Bankers were thrilled last year when Wall Street bonuses climbed for the first time in years after falling more than 15% in 2015. But unfortunately, even with equity markets around the world at record highs in 2017, volatility across asset class plunged this year – with the Dow seeing its least volatile year on record by some measures – has plunged, decimating bonus pools across asset classes, Bloomberg said.
As bank earnings have portended, a drop in trading revenue across asset classes over the past year will likely lead to cutbacks in the bonus pool for equity and fixed income traders.
However, the disappointment was widely anticipated, and traders have probably been bracing for light bonus checks all year. Just last year, Wall Street investment banks saw earnings from their fixed-income trading businesses rise for the first time in four years. But the drop in volatility this year has weighed on trading profits across the industry.
At Bank of America Corp., rates traders are likely to see bonus pools shrink by as much as 10%, according to people briefed on the discussions. Those teams at JPMorgan Chase & Co., the world’s biggest trading bank, are set for declines of about 5%, according to Bloomberg’s sources.
“Rates didn’t do poorly on an absolute basis, it just didn’t do as well as last year because of the lack of significant catalysts,” said Options Group Inc. Chief Executive Officer Mike Karp.
“Everyone hoped the French and German elections would create some activity, but it didn’t happen.”
Most bond and equities personnel can expect smaller 2017 pay packages because of low volatility and a lack of disruptive events, recruiter Options Group said last month. Equities trading may see bonuses remain flat or fall as much as 5 percent, while fixed-income traders could fare a bit worse, according to Johnson Associates Inc.
But give the number of catalysts that passed the market by this year, the drop in fixed-income trading revenues is even more surprising than the plunge in equities, and could be more severe, according to Bloomberg.
Elections in Germany and France, as well as three Federal Reserve interest-rate hikes, didn’t generate the type of volatility seen following the UK’s vote to leave the European Union, or President Donald Trump’s upset victory in the November 2016 election.
As DB said in its 2018 derivative outlook, “events produced very little vol in 2017. Vol spikes were few and shallow, and so technical market risks were never truly triggered.”
The rise of automation and a shrinking number of hedge funds have also helped weigh on compensation by curbing demand for Ivy League-educated financial pros.
On top of a weak year, other more structural trends are weighing on compensation. Struggles across the hedge-fund industry and the fewest startup funds since 2000 have made the threat of bank traders leaving less acute.
And all firms are looking for ways to automate some of the more straightforward tasks in the trading business, which may eventually lead to jobs being cut.
Debt-trading revenue at the five biggest Wall Street firms declined by 7 percent in the first nine months of the year, fueled by drops of 23 percent at Goldman Sachs Group Inc. and 11 percent at JPMorgan. Equity trading was little changed, with Citigroup Inc. and Bank of America posting the only increases.
Any hope that the fourth quarter would redeem the year has been quashed. Several bank executives this month forecast that trading revenues will be down at least 15%.
“The market backdrop that has been in place since the beginning of the year has continued into the fourth quarter,” Goldman Sachs Chief Financial Officer Marty Chavez said in November. “Volatility continues to be low and client activity continues to be subdued.”
The outlook is even grimmer for firms across the Atlantic. Traders at European banks are facing some of the worst bonuses in years, as the declines in both debt and equity revenue are steeper than those at US firms.
Lenders including Barclays Plc, Deutsche Bank AG and Credit Suisse Group AG may see bonus pools for fixed-income traders drop by at least 10%. Some bankers might even be forced to accept “doughnuts” – industry slang for a 0% bonus.
Unfortunately, as we pointed out last week, this drop in volatility hasn’t made markets safer. Instead, they appear more fragile than ever, as the number of five-sigma drawdowns increased dramatically this year…
As BofA pointed out, “2017 stands out for generating an unprecedented number of 5 sigma 1-day SPX drawdowns, suggesting US equities are unusually fragile today by historical standards.”