Many things can change over time but buy-side compensation, for those that can remain on the desk, really hasn’t.
Four years ago, buy-side trading desk budgets saw 66% of their spend going towards compensation, indicating the buy-side trader was a valuable commodity. But the next three years would have technology costs inflate budgets more and more while salaries stayed flat or eked out modest gains. But now things have swung back the other way and according to the latest Greenwich Associates report, budgets for buy-side trading desks in the U.S. and Europe grew 8% last year, fueled by increased spending on compensation.
A 2018 spike in compensation expenses on buy-side trading desks was by far the biggest driver of the 8% overall increase, which followed essentially flat trading desk budgets in 2017. The average budget for asset management and hedge fund trading desks is $2.73 million.
Compensation growth last year ended a three-year run in which compensation spending was being crowded out by ever-expanding technology costs, explained Brad Tingley, Market Structure and Technology Analyst at Greenwich Associates.
Technology expenses had been growing as a share of total budgets for both equity and fixed-income trading desks since 2015. Last year that trend reversed, with compensation climbing by eight percentage points, to 68% of total budgets.
Net-net over the last four years that means trader compensation is only up 2%.
Hmm. Is there something at play here?
In looking at the data, although technology costs shrunk as a share of the total, institutional investors reported significant increases in spending in a few key areas such as spending on execution management systems (EMS) increased to 6% of total technology spend. Increases were also reported in spending for market data terminals, market data feeds and hardware.
Is there something else?
With the buy-side reporting constrained budgets some point to the recent trend of outsourced trading.
In the fourteen months since it went into effect, MiFID II has proven to be a disruptive force for the financial services industry, upending existing business models and ushering in a new era of scrutiny in how firms spend their money. In Europe, trading and research can no longer be sold together as one service; even in the U.S., the global impact of MiFID has led many firms to explore full unbundling, leading to difficult questions about which costs are necessary and what it means to seek best execution.
Where there is disruption, however, there is also opportunity for growth. In this case, that opportunity can be seen as buy-side traders and hedge fund managers are increasingly enlisting outsourced trading firms to help them navigate this new normal.
A recent survey of Traders Magazine readers, representing a broad spectrum of buy-and sell-side professionals, found that 28% work for firms that have either already outsourced some of their trading and back-office operations or are actively considering doing so. That may not sound like a big number, but given outsourced tradings longstanding reputation as a niche service for hedge funds only, it qualifies as a significant figure.
Also, research consultancy Opimas noted that though outsourced trading desks have existed for some time, interest in such offerings has increased in recent years as the asset management industry faces increasing pressure in terms of fees, fund performance, and regulation. Octavio Marenzi, researcher at Opimas, said this is leading even larger asset managers to outsource at least part of their trading desks. He forecasts that by 2022 about 20% of investment managers with assets under management greater than US$50 billion will outsource some portion of their trading desks.
One former buy-side trader now at the sell-side told Traders Magazine that outsourcing is in fact due to the buy-sides need to keep costs in line and keep up tech spending.
You have no choice but to keep spending on technology these days – even if it is market data or connectivity, he said. With more trading venues popping up such as MEMX or MIAX Emerald youve got to connect – and there are more fees the desk is incurring. Something has to give.
Tim OHalloran, Managing Director at Tourmaline Partners, an outsourced trading firm, said that todays landscape increases the benefits of outsourcing for large and small managers alike.
Historically, outsourced trading has been popular with emerging managers at launch, because those firms are less likely to have the resources to support an in-house trading desk, he said. As a result of new regulation, changes in technology and a host of other factors, we are now seeing larger funds experience some of these same cost pressures. In addition, larger firms that do employ traders are starting to realize our global scale and expansive network of sell-side relationships can supplement their in-house trading activities. The result is that outsourced trading has become a much bigger tent.
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This article originally appeared in the March 2015 edition of Traders Magazine
Buyside Trading Desks Spend 66 Percent of Budget on Compensation, Balance on Tech
John D’Antona Jr.
The buyside has rewarded its traders in a big way – sending upwards of 66 percent of its trading desk budget to the compensation coffers while the balance goes to technology.
The buyside, looking to retain the trading talent it has left after years of shrinking commissions and budgets, has reported spending over $12 billion dollars to keep its trading operations humming along, including keeping traders happy.
That’s the news from a new Greenwich Associates report that shows trading personnel and technology are the two drivers of growing buyside firm budgets. With technology coming to the trading markets like a fire hose trying to fill a teacup, trading desks in 2014 raced to keep pace with the growing speed of electronic markets, changes in market structure and lower trading costs.
The report, “Buy-Side Trading Desks Spend Big Money on Talent and Technology,” released Monday from Greenwich, noted that in 2014, nearly two-thirds of the budgets supporting buyside trading desks went to trader compensation. The remainder was spent on spent on technology, including software, hardware and infrastructure.
Also, 60 percent of the technology spend went to fixed-income, where trading desks are navigating the movement of increasing amounts of trading volume to electronic platforms.
Furthermore, order management systems (OMS) and market data terminals remain the top two technology expenses for buy-side traders, accounting for 53 percent of the total technology budget.
For the study, Greenwich Associates interviewed 358 buyside traders across the globe working on equity, fixed-income or foreign exchange trading desks to learn more about budget allocations, staffing levels, OMS/EMS/TCA platform usage, and ATS satisfaction levels.
Asset Class Breakdown
Fixed-income trading desks remain in an investment phase, with spending up 11 percent from 2013. The market structure for government and corporate bonds continues to evolve, as investors focus on better access to both liquidity and improved cost analytics. The importance of human capital on bond trading desks is also important with budget allocated for trader compensation growing in 2014.
“Although the fixed-income market is awash with new data and trading protocols, relationships are still king,” said Kevin McPartland, author of the study and head of market structure research at Greenwich Associates. “The best technology platforms are of little use without traders who know the unwritten rules of trading bonds – especially when volatility comes back and interest rates rise.”
Spending on foreign exchange desks remained flat over the past year at just below $4 million on average. On equity desks, a slight growth in spend year-over-year can be attributed in large part to regulatory scrutiny in both the U.S. in Europe.
