Comments (30)

Jan 16, 2015

Depends on what you think a lot of money is. Multiple years guaranteed in the millions (e.g., 2x2) still happens. Granted, more compensation is deferred and/or in the form of stock these days (i.e., cash comp is limited especially at the UK banks).

Now, if you're talking $25-50+ million per year... yes, that is something you will predominantly see at hedge funds. Very few people make that kind of wood though.

It's quite common for traders on the street, depending on asset class, to earn in excess of a stick ($1mm) any given year. If you're clipping 1mm+ per year, then you're going to do quite well for yourself unless you're an idiot who spends all his money. Unfortunately, the latter is all too common.

Jan 16, 2015

when you say depending on asset class are you referring to the amount of money they are given to trade with?

Jan 16, 2015

Equities vs. Rates vs. Interest Rate Derivatives vs. Structured Products vs. Currencies vs. Commodities etc.

Even within each of those there are specialties. The more specialized / niche the market, the more lucrative it can be. You get paid to make markets and provide liquidity (i.e., bid/offer). You can also take some prop risk positions and different folks will have various amount of room to express a view (i.e., amount of capital to put at risk). Most sell-side seats are focused on making markets (i.e., not prop trading).

Depending on the flows (size) and liquidity (bid/offer spread) in a particular market, you can generate P/L. The more P/L you generate, the more you get paid (all else being equal).

In order to make the big bucks, you need to be in the right seat. That comes down to luck, opportunity, and skill.

Jan 17, 2015

Those days are over (although it depends on what you mean by "large")...

Jan 17, 2015

How are things for desk analysts? So the research guys who don't necessarily publish routine reports but sit with credit traders on HY desk?

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Jan 17, 2015

Not really what it used to be. Spreads are smaller and its much less common to have a bonus size tied to how much revenue you generate.

Also the more illiquid the product, the bigger the spreads. It's gonna be a lot harder to make $2000 on a trade of vanilla equities as opposed to some unique credit product or derivative etc...

Jan 17, 2015

Step 1. Worry about graduating
Step 2. Worry about getting a job
Step 3. Worry about pay

Jan 20, 2015

I was basically a desk analyst for a while before going into fixed income s&t.

Jan 20, 2015

volcker rule

Jan 22, 2015

Things are definitely tightening up at banks, although as a dev you can still make some decent money.

"When you stop striving for perfection, you might as well be dead."

Jan 22, 2015

Is it common for an ED level trader in a FICC product that sees good flow to clear 750k with bonus? What about on a desk that doesn't see a lot of flow?

The trader I talked to said it is better nowadays to be on a desk that doesn't see too much flow because then senior management knows that almost all of your PNL was down to your own proprietary positions and experience as a trader, as opposed to franchise PNL coming from the flow your bank sees in that product. He said that when senior management has difficulty differentiating what value you added specifically beyond the flow, you usually get a little stiffed come bonus time.

Jan 23, 2015

Banks arent taking prop risk like they used. If you are on a desk without much flow you probably arent going to to have adesk for long these days.

What many people dont talk about on here is difference between client flow pnl and franchise pnl. Franchise pnl is the pnl that is sort of going to come in every year irregardless of who runs the book. Ie a lot of structured products are gonna bring in a certain amount every year from new product issuance etc. This pnl fluctuates with general product forces (i.e. retail not buying a specific product etc). You dont really get paid for this pnl that much. This is why a structured trader who makes 70m might get paid the same as a flow trader that makes 20m.

Client flow pnl is a ltitle different. This has a "franchise" factor to it. I.e. if you are an options trader and sales comes with a client trade where you buy 100k vega 1 vol below mid market, who made that 100k? Sales, trading, the franchise? Sort of all three can have a claim to it partially. But lets say the trader was able t obuy this, and then sell 1 vol above mids because he knew there is a guy in the market looking for this vol. So now the trader made 200k. 100k of this is probably more due to others, but the other 100k is his value add. Similarly if he did some analysis and believe that he bought the vol 5 vols too cheap to what it will realize, so he holds it on the book for the next 2 months. And if it does what he thought he made 500k, 400k of which was his decision.

So its obviously not very clear, but "client flow pnl" can be broken down into two things, the initial trade pnl, of which small part of is attributable to the trader (maybe the trader was able to take down a large trade at a certain price because of his knowledge of the market so its not all sales/franchise there), and then the position management pnl. Trading at a bank isnt prop trading, its reactive risk management of a book, trying to a) capture the initial trade pnl and b) enahnce it. Thats waht you get paid for as a trader on the sellsdie.

But the bottom line is that you need flow for that to happen. If there is no flow you a) dont get to see waht people are doing, b) dont get the initial trade pnl, c) dont build a book to manage and d) cant price things competitively because you dont have the liquidity.

