The need for talent in equity and credit derivatives is intense, but God help those in FX and on the vanilla end of finance.

By Nina Mehta

Let's face it. Derivatives and risk management in general may still be one of the hottest areas in investment banking. But the days of exponential head count in derivatives shops are over.

By any measure, the derivatives job market is robust. Compensation is healthy, bonuses are up, and firms are aggressively seeking talent. But the last year of the millennium was marked by a number of confusing and contradictory trends. The fallout from the previous year's mergers and the increasing commoditization of products caused wrinkles of worry up and down the market, and the specter of an increasingly electronic order flow in the not-too-distant future prompted another round of anxiety.

In the employment sector, all this translates into more money for greater expertise and in-depth understanding of client needs. The people in demand are those with proprietary product knowledge, those with a few years of proven experience and, most important, those with established client relationships.

That's particularly true for people who happen to be in the right specialized niches, which these days means equity and credit derivatives. For those in currency or interest rate markets, however, the outlook is quite a bit darker.

The mergers that took place in late 1998—Deutsche Bank and Bankers Trust, Bank of America and NationsBank, and Citibank and Salomon Smith Barney—roiled the labor market well into the second quarter of 1999. The result: "fewer platforms with standalone derivatives desks,” notes Dirk Bouma, a veteran derivatives recruiter who recently formed Cambridge Management Associates, a New York-based headhunting firm of which he's managing director. Mergers are inspiring firms to integrate their derivatives businesses into their underlying cash businesses. Bank of America's San Francisco emerging-market desk, for example, was folded into NationsBank's high-yield area in Charlotte, N.C.

But consolidations of derivatives desks and cash desks are occurring elsewhere as well, particularly on the credit side, where exotic securitizations are being shuffled into bed with credit derivatives. Some of this consolidation, says Bouma, is billed as an effort to "bring up the level of financial sophistication on the underlying.”

There's still money to be made in order flow, but firms are trying to "develop more extensive businesses in highly structured products—products that for clients add a greater value than a particular hedge against a particular type of risk,” argues Alfred Daniels, principal of Alfred Daniels & Associates, a La Jolla, Calif.-based recruiting firm. "There's been a tendency for firms to want to leverage their franchise by having derivatives marketers work more closely with corporate finance. The ideal fit is when a derivatives salesperson introduced to a large corporate client can bring a multitude of solutions to the table.” Among the highest-margin products in all areas, he adds, are customized solutions oriented toward the specific tax, regulatory and risk management environment of clients.

Hot stocks

From an employment perspective, equity derivatives is king of the hill. "Equity derivatives has been on a roll for at least the last three years,” says Ken Randel, director and business manager for New York capital markets at The Options Group in Manhattan. "It's been a successful business for just about everyone—marketing it to the corporate or investor side or just from a trading standpoint. Desks can still potentially hit home runs in this world.”

"The International Securities Exchange is the single best thing that's happened to every floor trader and curb trader who ever wanted to go upstairs and trade for an institution.” —Ken Randel The Options Group

Equity derivatives groups are scouting for experienced talent instead of training people. "Anybody, for example, with a few years of dedicated derivatives risk management experience is in the cat-bird seat,” says Bouma. In the past, there simply weren't scads of people with serious experience in over-the-counter equity derivatives. Today more people can stake out that territory. "Firms are looking to build their market share by hiring marketers who already have rolodexes of clients and specific product knowledge,” notes Daniels. "They're looking for individuals who have an in-depth understanding of the more complex, higher-margin products, who can identify the client's risk management needs and spot opportunities.” Accordingly, the greatest demand is on the marketing rather than trading side of the business.

Traditional derivatives areas, by contrast, are not faring well. Foreign exchange, for example, is a dead asset class, with traders scrambling for work or, as another recruiter put it, dropping off the map and into an abyss. Demand for fixed-income derivatives specialists has fallen as more products become commoditized and are priced much more competitively. There's a faint glimmer of movement on the derivatives marketing and sales side, but none in trading.

The exception: credit derivatives. Structured credit and credit derivatives, in fact, is fast becoming the industry's favorite son. Dealers are eager to hire people who can trade books of structured credit and offer credit derivative products to investors and end users, notes Bouma. "Maybe it's because it's an area of higher margin, everyone wants to be in it, and there are not a lot of individuals who have expertise,” says Bob Olman, president of COR Management Services in New York, "but we've gotten the highest demand for people with credit derivatives experience and the slimmest portfolio talent.” At the same time, says another recruiter, credit derivatives is already where some of the industry's smartest people have gravitated.

