Sales traders have been on the move in recent years, leaving full-service firms for “eat what you kill” institutional brokerages. But in 2008, the trend accelerated. Call it the great migration.
As much as an estimated 40 percent of all sales traders have either lost their jobs or have moved to independent firms and asset managers over the past nine months, according to Eric Moskowitz, head of compensation consulting at Options Group, a New York-based global executive search and strategic consulting firm. The recent turmoil at the investment banks only boosted the number of sales traders on the move, he added.
Behind this trend lies the changing nature of the relationship between the buyside and the full-service firms. Money managers want to reduce their trading costs, so they’re running their easy, large-cap orders through cheaper, low-touch tools. Mid- and small-cap stocks are also going that route, more and more. Bulge shops anxious to retain the high-volume business are making the tools available despite the lower rates.
But amid this change, the independent model-consisting of execution-only services and the prevalence of commission payout compensation-has flourished. Those firms have focused on the cash equities business, learned how to use all of the electronic tools and know how to source liquidity for the buyside in the growing number of trading venues.
These firms-referred to as “variable compensation shops”-are fortifying their desks by attracting personnel with aggressive payout models that many sales traders find enticing.
And while some sales traders have moved to independent shops because they were laid off, others have left on their own. As full-service, high-touch commissions have fallen, sales traders are forgoing the shrinking paychecks being offered at the research houses.
“You’re finding people who are very experienced in the business, who’ve developed their relationships with their accounts over a course of years, and who are very comfortable transferring those relationships to a different type of platform that’s focused on trading cash equities,” Lance Lonergan, managing director and head of national sales at brokerage Weeden & Co., told Traders Magazine earlier this year.
Executives at independent firms say sales traders receive a percentage of commission payout that ranges from 25 to 50 percent.
Some of the firms that have been aggressively building up their sales trading staffs in recent years include BTIG, JonesTrading, Knight Capital Group, LaBranche Financial Services, Pali Capital, Weeden, Benchmark and dozens more. The list also includes former independent NYSE floor brokerages like WJB Capital Group, Cuttone & Co. and Rosenblatt Securities that have remade themselves into upstairs firms and moved into new products.
At the bulge bracket firms, sales traders get a salary and a bonus. However, the bonus pool is spread around to other asset classes within the firm and is tied to how each group does. They must be shared with the research department as well, leaving less for sales traders. In addition, the enormous financial hits the investment banks have absorbed throughout the year are expected to erase a significant portion of those bonuses.
The average vice president sales trader in equities at a bulge bracket firm who made $500,000 in 2006 is more likely to get paid a $100,000 base and a bonus of up to $250,000 in 2008.
Sales traders on the equities side can expect a projected drop in pay this year of as much as 30 percent from 2007, Moskowitz says. Still, equities desks are doing relatively well compared with those on the debt side, given the problems in the disastrous mortgage-backed securities market.
A head sales trader at one of the burgeoning independent shops said that those at bulge firms will consider those shrinking bonuses-as well as their job security-when they ponder opportunities at independent firms.
“Really high-end sales traders, who have worked really hard this year and are not going to get any [bonus] money, have opened their eyes,” he said. “And then people don’t know if they’re going to be the one on the chopping block, so they’re being more proactive and moving, and saying: I’m not going to wait around and be the last elephant out the door.”
And the employment outlook for sales traders for the near future should resemble that of late 2008, the trader added. There should be a large number of them looking for better or any opportunities.
Sales traders who’ve stayed at the bulge bracket firms must also take on additional clients and push new products and services: cash, derivatives, electronic trading and prime brokerage, among others. This can rub some on the buyside the wrong way.
Sometimes buysider Andrew Bell just wants equities execution services. And it’s often agency firms that can deliver, he says. Bell recently moved to Diamondback Capital in Stamford, Conn.
“There are no research products,” he said earlier this year in an interview, explaining the success of independent agency firms. “The product there really is the sales trader. It’s their knowledge, it’s their relationship, and it’s their ability to work orders. There’s nothing more behind them for the most part than that.”
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