How Are Traders Paid?

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:

WegmansTuna - Equity Research Analyst:

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?

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Comments (31)

Jun 15, 2008

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.

Jun 16, 2008

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?

Jun 16, 2008

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.

Jun 16, 2008

How are trader's commissions structured?

Jun 16, 2008

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?

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Jun 16, 2008

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.

Jun 17, 2008

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.

Jun 18, 2008

Very nicely done, very helpful.

Aug 7, 2017

Would anyone familiar with prop shops/hedge funds be able to comment what are the typical % PnL share for traders/PMs at either? (Also, are these usually contractual or discretionary?)

Aug 7, 2017

if you put up your own $$....then you will have a contract...and the typical range is 50-90%...depending on product, leverage, firm resources, etc..

if you are just an employee trading the firms $$ (no personal risk to you)...then of course your payout will be much lower...this is similar to a hedge fund, which hovers around 20%. Higher % payouts require a real track record..and often takes years to get.

Aug 7, 2017

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.

Aug 8, 2017

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.

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Best Response
Aug 9, 2017

Banks pay the standard for S&T as IBD/Research
Think it starts 90/100/ 1/2nd year analyst

Mine was 70/80/90 analyst stint and 120/140/160 associates

Once you are an associate you are compensated based on your book. Bank pay is around 6%. Some years less but rarely ever more than that. I think its safer saying if you got 6% you would be satisfied. The pay is low low relative to uber drivers because of the back office, middle office, MD's in said BO/MO/Compliance that get paid 250K salaries for sitting on their ass that the trader has to make revenues for. This fixed-cost per seat usually comes out around to 2-3mm.

So take your trader (Pnl-this seat cost(2-3mm))*.06

So if I make 10mm around early December, which is when most banks effectively cut off Pnl for bonus purposes, 3mm is dinged against me and I net 7mm in Pnl. This 7mm * 6% is 420k minus my 160k salary nets me 260k in bonus. Working at banking they will pay 70-75% in cash and the rest will be vested over the next 4 years in a combination of bank stock and cash. If I quit before the 4 years, i get only a pro-rated share that I've already received.

Hedge funds pay CASH, no vesting no forward obligations no nothing.
Hedge funds have lower ops, bo, MD's and otherwise non-revenue employees are minimal. Thats why the pay 10-20% of book.

Nothing more, nothing less

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Aug 10, 2017
MeatHead:

Hedge funds pay CASH, no vesting no forward obligations no nothing.
Hedge funds have lower ops, bo, MD's and otherwise non-revenue employees are minimal. Thats why the pay 10-20% of book.

If only this were true... In fact, many HFs practice deferred comp, somewhat similar to the banks.

As to the lower overheads, that's probably true, but then banks have franchises and HFs don't.

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Aug 10, 2017

Speaking solely to energy trading, hedge funds and physical shops pay cash, no doubt about it.

The benefit of banks is the client franchise to aide in customer flow, but this reduced risks on the trader side is met with reduced payouts on the bonus side

Think of traders at the large energy companies P66, Exxon, Shell etc. are paid much less than 6% because they are just glorified marketers that typically don't take any risk instead optimize their asset base

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Aug 10, 2017

There are very few funds that pay large bonuses without at least half as interests in Fund.

Aug 10, 2017

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

Aug 10, 2017

Short answer, yes you get paid on it.
OR
you don't, not get paid on it

Aug 11, 2017

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?

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Aug 11, 2017

Exactly. The way to think about banks, HFs, prop shops, and trading your PA is that your % of book will increase alongside the career risk you take...for the most part. So at a bank you're looking at usually 5%-8% of PnL, HFs in the 10%-15% range, prop is 10% - 90% depending on how arcade like it is, there was an article on this awhile back. Definitively the most variability in prop shops as that's a loose definition. Happy to answer more questions.

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Aug 11, 2017

your assuming all hedge funds solicit outside money and simultaneously adhere to some arcane model of 2 and 20...this doesn't happen in the real world and if you know anything about how energy trading shops function you'd know this is off base

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Aug 15, 2017

usually your seat cost is netted out first

Aug 13, 2017

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

Aug 14, 2017
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Mar 1, 2018