Traders Moving to Smaller Firms

The WSJ highlights one of the changes rippling through Wall Street's trading community due to the government's attempts to crack down on compensation. The article begins with the tale of Steven Schonfeld, the 50-year old owner of the trading firm Schonfeld Group Holdings. Mr. Schonfeld took home $200 million in pay last year and bought himself a $90 million house near the Long Island Sound. Since Mr. Schonfeld's firm is private and didn't need any help from the government to stay afloat, you won't see him testifying to Congress to explain his compensation package or apologizing for his grandiose lifestyle. Furthermore, last year's volatile markets gave his traders unprecedented opportunities to make money, allowing Mr. Schonfeld to expand and hire traders from A-list firms.

Fed up with compensation restraints, proprietary traders from big name broker dealers, who don't dependent on order flow for profits, are flocking to smaller securities firms. Smaller firms give larger payouts based on profits generated by the individual trader. Meanwhile, many larger firms, burdened by losses from the credit crisis, not to mention regulatory pressure, are scaling back on proprietary trading operations. This is a positive trend that should continue until no systemically important financial institution is in the business of making huge proprietary trading bets. Profitable traders should get paid as a percentage of profits generated. I just hate the idea of government-subsidized risk taking. If Schonfeld Group does a poor job of risk management and happens to lose its capital due to poor trading decisions, Ben Bernanke is not going to get a phone call in the middle of the night. The company will file for bankruptcy and all the other traders who were up on the year and hadn't been paid out yet will be pissed off. No systemic risk. Nobody else will care. This is where the real trading "talent" should go. Mr. Schonfeld claims that his best traders make $5 to $10 million a year. Very few good proprietary traders operating under compensation constraints at big firms would argue that that kind of take home pay is too paltry to trade for the prestige of working for, say, Citigroup. The catch is, you have to be really good. Smaller firms typically don't pay large salaries, some only in the form of a draw, and if you aren't making money trading, you get zip.

For less talented traders who aren't as confident of their trading skills and don't mind government intervention in their pay checks, there's always the New York Fed. According to the FT, the NY Fed is on a hiring spree in order to get a handle on its exploding balance sheet. Don't like working for a small entrepreneurial firm? Surely the $2 trillion in assets that the NY Fed has acquired over the course of the last two years should keep you busy. No word on what your comp might be, but I'm guessing it won't be $5-$10 million.