Volatility -- good for S&T bonuses?
So with all of this crazy volatility (I just read that trading volume for both securities and options contracts is twice the average), does that mean that S&T people at the BB are going to clean up this year with bonuses?
No satisfying answer, because “it depends.” Can’t speak across all asset classes, but mildly elevated vol will increase PnL dispersion, assuming street crowding isn’t too severe. So it can be good for your bonus. But there’s a point of elevated vol — which has been reached this week, where liquidity goes to absolute shit and desk volumes will suffer. In core sovereign rates, across both cash and futs, bid-asks have gotten fucked up wide for hours at a time with basically no size getting done. That is not great news if you’re on one of those desks.
No clue. Some desks are cleaning up. Other desks are bankrupt.
Some survive and crush now that there’s no liquidity. Treasury market is legit broken now. Crazy things happening in spreads.
Depends on firm. I imagine Citi, JP and other banks will likely to use trading profit to flat its loss from rates cut. Sell off is bad for sales trading in long run of followed by recession. Also if jobless rate increase banks feel less the need to pay you because you are very replaceable if you work a flow trading business
Very insightful, thanks!
I don’t think the banks have much exposure to rate cuts.
They might actually have huge positive pnl exposure to rate cuts. Citi reports about a 1.5 billion pnl loss on a 100 bps fall in overall rates across the yield curve. But rate cuts will steepen the yield curve so that should be hugely bullish net interest margin. 30 years at 1.5 now and I bet it goes higher in yield. A fed funds will be at 0. It’s going to be a steep curve which should boost income.
The oppurtunity is there volume wise, depends on the profit they make but what else the year has in store.
I think OP refers to the interest income of commercial bank and structured product. These LOBs likely to get hit hard by rates cut and not realistically for them to hedge all their exposure. Sales & Trading revenues will be “averaged” to help core businesses for big four banks. Besides, for big banks, they think your P&L are dependent on flow. So your personal skills are less important and traders can thus be easily replaced. With big layoffs in foreign banks and asset management, banks fund it has never been easier to find replacement. For many business, banks start to use more junior traders and they find junior people can easily qualify the job after short period of trading. Since flow business heavily counts on platform and brand names, senior traders can’t bring much more value add anyway. That’s why aspirational traders in big banks keep leaving to places where their skills can be more valuable. If a desk full of juniors, then you know individual skill set is not so useful. This is particular bad for equities. I know some bank’s equity derivatives trading desk made huge p&l last year but that bank told them don’t expect big bonus as they can only do those profitable trades with bank’s platform and cheap financing. Not surprisingly many people left this year yet banks get some traders with a even cheaper cost (mostly juniors and underpaid senior traders laid off by foreign banks in US)
Thanks for the response always good to get detailed insight from people in the know. +1, has it been like this since the last recession!
Given the recent trend, it's more than likely there will be some excuse why not to pay people come bonus time (most likely because other parts of the bank not doing well) lol.
As it relates to derivatives, I can confirm that Indeed it has been really good so far for us. Like someone above said, though, it has gotten to the point where liquidity is really constrained and volume suffers. With that said, vol is how equity derivs makes money.
Think I saw an article about JP morgan being up $300mm in revenue compared to this time last year in equity derivs, so desks across the board are doing well.
In the end, though, the bank probably suffers more through other areas than what it gains on derivatives. Plus lower rates means means lower NIIC, etc. as well so banks are getting squeezed. It'll be interesting to see how bonuses pan out this year. I'll probably end up with a stub, though.
Thanks for the info.!
Yeah this. S&T is probably going to end up with the best year in a decade, but the rest of the bank is going to be absolutely destroyed revenue wise.
If possible can you explain why S&T will do well this year ? Is it strictly because of the vol or ?
As someone who works in macro derivatives the last 2 weeks have been amazing for my desk. No complaints here really.
Doubt it will be substantially better. Nowadays all the bank position themselves as a platform business and it is much easier to get paid well in a decent year in a good economy than a blockbuster year in a bad economy. It is hard to point at a pile of cash and say 'thats there because of me'.
