'Most people will be disappointed’: A top Wall Street headhunter throws cold water on the prospect of huge bonus increases for stock traders this year

Tim Boyle/GettyTraders and clerks shout orders on the floor just moments after the Fed announced interest rate news in the Eurodollar Futures Pit at the Chicago Mercantile Exchange.
  • An industry report from consultant Johnson Associates earlier this week said stock traders were likely to see a big bump in their year-end bonuses in 2018.
  • Not so fast, said a top equities headhunter, who argues that bonuses for most traders won’t come close to that level.

Wall Street stock traders got some welcome news Monday.

A closely watched industry compensation report from consultant Johnson Associates said bonuses were expected to rise across finance, with equities professionals set to reap the largest increases – up 15% to 20% from 2017.

That would be a breath of fresh air for a business that has been steadily contracting in recent years, including an especially dismal run in 2017 when clients sat on their hands and volatility laid dormant.

Not so fast, says a top equities headhunter.

Traders banking on 20% increases to their bonus pools may be sorely disappointed, according to David McCormack, founder and CEO of DMC Partners, an equities focused recruiting firm.

“I hate to throw cold water on such compelling analysis but if you read that report and you work in equities, please don’t expect your comp to be up 20%” year over year, McCormack wrote in a LinkedIn post Tuesday. He added that even two of the top performing equities shops, JPMorgan Chase and Morgan Stanley, wouldn’t beef up bonus pools by 20% “in their wildest dreams.”

What gives?

Volatility jolted back to life in 2018 and equities revenues have surged, totalling $US34.6 billion through the first three quarters at the top global firms, according to Bloomberg data. That’s a 16% increase from the $US29.7 billion over the same period in 2017, and a 14% increase from the $US30.4 billion reported in the same period in 2016.

But there are some caveats to the healthy surface level figures, as the gains weren’t evenly spread across banks or equities product lines.

In earnings calls this year, many banks have called out performance from their derivatives and prime finance teams.

Some stock trading operations made a killing on the volatility spike in February – especially derivatives teams that were positioned to capitalise on the CBOE Volatility Index spike – as well as from subsequent bouts of market turmoil in March and more recently.

Hedge funds have also been active, so the business of providing them with loans and other services, known as prime brokerage, has been robust as well.

Electronic or algorithmic stock trading has also done well, but that’s a commoditized business, McCormack noted, and inherently involves less staff in favour of machines and lines of code.

Read more:Equity traders are crushing it as big banks celebrate a huge six months

The gains in traditional stock trading for clients via humans, known as cash equities, have been more measured. That business was up 7% through the first half of the year at the 12 largest firms, compared with 35% for derivatives and 17% for prime, according to the most current data from industry consultant Coalition.

This more human-intensive and less sexy equities business line has in recent years been overlooked and underinvested in, which McCormack says has been mistake.

“Most banks have made ‘cash’ their red headed step child, which is unfortunate and a mistake as all these high margin businesses – derivs, prime, electronic – only work with a ‘cash’ engine,” he said in the post, adding that that if “your client franchise isn’t strong, the other stuff doesn’t perform.”

Some traders will see 20% bumps come bonus time – some even 50%, McCormack said. But that will be highly individualized and specific, rather than a rising tide across the field. For every trader pulling in $US1.5 million – the outlier – there are hundreds that will draw $US450,000.

“I believe most people will be disappointed in comp, meaning it will be flat,” McCormack wrote. “Flat is the new up, equities will subsidise other business areas this year and that’s the nature of the beast.”

The only area where compensation will be in a “different zip code” is derivatives, and even then “not everyone will benefit.”

And of course, derivatives has been one of the hottest hiring sectors of the year. Many of the star traders who brought in tens of millions in profits during the VIX spike parlayed that performance into a job at a new firm – meaning they likely would have already been well-compensated for the healthy bonus they sacrificed by leaving.

See also:

NOW WATCH: Money & Markets videos

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.