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Jan 24, 2015

Banks, under increased regulation are placing less emphasis on their trading operations than they used to so the opportunity to have the right assets in place to "hit home runs" isn't as likely as pre-2008-9. That being said compensation unfortunately will not go back to where it once was.

Jan 24, 2015

I'm not an expert but i don't think your analysis is accurate

say if a trader bought $500mm worth of IBM stock and shorted $500mm worth of MSFT stock, his balance sheet would be $500mm but he isn't actually using any capital.

so I think the balance sheet limit is more about controlling the amount of risk exposure a trader can have rather than the "capital" the trader can use to "invest"

correct me if I'm wrong

Jan 24, 2015

Interesting. Hope some more knowledgeable people comment on this.

However, I do think maimai's analysis sounds weird only because I don't how from a risk management perspective its inherently better to be long 500m X, short 500mY, rather than long 500m X, long 500m Y (X,Y arbitrary).

Jan 24, 2015

yea you're right

but i deliberately made the case for IBM and MSFT assuming they have some kind of strong positive correlation

Jan 24, 2015
pelham123:

Is trading really that profitable?

Is the pope really that Catholic?

Serioiusly, look at all the press releases for financial firms' earnings. Almost every single one reads, "XYZ firm makes record earnings ON STRONG TRADING REVENUE."

"I just want to be a monkey of average intelligence who wears a suit. I'll go to business school!"

Jan 24, 2015
  1. Market makers return more than 10% a year.
  2. A market maker's PnL is somewhat independent of directional market moves. While putting $500mm into the S&P may give you a healthy return, there is an incredible amount of downside risk involved. Day in, day out, market makers collect the bid-ask spread and laugh at others who try to predict the future.
Jan 24, 2015

Yeah you've got the wrong picture of Market Makers.

P and L is a better litmus test for a prop desk than a sell-side desk.

One of my mentors in the trading world, is a Sell Side MD at a BB. I told him once I used to want to be an attorney and he said:

"Why would you want to be an attorney? They bill based on hours of work, even at the best law firms there is only so many hours you can log on your clients tab, and most clients are only in your office once in their life. In Trading (specific to sell side) someone is always buying and selling, we make money off the trade. Whether the market is good, bad, or otherwise, something will ALWAYS be moving."

You could trade 400,000 shares of the same stock back and forth all day between different clients. At the end of the day the client (buy side) may have a solid investment (like your high yield index) but in the mean time the bank probably logged a couple hundred grand from the shares moving back and forth with ZERO risk. Even a measly .01 cent per equity share would log the desk 4,000 per transaction, and most BB charge closer to .05 or higher depending on the quote level.

Multiply those figures by hundreds of desks trading different products across the world at all hours of the day.

So yes, Sell Side makes money, and its MUCH MORE WORTH IT than betting 500MM on some index for the shear fact of risk and exposure.

"I'd rather be working for a pay check than waiting to win the lottery."

Jan 24, 2015

Where do you get your you get 700mm of balance sheet to return 50mm?

Those numbers seem to be a bit off. Also what product are we talking? Not everything corrleates to the S&P 500.

Further your description, lets take Paulson he could have taken 500mm and bet against the S&P 500 as housing falls. Or he goes out and makes a trade for Abacus....which you think returned better?

Jan 24, 2015

@ adehbone -- my number of $500mm of balance sheet to return $50mm was just a ballpark number based off what i have heard. as i said, it could be more, it could be less. but i don't think my numbers are too far off from what i've heard. but my question still remains, how am i suppose to think about a return on capital from the perspective of a sell-side market-maker? let's assume we are talking about investment grade or high yield credit.

@ m.c.trader -- i don't think you answered my original question. you say that P&L is a better litmus test for a prop desk, and not a sell-side desk. so what is the litmus test for a sell-side desk? at the end of the year, that sell-side trader is still using "X" amount of balance sheet to generate "Y" amount of revenue. so wouldn't it be correct to say that the return on capital is something around Y/X? and again, let's assume i'm talking about investment grade or high yield credit where the majority of trades are not crossed and are not zero risk.

@ tabularasa -- you say marketmakers make more than a 10% return on capital...how am i suppose to calculate the return on capital of a market maker? let's say the trader has a $500mm cash position on january 1 to facilitate all of his/her market-making activities. on dec 31, the trader has $550mm, which the trader has made through bid-ask spreads as well as being long or short certain positions that the trader had to carry on his balance sheet b/c the position could not be immediately crossed or the trader was taking a directional view. what is the return on the $500mm that the trader made?

@ Guenter -- sorry, my subject/topic/heading may have been a bit misleading. i don't mean to question whether or not trading is actually profitable. i know it is profitable, and that it can potentially be incredibly lucrative. the topic was intended so that people would be intrigued enough to click into it and read my actual underlying question and give a thoughtful response. i had a different topic/heading before, and i wasn't getting any responses. sorry for any confusion.

