Don't believe the hype. Although 'volatility is back' and Credit Suisse said today that its markets revenues are up 10% this year, things are still very quiet. Maybe it's half term: maybe it's because clients are skiing. Maybe it's because this is the wrong kind of volatility: ongoing uncertainty like North Korea instead of big defined events like Brexit which require clients to keep trades on for six months rather than six days. - Either way, as a rates salesman I'm not optimistic about the year to come.
It's partly down to market structure. My clients are hedge funds and the hedge fund industry has changed. Hedge funds today are smaller and more specialist than they were. Four years ago, big funds were making big trades and moving markets. Today, you have 10 funds with $500m instead of one fund with $5bn. There are fewer market swings, fewer things to trade against. Then there's MiFID II and Dodd Frank and the huge push for market transparency. U.S. banks, for example, now aggregate their derivatives trade data on Swap Data Repositories (SDRs). More transparency means lower margins. We're all here, fighting over a smaller pie.
This has implications for pay. In fixed income, teams are already as lean as they can be. As margins are squeezed, banks are reacting by handing out zero bonuses. U.S. banks have been doing this for a while, but the Europeans have started doing it too. There's just no longer the money to go around.
In today's markets, some banks are better placed than others. In my market, one of the best is RBS. People presume RBS's investment bank is nothing nowadays, but they could not be more wrong. RBS has always been a big rates player, but in recent years it has really focused on its niche and quietly become an absolutely incredible Euro Govies house. In January 2017 it hired Mark Deniston from Brevan Howard and Goldman Sachs before that. In October it hired Ian Donaldson from BAML. Yes, RBS got rid of people, but it also kept its best performers, many of whom have been loyal to the bank for years: incredible people like Robbie Anderson. RBS has six or seven of the best traders and the best salesmen in the industry. It's a well-oiled machine.
It's not just the people though. RBS also has an inherent advantage over banks like Goldman because of its huge corporate client base. It makes loans to UK corporates and those corporates come back when they want to hedge. While the rest of us sit around waiting for flows from the 'right kind of volatility', RBS has built-in flows from its corporate clients. A company like Tesco isn't going to wait and see whether Trump declares war on North Korea: it needs to hedge its currency exposure anyway. RBS has clients like Tesco and they give it a massive advantage.
Goldman Sachs has belatedly woken up to the advantage of being an RBS; it's now chasing corporate flows too. But you can't build a business in this kind of market overnight, especially if you don't have the balance sheet to make commercial loans. In the meantime, I detect signs that Goldman is struggling to reward people - it promoted a lot of fairly junior rates professionals to managing director last year. This is usually an indication that bonuses won't be great - who's going to care about a bad bonus when he or she just made MD?
At RBS, meanwhile, the pay isn't bad. Because of restrictions on bonuses and harsh deferrals, RBS's top traders and salespeople receive unusually high salaries. They know they're getting paid.
Of course, there are also downsides to working RBS - and they're about more than British politics. The flow at RBS is so huge that you might end up doing 100 trades in a day instead of two or three at other banks. The pace there is incredibly fast. You're also working for a one trick pony - at Goldman Sachs or J.P. Morgan, you're part of a large organization trading a whole spectrum of products. At RBS, it's pretty much Euro Govies or nothing.
Even so, RBS is a sign of how the market has changed. You can work for a jack of all trades bank and receive a zero bonus as it struggles to cover costs in a world of declining margins. Or you can work for a highly specialized bank which dominates its niche. I know which I'd prefer right now. RBS beats GS for me in 2018.
Igor Jones is the pseudonym of a London-based rates salesman who's been around.
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