Bonus marchers

In spite of hot and cold spots within the job market, recruiters say bonuses this season were higher than their recent average. "The shark's in the water and it's feeding time,” summarizes The Options Group's Randel. "Bonuses are considerably up, people did better than in previous years and the firms announced strong years.” One recruiter reports that Bank of America and Morgan Stanley paid out handsomely last year. Others say even JP Morgan paid relatively well, after five or so years of lackluster performance, while Lehman Brothers and Merrill Lynch bonuses were quite adequate. The word on the Street, however, is that Goldman Sachs had trouble doling out generous bonuses, perhaps because of distraction from its IPO, and lost a number of people dissatisfied with their payouts.

"Anybody with a few years of dedicated derivatives risk management experience is in the cat-bird seat.” —Dirk Bouma Cambridge Management Associates

The good fiscal numbers across the industry have also led to a flurry of aggressive counter-offers. "This gives potential candidates many more options than they had as little as a year ago,” says one recruiter. "The business is turning from a buyer's market into a seller's market.” Another notes that counter-offers haven't been this uniformly strong for five or six years.

Equity Derivatives Compensation Level Annual Base and Bonus Senior salesperson: $750k-$1.5m Mid-range salesperson (3-4 years experience) with client relationships: $300k-$600k Trader (3-4 years experience): $300k-$600k Second-year MBA: $150k-$250k First-year MBA (in corporate finance or investment banking): $100k+

Most firms already compensate senior people with stock options, but some are extending the practice down the ladder to the intermediate rungs. There are still vanishingly few two-year deals or percentage deals, but firms don't bat an eye over buying out bonuses or offering like for like when a candidate's stock isn't fully vested—and on the same vesting schedule. One consequence, says a recruiter, is that "a lot more people are leaving before the end of the year than I've seen in the past.”

Some recruiters, meanwhile, have reported a subtle shift in firms' bonus strategy. "Bonuses were strong last year, and some people received enormous compensation packages—but some people got completely shortchanged,” says Mark Moyer, managing director of the capital markets division at Peak Search in New York. "Firms will send a not-so-subtle message to those individuals they can afford to lose by awarding them minimal bonuses.” In addition, he notes, some of those who were disgruntled are in groups that did extremely well but received bonuses based on their firm's overall business.

A few recruiters say that a lot of the discretionary bonus distribution went to the more junior players. "I think there's probably a general perception today that A. many of the more senior players are going to leave anyway, and B. you probably get more bang for your buck out of the more junior people,” says a senior derivatives headhunter. As elsewhere, it's an issue of marginal value. Put another way, "there were a lot more people disappointed at the higher end in the derivatives world than there were at the lower end on the discretionary side of bonuses,” he says.

One hedge fund client, for instance, was distressed to find that, while it hoped to pick up an interest rate swaps trader with a couple years of experience for $230,000 to $300,000, traders with three years under their belts were expecting half a million dollars. "That's where some of the people who are three layers below the head of the desk did well,” says the recruiter. "The head of the desk probably did well, but on an expectation basis maybe not as well—because as a management initiative the bank wanted to make sure it kept a lot of the younger talent it was growing.” Other recruiters confirm that the inability to hold on to younger talent is an Achilles' heel for many banks, especially as dot-com mania steals under the flaps of finance's big tent.

