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17th of January 2018


Wall Street bond traders fear zero-bonus ‘doughnut’

Ben McLannahan in New York

December 20, 2017

The dreaded doughnut — or zero bonus — could be back in a big way on Wall Street, particularly for bond traders who have struggled to make money in listless, lacklustre markets. 

Revenues from banks’ fixed-income sales and trading units have been falling all year, crimped by post-crisis rules curbing risk-taking and a general lack of volatility. Recent public remarks from big bank executives suggest that trend continued into the fourth quarter, meaning that bonus pools will be shallow and are likely to be dominated by “strong, up and coming” vice-presidents, said Oliver Cooke, head of Selby Jennings’s US recruitment practice.

On Tuesday Jefferies Group gave the clearest sign yet that overall payouts will be poor, reporting a 37 per cent slide in net revenues from its bond trading unit to $95m. Net bond trading revenues for the full year at the firm, which has an unusual November year-end, came to $618m, falling from $640m last year.

“There are a lot of people who are not going to be happy” with their bonuses, said Mike Karp, chief executive of Options Group, a recruiter. “But it’s only fair when businesses don’t perform, people don’t get paid.” 

Bond units on Wall Street have been grappling for the past few years with reforms such as the Volcker rule, which bans banks in the Federal Reserve system from putting on positions unrelated to client demand, and with a steady shift of trading to cheaper, electronic venues.

Morgan Stanley, for example, has made deep cuts, aiming to clear a low bar of $1bn of revenues each quarter from a business that used to deliver $2bn or $3bn. Goldman Sachs has cut heavily, too, but has faced criticism that its restructuring has left it too heavily exposed to fickle clients such as hedge funds.

Another sub-par quarter from fixed-income could mean banks face pressure for more drastic measures, including on pay, said analysts. “For several years now we’ve had the argument, is this cyclical or structural,” said Ken Leon, global director of industry and equity research at CFRA. “It’s obviously more secular.”

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According to data from Coalition, a London-based consultancy that tracks the top dozen global investment banks, overall revenue from trading interest rate products linked to “G10” currencies fell 11 per cent over the first nine months of 2017 to $19bn, while trading of currencies and credit products dropped 21 per cent (to $5.3bn) and 1 per cent ($11bn) respectively. Industry-wide, total revenues should come to about $70bn this year, Coalition predicts, from $76bn last year.

Options Group data suggest those trends will be mirrored in pay, with total packages falling almost across the board in fixed income. Investment banking departments are likely to do better, with total pay rising about 10 per cent from last year, while wealth management professionals should see an average 6 per cent rise.

Mr Karp said that zeroed bonuses for debt traders are likely to be concentrated in European banks, where base salaries tend to be higher: $800,000 for a managing director, for example, versus $600,000 in a US bank.

Jefferies, which is traditionally seen as a bellwether for banks with December year-ends, said debt trading results for the fourth quarter were hit by a fall in volumes from a US election-boosted period a year earlier, as well as narrowing bid/offer spreads.

Quarterly numbers from the investment bank were otherwise strong, boosted by a 27 per cent rise in net revenues from advising companies on mergers and fundraising, to a record $529m. 


The weak performance from bond trading is likely to mean that banks across the industry slash discretionary payouts for people they deem “dispensable”, said Paul Sorbera, president of Alliance Consulting, a search firm.

A zero bonus from a stable bank is normally a strong hint that the employee is no longer wanted and should consider looking for a job elsewhere. Payouts tend to be finalised in January and February, with some European banks bringing up the rear in March.

“Wall Street is becoming more of a meritocracy,” said Mr Sorbera. “In the old days you used to carry people a lot more than you do now.”

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