Related Feature: Agency Brokers Go On Hiring Binge to Launch Fixed-Income Desks
Clearly compensation is one of the factors driving sales traders to abandon the large traditional fixed-income trading houses for agency brokers. Many sales traders -- who were fortunate enough not to get caught up in downsizing efforts -- worked hard and made money for their firms but were nonetheless denied their bonuses in 2008 because their banks lost money. Others had their bonuses tied up with their firms' stock and lost it all as the markets plummeted.
"You could have a great year and contribute $20 million to $30 million in P&L, and they could pay you based on the firm not making money," laments Allen Oppici, now managing director of fixed-income sales and trading at Concept Capital in New York and himself a victim of downsizing at Credit Suisse in 2007. Oppici was hired in February to build the agency broker's fixed-income team. While the traditional banks pay out bonuses once a year, agency brokers often pay out bonuses more frequently. "In the agency commission-based model, it was nice to know what you would get paid at the end of each day," says Oppici, who adds that degree of certainly is not available at the larger banks.
Under the new agency commission model sales traders earn a percentage of the dollar value of the bonds they execute for clients. "If you traded $10 million bonds for the week, you're paid on that scale," explains Gregory Nassour, principal and co-head of investment-grade fund management within Vanguard's fixed-income group. "A lot of these guys are making very good money. It's lucrative to the sales people."
Meanwhile the agency commission model is motivating sales traders to find liquidity for buy-side clients. "You have people who are incentivized to find that buyer, and they're getting paid the next month," says Todd Soots, senior investment analyst at Ohio Public Employees Retirement Systems (OPERS). "They would see the paycheck coming to them a lot quicker than in the traditional large firm model," he contends, adding, "It's a total commission model where those guys are going to get paid for their productivity."
The saying at the agency brokers is, "You eat what you kill," Soots continues. "You're not dependent on anybody else, and you make your own business." On the other hand, he adds, "A lot of these guys who were in the J.P. Morgans and the Lehmans don't know what they'll be paid."
According to Soots, the agency compensation model has "helped us quite a bit." He explains that the agency brokers have been particularly valuable for finding liquidity in the high-grade corporate investment market.
"It's a more driven type of personality that is showing up there to feed their families," says Soots of sales traders who have made the move to agency brokers. "They have without a doubt filled a void. In this year and last year, they've been a welcome addition to the market."