Watch Out for the ECNS

A senior recruiter who has worked with a number of bulge-bracket firms over the years points to equity derivatives market-making as the hottest area in finance right now. Goldman Sach's $531 million move to buy Hull Group and Knight/Trimark Group's acquisition of Arbitrade blasted the remnants of sand out of the industry's eyes. Other firms, meanwhile, are now trying to duplicate those market-making capabilities on electronic communications networks and other trading platforms in anticipation of the coming electronic revolution. Bank of America reportedly has a big internal initiative in the pipeline, and Deutsche Bank is striding aggressively into the market; others have their own projects or joint ventures going. The result: a feeding frenzy for technical talent and traders who understand the equity derivatives marketplace. Compensation for C and C++ programmers and those who can canoodle comfortably with user interfaces and various communications protocol-type systems is at a premium. And options traders are in good stead since they can hit the front-end screen running. The International Securities Exchange, argues The Options Group's Ken Randel, "is the single best thing that's happened to every floor trader and curb trader who ever wanted to go upstairs and trade for an institution.” The Chicago Board Options Exchange will continue to rule the roost, of course, but he expects a couple of hundred floor traders in Chicago, New York and Philadelphia to jump ship and work for the larger investment banks as primary and regular market-makers on the ISE, which opens for business in May. For investment banks, this is a windfall since they can pick up people whose experience level is proportionally higher than their compensation. "You'll see a good trader with three to four years of experience in an investment bank making $300,000 to $600,000, while a typical junior floor trader makes $100,000 to $400,000,” he says. "So traders are also seeing an opportunity to come to an investment bank and realize a premium and upgrade.” —N.M.

Upgraded workers

Competition in the employment marketplace has also penetrated the back office. Money is up and the market is tighter—especially in trade support for equity and credit derivatives. Base salaries have risen 25 percent to 50 percent over what they were three or four years ago, notes Peak Search's Moyer, and firms have upgraded their requirements to include college degrees, some systems knowledge and more product knowledge from workers. Chase in particular, say a couple recruiters, has made a turnaround in its fixed-income and derivatives support areas by upgrading qualifications and talent.

Although back-office workers are better paid, there are generally fewer of them. It's the same fallout as technology pushes forward elsewhere, standardizing operations along the way, says Daniels, based in La Jolla. "A department that may have had 50 people a few years ago now has 25 who have a more in-depth background in technology,” he says, "and the 25 are getting paid more money but they're also working harder. So Wall Street must pay a lot more money for those individuals than it did in the past—and retaining good talent remains difficult.”

Modelers and Analysts and Quants, Oh My!

In the 1990s, math and physics PhDs and other numerati with quivers full of quantitative talent had an easy time landing jobs on the Street. Over the last couple of years, however, the growth of quantitative jobs has slowed. "It's not quite the boom some of us expected in 1997 and 1998,” says Ken Randel, director and business manager for New York capital markets at The Options Group. "It's a healthy climate and market for quantitative talent in risk management, but not overly strong.” Salaries for quants haven't increased appreciably in the last few years, mainly because banks already have enough people who understand and manage risk. Firms are getting choosier about who they hire and are insisting on more in the way of baseline personality and experience. Consequently, what's liable to lift one quant's boat rather than another's is an understanding of markets and the ability to know where to shine the flashlight when there's a problem on a trading desk. "Without experience it's a tough job market to break into,” says Andy Gogates, president of The Gogates Group Inc., a New York-based executive recruiter. "Years ago you could walk in fresh from the big particle collider in Texas. Today they want people who have done a bit of research, and maybe taken a couple of courses in business.” There's a burgeoning need for quants who can stand between a trading desk and management as well. "There's a need for them to be able to relate to traders on the one hand, and business unit heads on the other,” says Dirk Bouma, managing director at Cambridge Management Associates. "So you need to look for individuals who know how to communicate, how to write a risk report, and who can be presented to senior management. Those are very rare people.” Quant Compensation Level Annual Base and Bonus Senior research positions (5-10 years experience): well north of $500k and into seven figures Mid-range analysts (3-4 years experience): $200k-$500k Junior-level analysts or researchers (one year experience):$100k+ Fledgling researchers: $75k+ Firms also want more programming skills, points out Bob Olman, a 20-year recruiting veteran and president of COR Management Services in New York. Instead of relying on programmers to translate ideas into code, "they want you to implement your own work in a manner that's semi-maintainable, in C or C++.” The quants now in demand: those with proven models, those who can spot anomalies in the markets and know how to take advantage of them, and those with front-line proprietary product knowledge. There's also an unambiguous desire for quants who can get it done, get it out and let the traders use it. "Someone who's been spending an untold number of years on a prepayment or term-structure model will not get paid as much as someone who's close to the desk putting up things on the fly to help with the transactions that makes the firm a lot of money,” notes Olman. Quants already in the field, however, aren't going to find themselves left out in the cold anytime soon. Finance, after all, is a numbers business, and south of Canal Street success is quantifiable—something quants can surely understand. —N.M.