Conventional wisdom on the effect of the financial crisis on pay in the derivatives market runs something like this.
As far back as Bear Stearns’ absorption by JP Morgan in March 2008, remuneration packages began to weaken. The flurry of redundancies that followed the collapse of Lehman Brothers in September 2008 affected all the major investment banks, if not necessarily in derivatives (JP Morgan had announced cuts even before it acquired Bear Stearns). Continued rounds of belt tightening led to significant decreases in basic pay being offered to candidates; the disastrous performance of the leading investment banks caused bonuses to shrivel.
“The effect was most striking for new hires who lacked the negotiating leverage of an existing position,” says Rob Strichartz, managing director of Optimal Financial Recruitment, a US consultancy specialising in the global treasury and capital market industries.
Talking to derivatives professionals and headhunters, it seems that this familiar tale is accurate in some respects.
“We noticed cuts in contractor rates of up to 10%,” says Alan Bawden of London-based JM Group (pictured), which supplies programmers, business analysts and project managers to IT departments supporting exchange-traded derivatives. 
“And the major banks were being very tough about it,” Bawden adds. “Where in the past they may have made some exceptions, this time it was ‘take it or leave it’.”
But when it comes to permanent positions the story is more complex. In some areas headcount has fallen: the well-publicised cuts at investment banks were matched by the London Stock Exchange Group, which cut 12% of its total staff last summer, and, a spokesperson says, “continue[s] to keep this under review”.
Deutsche Börse has not made any redundancies, but adopted a hiring freeze that is still in place.
Spoilt for choice
And when it comes to taking people on, most employers have become choosier. With overall employment in financial services and the economy in general still far below the level of early 2008, and several leading derivatives players – Lehman Brothers, AIG and Bear Stearns – out of the picture, companies have been faced with a huge pile of applicants for most jobs.
“Where they may have taken someone with an 80% to 90% fit two years ago, employers are now holding out for the perfect candidate, and dragging out the recruitment process through weeks of interviews,” says Bawden.
The result of this glut of candidates is that companies – like the derivatives brokerage Newedge – which have had the cash to remain on the lookout, have found some bargains at executive level.
“Employers who have maintained an ‘opportunistic’ hiring strategy have been able to pick up key, transformational hires,” says Siobhan Janaway, the French-owned brokerage’s spokesperson.
Many of the firms that have made cuts have used it as a chance to get rid of underperforming staff. The official line, inevitably bathed in euphemisms for sackings, is that this has not been a response to the financial crisis; but the effect on the labour market has been the same: more derivatives professionals on the street, exerting a downward pressure on salaries.
Intercontinental Exchange reports that staffing levels at its core businesses were “roughly flat” through 2009. This despite several acquisitions and expansions that brought significant new staff numbers to the group: 300 arrived through the purchase of Creditex in August 2008; another 100 when ICE added The Clearing Corp a few months later, and more with the creation of two completely new clearing houses during 2008-9. “Synergies included staff reductions in some areas,” concedes an ICE spokesperson.
Sheltered sectors
Although lay-offs have been widespread, the effect of the crisis on the job market is complicated by the fact that some sectors in derivatives remained resilient to much of the financial crisis.
“Pay in FX and equity derivatives has been robust,” says Rob Strichartz. “There was a spike in demand for FX talent last year because these divisions were continuing to make money when very few around them were.”
Even in interest rates, where exchange-traded derivative volumes tumbled, headhunters say bonuses have been protected and headcount in some cases increased, in stark contrast with the acute trouble in the credit market.
Perhaps most crisis-proof of all were the highly in-demand skills required by the secretive world of high frequency traders at firms like DE Shaw, Renaissance Technologies and Citadel.
“While it seems to defy common sense, there has been no impact [from the crisis] on salaries in the high frequency trading space,” says a Chicago-based recruiter specialising in the area. “This is counter-intuitive because the talent pool got bigger. But many of these firms were very successful in 2008; assets were retained for the best and they knew they were competing with each other for the same talent.”
Banks on the hunt
Besides these outposts of trend-bucking performance, firms like Barclays Capital and Goldman Sachs have been hiring in some areas.
“Many of those from the front office lost by Bear and Lehman were snapped up promptly by other investment banks,” says Chris Hickey, UK managing director of permanent recruitment at Robert Walters in London. “For in-demand asset classes, there was no effect on salaries and, with the exception of parts of the asset-backed space, no notable decrease in guaranteed bonuses.”
Another London recruiter we surveyed was inundated three to four months ago with requests, as clients worked to capitalise on the relative paucity of competitors. In stark contrast to the choosiness that had gone before, they had widened their qualification criteria to increase the flow of applicants for new roles.
Indeed, the opportunities available in the market sectors that continued to thrive, and the decision by some firms to cash in on the relative weakness of competitors, added to the buoyancy of salaries and bonuses last year.
All in all, the depressing effect of the crisis on employment and pay in derivatives has probably been exaggerated.
Expansion on track
In exchange-traded derivatives – notably interest rates, FX, equities and commodities, some firms took the opportunity to go on the offensive.
Among the exchanges, CME Group’s staff numbers in London and Singapore increased significantly during 2009.
Brokerage MF Global said it hired key talent across its global operation during the financial crisis. Dozens of senior professionals joined the fixed income business, a strategic priority for CEO Bernie Dan.
In senior management, Paul Farrell joined to head MF Global’s FX business after 35 years at JP Morgan Chase; Peter Forlenza, formerly of Bank of America, came to lead the equities division; and top-ranked UBS economist James O’Sullivan arrived at MF Global as chief economist.
However, the fact that overall headcount remained flat suggests MF Global also cut those not contributing to the bottom line.
Smaller trading firms also prospered. Jonny Aucamp (pictured), CEO of London and Kent-based prop firm OSTC, says: “We have not cut our headcount as a result of the financial crisis; in fact our headcount in traders and back office has increased, largely in line with our business plans over the last two years.” 
Pay holds steady – about to rise?
Importantly, though, anecdotal evidence suggests that resurgent demand from aggressive firms has not yet led to pay inflation.
JM Group’s latest JM Index pay survey finds that salaries for derivatives IT jobs remained flat up to December.
“There are still a huge number of candidates in the market keeping pay down,” says Bawden. “In addition to those who have not been working, strong bank profits are luring back professionals who chose to weather the crisis in roles outside the City.”
Outside the IT discipline, things may be brighter for derivatives specialists. November research by Options Group, an executive search business with offices in London and New York, predicts proportionally larger bonuses among derivatives professionals this spring.
Commodity salespeople and traders will receive bonuses 45%-50% higher than last year; FX traders and sales force, as well as rates traders, will get 35%-45% more. Both those uplifts are higher than the predicted average for the banking industry of 35%-40%.
But derivatives workers contemplating a lavish holiday in March would be advised to book at the last minute.
The Options Group research came before the UK’s bonus tax was announced in December, and before President Obama’s January declaration that banks’ wholesale liabilities would be taxed.
Even if governments have so far proved impotent to control banking pay, bankers’ confidence will certainly have been tempered by an announcement from JP Morgan Chase on January 15.
Morgan, the first of the big US banks to announce its income statement, said it would set aside just 33% of its investment bank’s revenue for compensation, compared with 62% in 2008.
For the time being, derivatives professionals, along with most of the financial industry, are holding their breath.