."


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