How Are Traders Paid?

Well there's flow trading and prop trading. Flow traders tend to get paid less than proprietary, because its really the value of the seat that is generating money. For example, now CDS flow traders are making a killing because everyone is unwinding and have to go through the big investment banks. Proprietary traders really generate their money through ideas, and so tend to get paid more. Hedge funds traders are all prop traders, and since its a hedge fund with low costs it can afford to pay its traders well.

So if their money is generated through ideas, they basically get x amount of capital to trade based off their own trading strategy they developed?

Depends...At a Market Making firm for instance, trader's are given X amount of capital, but they sure can't just trade however or whatever they feel like trading; there are strict regimens that they must follow, which are usually reinforced by risk teams and what not......So the extent to which each trader is given X amount of capital may be true, but they can in no means trade however they please....Hope that helps.

How are trader's commissions structured?

That's exactly what I want to know, but I'm lovin all the input keep it coming.

I basically want to know how the commission is structured at, let's say, a day trading firm, compared to a hedge fund, or on a prop trading desk at a BB?

I can only speak for prop shops, but I believe the pay structure is something like this:

Each trader is paid a base salary which is usually very low at the entry level, something like 40K for a new trader. The meat of the pay will come from your bonus, which can easily be 2 or 3 times as much as your base salary. The flip side is that your bonus can also be nothing, zero, niltch, nada (you get the point).

That is exactly why being a trader is a risky career path, you can potentially earn just your base salary for the year, which in most cases, is not much greater then the poverty threshold (they design the pay structure that way for the sole purpose of increasing performance). As you gain experience within your firm your base salary will increase. The seasoned traders, the ones that have been trading for 10 or so years, get paid excellent bases and they still get their bonus on top of that. The bottom line is that a trader's pay is contingent upon his or her performance; if you don’t get the job done, you don’t get paid.

Now that does not mean one can’t trade very conservatively and earn a moderate base + bonus each year. As long as you generate money for the firm you will earn a performance-based bonus. It is the traders that end up in debt at the end of the year who don’t earn bonuses…….I hope that helps guys.

For standard sell-side desks the traders make the same base salary as everyone else (IBD, Sales, Structuring, etc.). So an analyst will start at whatever they make ($65,000?), and associates at $95,000 (unless it has increased in the past year or so). For the first few bonuses everyone gets paid based on some mix of HR ranges, then some additional range based on desk or group.

Once you are on your own (i.e. after 18 months for associates; for analysts depends on the bank, if at all) you get a % of P&L (if you're a trader; it's called something different in sales and structuring but it's the same thing). From what I've heard at banks it tends to run from 5%-10%, depending on how the firm does, how the group does, etc. (this is why traders at hedge funds make more, because they often pay out 20% or more of P&L). That said, in bad times (like now), I know of people at bulge brackets who got 2-3% of P&L.

So let's say you have a good-sized structured trade for a client and the total P&L is $1,000,000. That goes to the trader's P&L, with the caveat that some may be put in reserve to cover certain costs to the firm (this is especially the case with illiquid, very exotic, or new products). What is held in reserve is released over time based on a number of factors. If the reserves are not released by the end of the year then it doesn't end up in your P&L and you won't get compensated for it until the following year.

Sales and structuring get the same amount in their P&L (again, it will have a different name) and are compensated in the same way as the trader. That said, the trader's P&L is real money, whereas the sales guys' P&L is essentially notional. So if the trader cannot properly hedge the trade (say it's a very illiquid market) and his or her $1.0mm P&L drops to zero, then the $1.0m profit the sales guy makes disappears as well.

Caveat all this by saying that I'm in sales/structuring, so this is just what I've picked up talking to people on the desk, so forgive me if it's not the most eloquent explanation.

Very nicely done, very helpful.

I can only speak for a commodity(physical) asset optimization firm, but we're told here are your risk parameters(var, etc.), here's your target...you get X% if you hit your target, anything more gets ratio'd(like say every 250k more gets 2% more, etc.).

I don't like this idea. I don't take all deals in the money, cause I keep pulling for more. If I go in and bite the bullet with it being in the money, but barely, it causes other optionality to fall out of rank for the other traders on the desk. Part of me wants to say fuck it, I'm getting mine bitch.

I structure/underwrite/trade credits, and at my firm we actually take home like 15-20% of net discounts and P&L. So to put it in perspective, my group did close to 11 million this year - My MD will make 1 - 1.5mil (He is an industry expert, and probably one of the best. This kind of bonus is pretty high/abnormal), the associate probably 200-500K, and myself 40-100K (I'm still in my first year, my base is a little over 50K). It's a pretty good living all around, but the one thing that will get you is that it is a mother fucking grind. Not a day goes by that I don't feel like if I fuck up decently bad, I may lose my job. You're constantly on your toes, and one shit deal could end you if the market turns 50-100 bps.

What I'm confused is, there are so many types of traders. If you're in S&T at BB, u don't get paid based on P&L right? Because ur simply executing trades for clients and occasionally making money from spreads

I am a little bit confused as to how some guys on here think that HF's pay 20%+ of your PNL as comp?

You are paid out of the fees that the HF management company makes, which is historically 2%+20%. The management company is owned by certain people (usually the founders, top MDs, sometimes external people etc), so why would they pay the entire performance fee to the guy that made the pnl? As with all employers, they are incentivized to pay as little of that as possible subject to keeping the PM happy, so they might pay 10-15%, but why would they pay the whole 20% and keep nothing for themselves?

Not sure where some of these answers are coming from. Literally no top BB on the street will pay you a % of your PnL. It will obviously correlate with your business but direct drive doesn't exist in the industry. There might be a couple people per bank with grandfathered contracts but your certainly not getting anything like that it today's world.

For analyst your pay is fixed and you bonus is based on your ranking/rating/bucket. Most people make the same. At associate your desk performance starts to factor in but outside of extenuating circumstances you're going to be within a pre set band