Average incentive compensation for traders at banks, hedge funds, utilities and trading companies has slumped on both sides of the Atlantic since the 2008 financial meltdown. Speculative trades that can generate large profits have been limited under the so-called Volcker Rule in the U.S. and other regulations.
Yet some believe another heyday for traders may be around the corner. Commodity recruiters surveyed by Bloomberg News say a lighter approach to regulation by U.S. President Donald Trump’s administration could usher in a new era in energy and commodity markets by unshackling traders looking for bigger risks and bigger paychecks.
“People are looking to 2017 for hope,” said Jason Kennedy, chief executive officer of the Kennedy Group in London, which hires for banks and hedge funds. “With Trump coming on board, possible deregulation, including removing the Volcker rule, everyone’s got their hopes pinned on this.”
Bonuses in Europe are due this month. Average incentive compensation for a European power or gas trader is forecast to be about 275,000 euros ($292,000) for last year, according to the average estimate of five recruiters in the survey. That’s less than in 2015 and a third of the level before the financial crisis.
Things are slightly better in the U.S., where traders anticipating the largest buildup of natural gas-fired generating capacity in at least a dozen years are focusing more on short-term buying and selling. Payouts for power traders in the U.S. rose about 5 percent with a median bonus of $472,500 last year, according to Dallas-based recruitment firm Kaye Bassman International Corp.
A move toward less regulated U.S. trading floors would be a strong reversal from the past half decade, but probably wouldn’t have immediate global effects, according to Peter Henry, a New York-based managing director for HW Anderson Ltd. Employers of regional traders, such as those working in German power, predominantly look at local conditions when tabulating paychecks, he said.
Banks alone have already spent about $36 billion since 2010 complying with rules aiming to prevent a second worldwide financial meltdown, meaning no one is reversing course immediately, he said.
Even so, Kennedy said traders are hoping Trump will make his mark, especially on those working with global commodities. For example, if a Houston-based bank suddenly finds itself free of salary and bonus caps, or rules requiring it keep large amounts of capital on hand in case of a crisis, it may ratchet up pay packages to lure the best traders.
That, in turn, pressures banks, funds and trading houses from London to Singapore, also competing for talent, to boost their remuneration to stay competitive, said Kennedy.
“To me a lighter touch on regulation and those type of positions, it could lead to bigger, faster growth,” HW Anderson’s Henry said by phone. “It is definitely going to be a swing back toward more of a boom and bust model.”
Trump has said Obama-era rules like the Dodd-Frank overhaul from 2010 are “a disaster” and he will “do a big number” on them. Killing Dodd-Frank may end the Volcker rule, which restricts banks with taxpayer-backed deposits from making “proprietary” trades, or ones done with the bank’s own money. Trump signed two directives in February aimed at starting the process of rolling back financial restrictions.
Dodd-Frank limited trading in over-the-counter commodity swaps as well as exchange-traded futures. Tougher regulation, also including the European Market Infrastructure Regulation, is among the main reasons many banks left Europe’s power and gas markets. It also hastened a shift toward trading on exchanges, rather than over-the-counter, according to Danish utility Dong Energy A/S.
There are still those raking in pay similar to what was on offer to the best and brightest before the financial crisis. In 2016, a top European power or gas trader at a trading firm or hedge fund may have taken home as much as 4 million euros ($4.2 million) in bonus pay, according to the top estimate in the survey of recruiters.
What would have impacted last year’s bonus the most in Europe is the surge in power and gas prices at the end of 2016 due to cold weather and how traders handled the price swings, according to Shaun Smart, a client partner at Commodity Appointments Ltd. in London.
U.K. gas prices surged 62 percent last year after sliding 33 percent and 28 percent in the previous two years on ICE Futures Europe in London.
Volatility on the benchmark was almost the highest level in five years in September. The spike was mainly caused by an unexpected shutdown at Centrica Plc’s Rough, the largest storage facility in Britain.
“2016 was another very tough year for EU energy trading,” said Douglas Ferguson, managing director for Kariba Pte Ltd. in Singapore. “Although there was a lot of volatility in U.K. gas, most traders got hammered by the unexpected shutdown of Rough.”