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FLASHBACK FRIDAY: Buyside Trading Desks Spend 66% of Budget on Compensation, Balance on Tech
Traders Magazine Online News, March 8, 2019
Many things can change over time but buy-side compensation, for those that can remain on the desk, really hasn't.
Four years ago, buy-side trading desk budgets saw 66% of their spend going towards compensation, indicating the buy-side trader was a valuable commodity. But the next three years would have technology costs inflate budgets more and more while salaries stayed flat or eked out modest gains. But now things have swung back the other way and according to the latest Greenwich Associates report, budgets for buy-side trading desks in the U.S. and Europe grew 8% last year, fueled by increased spending on compensation.
A 2018 spike in compensation expenses on buy-side trading desks was by far the biggest driver of the 8% overall increase, which followed essentially flat trading desk budgets in 2017. The average budget for asset management and hedge fund trading desks is $2.73 million.
“Compensation growth last year ended a three-year run in which compensation spending was being crowded out by ever-expanding technology costs,” explained Brad Tingley, Market Structure and Technology Analyst at Greenwich Associates.
Technology expenses had been growing as a share of total budgets for both equity and fixed-income trading desks since 2015. Last year that trend reversed, with compensation climbing by eight percentage points, to 68% of total budgets.
Net-net over the last four years that means trader compensation is only up 2%.
Hmm. Is there something at play here?
In looking at the data, although technology costs shrunk as a share of the total, institutional investors reported significant increases in spending in a few key areas such as spending on execution management systems (EMS) increased to 6% of total technology spend. Increases were also reported in spending for market data terminals, market data feeds and hardware.
Is there something else?
With the buy-side reporting constrained budgets some point to the recent trend of outsourced trading.
In the fourteen months since it went into effect, MiFID II has proven to be a disruptive force for the financial services industry, upending existing business models and ushering in a new era of scrutiny in how firms spend their money. In Europe, trading and research can no longer be sold together as one service; even in the U.S., the global impact of MiFID has led many firms to explore full unbundling, leading to difficult questions about which costs are necessary and what it means to seek best execution.
Where there is disruption, however, there is also opportunity for growth. In this case, that opportunity can be seen as buy-side traders and hedge fund managers are increasingly enlisting outsourced trading firms to help them navigate this new normal.
A recent survey of Traders Magazine readers, representing a broad spectrum of buy-and sell-side professionals, found that 28% work for firms that have either already outsourced some of their trading and back-office operations or are actively considering doing so. That may not sound like a big number, but given outsourced trading’s longstanding reputation as a niche service for hedge funds only, it qualifies as a significant figure.
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