Jan 24, 2015

I'm interested in this too, and my question is somewhat similar.

How exactly should I be comparing the performance of the same trading desks at difference banks? Simply looking at their profit doesn't really help due to different book sizes/number of people on desk etc. So what measures should I be looking at in order to decide the 'better' desk to join as a FT (if culture/people/location etc are equal).

Jan 24, 2015

the people and the products. do you like them? if you don't, the prestige and other vein shallow shit can't make it up...

Jan 24, 2015

@ m.c.trader -- i don't think you answered my original question. you say that P&L is a better litmus test for a prop desk, and not a sell-side desk. so what is the litmus test for a sell-side desk? at the end of the year, that sell-side trader is still using "X" amount of balance sheet to generate "Y" amount of revenue. so wouldn't it be correct to say that the return on capital is something around Y/X? and again, let's assume i'm talking about investment grade or high yield credit where the majority of trades are not crossed and are not zero risk.

You're proving your self wrong with your own logic.

If there is no market makers, people trading risk as you say by covering spreads, then there is no market place.....

You're probably right, if I had 500MM I may not go open a market making firm, I'd look at other Equity. Wall st is seeing that too, that's why Prop desks are growing (for now) at BBs.

But you have to understand that the market can not function, the prop desks can not make money, WITH OUT people willing to trade risk. The profits are higher than you've quoted, though they may not be higher than a prop desk in terms of PnL.

A good market maker would not loose money or allow himself to be exposed to risk, if he is on the short side of one obligation, you better believe he's on the long side with another client. His exposure is, by definition, SUPPOSED to be zero.

I don't know how else to spell it out to you, I think you're trying to compare apples and oranges. You're talking about two entirely different ways for banks to make money. Having goo market makers and institutional traders will hedge you against the exposure your prop desks face.

It takes all these pieces to make an IBank work.

Jan 24, 2015

@ m.c.trader

somehow my original question remains unanswered. i understand that an orderly market needs market-makers, be it electronic or actual sell-side traders, to be functional. that was never in debate to begin with.

so again, what is the benchmark to which a sell-side trader is compared/"graded"? is it just absolute P&L? or P&L with respect to how much balance sheet the trader is using?

Jan 24, 2015
pelham123:

@ m.c.trader

somehow my original question remains unanswered. i understand that an orderly market needs market-makers, be it electronic or actual sell-side traders, to be functional. that was never in debate to begin with.

so again, what is the benchmark to which a sell-side trader is compared/"graded"? is it just absolute P&L? or P&L with respect to how much balance sheet the trader is using?

Its PnL, but it takes into consideration other factors such as bonuses, operating costs ect. Usually you might compare it to how other desks are doing and how the same desk at a different bank does. Certain desk will out perform other desk at take home larger bonuses, but those those bonuses won't be directly proportional because bonuses are usually pooled by division.

In regards to your question, you are forgetting a key point.
1. A Market Maker is only borrowing the balance sheet for a short time until it finds an opposite party. The bank is so large that no one has a set balance sheet, instead traders are constantly sharing it with each other at different times. Its not like he has 500 million that no one else can touch, its all very fluid.

Also the traders returns are not absolute..they need to be annualized. So say a trader uses 10 million of balance sheet and makes 10K on a transaction in an hour...you need to annualize that return.

Stop thinking about it as a return on investment...prop desks worry about returns. Market Makers are like toll booths...they make money from cars going both ways on the bridge and only have to worry about covering the costs of maintaining the bridge, the rest is profit.

Jan 24, 2015
Gekko21:

Stop thinking about it as a return on investment...prop desks worry about returns. Market Makers are like toll booths...they make money from cars going both ways on the bridge and only have to worry about covering the costs of maintaining the bridge, the rest is profit.

Ditto.

How do you measure if McDonald's is doing well, or Apple, or Starbucks?

You look at how much they made, and how much they spent, subtract the two, and BOOM. There you have it.

Sell-side and Market Making is more of a traditional vocation than prop trading in the way they earn money. I still don't consider it PnL, just because that term has latched itself onto HF's and Prop Desks, it's more traditional revenues.

Again, if you are convinced that dumping the 500MM into a particular security would be better for the company, open a prop shop and try it out. If you don't Hedge you bank to market exposure you'll find out that over 10 years you would have made more money if you practiced both Sell/Buy side trading.

You'll have those years that you mentioned in the OP, but then you'll have years like '07, etc.

This is a very business minded decision that a CIO or CEO or CFO would make, and rarely do those people think like traders when talking about the Banks capital.

Jan 24, 2015
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Jan 24, 2015
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