The third year was not the charm for equity traders in 2012.
Equity traders can expect coal in their stockings this year as bonuses are expected to be down again for a third year in a row. But 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 predictions from compensation consultants. Just like in 2011, slumping equity trading volumes and a lower commission environment have contributed to the lower payouts. Additionally, with several brokerages closing their desks and the resultant growth in the labor pool, bonuses are harder to come by.
“This follows a dismal 2011 – which was not a very good year to begin with,” said Alan Johnson, partner at Johnson Associates, a New York-based consultancy. “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.
Firms will increasingly manage compensation and other expenses to achieve short-term financial results,” he added. Going forward, this favors firms and traders who specialize, are flexible, and firms that keep staffs lean.
In 2011, bonuses dropped in part due to the closing of proprietary trading desks, which were required by Dodd-Frank as well as slumping trading volumes. This year saw volumes remain low and as a result, several brokerage firms, from one bulge shop to 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 low-touch or electronic trading efforts. Cash trading is just too expensive for many firms.
Electronic trading professional can expect to see their bonuses shrink only 10 percent in 2012 versus 2011, he forecast.
“Banks want to move things towards 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, are not a good recipe for better bonuses.”
So does 2013 look?
Not much better as volumes are expected to rebound somewhat next year, but not to the heady days of 2007 or 2008. While Options Group’s Mejia declined to forecast next year, Johnson Associates Johnson said that in 2013 bonuses will be in line or flat compared to 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.”
Mejis added that given the current backdrop of low commissions and volume, it will be hard for firms to gain market share, which would be a precursor to rising bonuses.
“Many firms are seeing how hard it is to generate equities-based revenue in this current commission squeeze environment,” Mejia said. “Thus, the compensation model as structured cannot support higher bonuses going ahead.”
