Institutional buy-side traders could see a drop in compensation and bonuses in 2018 as trading desk budgets instead pivot towards investments in technology, according to a new research report.
Greenwich Associates found that with budgets expected to remain relatively flat at $17.3 billion this year, buy-side firms are planning to spend less on trader remuneration in favour of technology outlays.
Asset managers spent nearly 70% of trading desk budgets on compensation and 30% on technology in 2015, but by 2017 the allocation had changed to 60% on compensation and 40% of technology.
The research found the trend is more prominent on bond trading desks with compensation spending between 2015 and 2017 falling from 70% to 59%, compared to equities counterparts where it dropped from 70% to 64%.
Kevin McPartland, head of Greenwich Associates market structure and technology research, and co-author of the report, said that while the shift is a secular trend it is, in part, due to the effects of MiFID II’s research and transparency requirements which came into effect on 3 January this year.
With the introduction of the new regulatory regime containing a high degree of technology-related oversight, the report stated that post-MiFID II more money will continue to be allocated to technology at the expense of trader bonus pools.
Speaking to The TRADE, McPartland highlighted that varied trading skill sets will become more important as the trend continues, although it is unlikely that headcounts on buy-side trading desks will decrease.
“We do not expect to see trading desks shrink, but instead to see a continued shift in the skill sets of successful traders,” he said. “Those that understand data, analytics and the value they bring to the trading process will ultimately come out ahead.”
Fixed income boost
Greenwich found that the average reported trading desk budget increased 0.52% year-on-year in fixed income, but decreased 1.57% in equities.
Over the past few years equity desks have cut costs to balance the low volatile environment, while fixed income desks have boosted spending in talent and enhancements to technology systems and infrastructures as electronic bond trading continues to grow in popularity and efficacy.
Market data terminals such as those provided by Bloomberg continue to be the largest technological cost for trading desks, shortly followed by order management systems (OMS). Combined, both services make up half of the buy-side technology budget in 2018, according to the research.
Tools including transaction cost analysis (TCA) and risk/portfolio analytics have seen a greater allocation of budgets since 2015, and as MiFID II makes a global footprint, that surge is expected to continue.
The research concluded head traders at asset management firms will be able to justify the changes to budgets by increasing the value they bring to underlying funds.
“Until very recently, most asset managers viewed their trading desks as a cost centre,” Brad Tingley, institutional analyst and co-author of the report, concluded. “Today, they are seen as profit centres, due to their ability to create an advantage over competitors with better execution.”