I'm curious to know how are traders paid? I know that traders at hedge funds are paid more than a trader at Goldman's or whatever. But why is that?
Is there some type of tier system based on how well they perform stating they will be paid x amount of dollars if the produce x return?
I've Google searched this many times over and found nothing, Thanks
What Different Kinds of Traders are there?
Flow Trading - this type of trading involves managing the client's funds. Flow trading typically involves divesting his/her position to his client's while making profits, buying for his client, and acting as the market maker.
Prop trading - similar to flow trading, prop trading trades stocks, bonds, currencies, commodities, but with the firm's own money instead of a clients. Typically, prop trading is riskier but can produce more volatile profits.
Market maker - essentially a variety of stock and currency exchange fall into this bracket (New York, London stock exchange) in which they stand ready to buy and sell stock on a regular and continuous basis at the public price.
Are Traders Paid on Commission or Salary?
While each different firm has varying ways of compensating their traders, the community of WSO has come together to give a solid snapshot.
Flow traders tend to make less that prop traders due to the value of the seat they own. They are often paid a base salary and a smaller bonus based on their performances.
User WegmansTuna, an equity research analyst, makes a good point on how prop traders make most of their money:
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).
Market makers make a vast majority of their money from the spread, or bid-ask price as well as provide liquidity to their clients to earn a comission.
Within each firm there can be a tier system based on performance or how long you've been there. The general trend is that you start as an analyst and you are paid a base salary, then move up to an associate where your bonus is based on your book. From here there can be countless other positions with varying compensation plans.
If you have any other comments regarding compensation or how traders are paid please comment below!
Want to Learn More About a Traders Salary?
Check out the WSO Hedge Fund Industry Report to learn all about salaries for hedge fund managers at different experience levels.
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