Hiring Spree

Wall Street Opens Its Wallet to Prep for Post-Volcker Era

Big banks jockey for a debt-trading revival that hasn't taken off yet.
Photographer: Dan Kitwood/Getty Images
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Wall Street banks are beefing up their credit-trading and sales teams again after years of deep cuts ahead of what they hope will be a coming bonanza.

The pace of hiring hasn't been this brisk since 2011, said Michael Karp, chief executive officer of recruitment firm Options Group. The action is heating up as debt-trading profits fall, raising questions about how long it can last.

To give a sense of how active the recruitment has been, BNP Paribas SA recently hired credit brokers from Credit Agricole, including energy-focused trader Paul Marx and salespeople Alison Louie and Peter Joseph. Earlier this year, Bank of America Corp. hired Credit Suisse Group AG trader Philip Hoo as it bulks up its U.S. credit-default swaps business, Bloomberg News reported.

Credit Suisse, meanwhile, just informed its staff that the broad cuts may soon be over and that the Swiss firm is looking to emphasize more lucrative areas of its business.

Fierce Competition

U.S. banks are widening their lead over European firms in the race for bond-trading business

Source: Bloomberg Intelligence

There are several reasons for the significant increase in hiring. First, there’s a widespread belief that the Trump administration will roll back financial regulations. One target of recent talks has been the so-called Volcker Rule, which seeks to limit banks’ trading with their own money. Even if this provision isn’t nullified entirely, banks will most likely be given more leeway to use their own money to buy and sell bonds. 

The consequences of that are significant: It places a greater emphasis on traders who can act a bit more like investors themselves rather than just matchmakers for fund managers. These looser rules would most likely pave the way for debt-trading to become more profitable.

Second, the Federal Reserve has been raising benchmark interest rates from near zero, which will ostensibly lead to higher borrowing costs and more volatility. Typically, credit trading is more lucrative when benchmark yields are higher because there's a wider margin from which traders can take commissions. 

Big Business

While bond trading has become less lucrative, it's still a very profitable business

Source: Bloomberg Intelligence

And third, bond-trading revenues had been increasing until recently. Fixed-income trading revenues at the biggest banks increased 8 percent last year, the biggest annual gain since 2012, according to data compiled by Bloomberg Intelligence. Bond traders got their first pay bump since 2012. Some bankers started talking about a new dawn for fixed-income revenues. The goal for many firms was to grab as much market share as possible now to cash in when the business inevitably heats up in the future.

Of course, that steady run of rising bond-trade income came to a grinding halt in the three months ended June 30, with debt-trading revenues down at all the big U.S. banks, especially at Goldman Sachs Group Inc., which reported a 40 percent decline in the unit.

Slipping Up

Big U.S. banks experienced a dip in debt-trading revenues in the second quarter compared with those a year earlier

Source: Company filings

The next few months will be important in determining whether big banks will keep up their torrid pace of credit hiring or whether they'll slow down and reassess whether they were being overly optimistic. As the latest quarterly bank earnings have shown, it's too early to say that the good old days of bond trading (or even a small taste of them) is set to return to Wall Street.  

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Lisa Abramowicz in New York at labramowicz@bloomberg.net

    To contact the editor responsible for this story:
    Daniel Niemi at dniemi1@bloomberg.net

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