Commission based sales guys are doing very well right now. Lots of vol and dealers not taking down risk means that everything is riskless right now and bid ask is huge. You don't need balance sheet and new issue to make money in this market. Guys are making points on bonds that had a 3bp bid offer 3 weeks ago. Will be interesting to see how long the bid from banks/insurance lasts on to absorb the ETF selling. Things keep leaking wider but trades are happening. Its always fun when customer offers are just indications and the seller hits a huge back bid.
Trading is doing broadly very well during this (everyone seems to be making a lot of money right now), but the bigger issue is that bank as a whole won't be (ex. investment banking likely to be completely dead in every aspect). If trading smashes it, but investment banking revenues is down 50% on the year, it doesn't really matter... In some cases, it might be even worse for those with big corporate or consumer banking businesses (ex. JP, Citi, BAML, etc.)
TBH I think most people in the industry are aware of this, now just making sure get something decent by making money. So in the end, bonuses will more than likely be flat or maybe even down. The good news is this isn't a "financial" crisis so there's low risk of the ban blowing up and losing our jobs :)
So do you think interns doing M&A this summer are gonna have nothing to do? Just... busy work?
I mean in ib you were gonna be doing busy work regardless lol
Yeah, that's what I've been gleaning from what people say about it... man, I hope the works is not boring as crap. Regarding your experience in S&T... I'm sure the adrenaline these last two weeks must have been crazy, but do you generally enjoy the work in S&T?
Yeah unfortunately, given what's going on, I highly doubt any companies are looking at M&A right now or financing any type of expansion (more like survival mode) - likely to take some time to get back on their feet too, as no one really knows when this will get better
As for your second question, yes it has been insane. I'm in a macro type trading seat. I've been in the market for about 5 years now, and it's the most on edge and most volatile I've ever seen (by magnitudes. I'm glued in most of the time and tbh it's been exhausting - huge difference to what it was just a few months ago or even the past few years at the most volatile times. Even on screen for markets that are normally very liquid (ex. gold futures or fx pairs), spreads right now are 5-10x what they used to be in like 25% of the size bid/ask which obviously means a lot more opportunity for us to capture. It also now doesn't take much size to make a lot of money and at the same time it doesn't take much to lose a lot of money lol. I've heard that although we're not quite there yet, it's the closest to the crisis environment since...
If you want an example of how crazy things are, look at the price of palladium in the past two weeks or what USDJPY has done in the past few days compared to the range over the past few years... Vols are at levels that are basically unheard of and because a lot of people got used to low vol environments, they are getting destroyed. Some markets are just totally broken.
Equities wise means also a lot of new deals but you have to be careful to play your gamma and vega in the right direction. Is lovely to see a lot of vol spreads in place after
Are there going to be any hiring in S&T from this?
I highly doubt it. If anything this entire ordeal has justified the cuts in headcounts that banks have been making over the past few years and shown they can get the same done with less.
Hey, it's me, Koalamacro, I'm back. Another crazy close, another day to get your wisdom regarding upcoming recession and how it may obliterate an IB M&A internship...
You mind if I PM you?
in Equities at least (cash + derivs) it’s highly Desk dependent. Cash (high tough + low touch) will do well for now as the volume they get may quickly spike now but will be followed by less after volatility dies down while everyone waits for this Covid curve to flatten out and shitty earnings reports come in (mostly priced in already, anyway). On the derivs side, I’d say mostly flat actually. Flow will make also make a killing, but you can see a good portion of that offset from structured products which can blow up really badly in just a few days even (short vol, short gamma, and long diva - all not great places to have been in the last 3 weeks). In the long run though, once a bottom is reached and everyone anxiously waits for good news to come out before a rebound occurs, volume will be low, hurting the entire business equally. Trading PnL is temporary though, what matters the most is you stick with your clients during the tough times and make a few sacrifices to your PnL if necessary so that you have their trust and are their go-to as soon as everything rebounds again.
Forgive me for not knowing but what do you mean by "long diva"?
long dividends
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