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Does any trader deserve 30% of his P&L?

Phibro’s Andrew Hall caused something of a stir over the weekend.

According to The Wall Street Journal, Hall is demanding that a contract which last year saw him paid $100m, is upheld again this year – despite the fact that the US government’s about to become the owner of 34% of the bank.

According to the Journal, Hall is currently allowed to take more risk individually than entire teams of traders are allowed to take elsewhere in the Citigroup empire. His contract is also said to entitle him to a massive 30% of any gains.

Roger Ehrenburg of Information Arbitrage reiterates why Hall’s pay arrangements (and those of most traders on Wall Street) are very, very wrong.

“Wall Street traders effectively start at zero P&L each and every year, institutionalizing a short-term mind-set that doesn’t create sustainable equity value for the firm. In short, the Wall Street trader compensation model is badly broken, in large part because of the agency effects of risking hundreds of millions to billions of dollars of “other people’s money” (OPM) with a grossly asymmetric payout function (e.g., shaped like a call option where the trader’s max loss is their base salary, while their max gain is effectively infinite and is a function of gross profits).”

To overcome this, Ehrenburg recommends banks pay traders in the way hedge funds do – namely encouraging traders to invest in their own funds, only allowing them to withdraw small amounts of capital every year, and imposing high water marks for performance over time, below which bonuses can’t be paid.

The real issue, however, is not only that Hall’s being paid for performance on an annualized basis, it’s the fact that he’s getting 30% of any upside with no real exposure to any downside. Very few traders at hedge funds get this kind of percentage nowadays, let alone traders at hedge funds which are underpinned by the US taxpayer.

Comments (9)

Comments
  1. 25% of P&L is something i come across occasionally when tapping traders in NY, even where they’ve been averaging as little as $20m a year.

    So 30% for (impliedly) 10-digit performance seems not unreasonable.

  2. Cue outrage from the Marxist left on how the worker is exploited for the gain of the rent-seeking capitalists and is being denied their fair share of the value created by their labour.

    Oh he’s a trader? Never mind then…

  3. good traders are rare breed . trading is all about how profitable you are . if u are money making machine then u deserve a good cut… the answer lies in you hands .. just open a simple trading account and trade for 1 month and u will go thru what traders go thru every single day!

  4. From what i gather PHIBRO gets NO MORE than 30%, So he has to pay his traders and back office etc as well as himself. MAybe there are clawback agreements already in place – which for such large payouts remove aysymmetry of the “traders option”

  5. Hall is undoubtably a savy trader but its still heads he wins, tails Citi loses

  6. If it was a retention bonus, then he ABSOLUTELY deserves to be paid it.

    If his bank was in trouble, and he chose not to leave, it’s probably solely for the bonus.

    People with very tiny brains seem to think that “bonus” always means “performance bonus”, but this is taking place in the real universe, where you can get paid a bonus for other reasons. too.

    If the criteria of his contract are met, then he gets the bonus. Enforcement of contracts is absolutely essential, even with rampant socialism destroying the economy.

  7. Well, he gets a cut of what he makes I assume, so what is the problem. All moaner out there, try trading yourself for a year then criticise a trader. He is a breadwinner and I am pretty sure risk management has taken care of the possible downside in this economic relationship.

  8. to KAZ

    it is nor socialism not capitalism: in capitalism Citi would have gone down and MR Hall got 0%. The taxpayers (regular joes making 30/40k) were taxed to support citi, they shouldn’t be taxed to support a mega bonus (performance, retention, whatever).
    Heads Hall wins, tail the regular joes lose. It just doesn’t add up….

  9. PS: quite

    if they relabelled Producers’ bonusses “Commission”, clearly distinct from the upper-execs’ parasite suckings, a lot of this drama would go away.

    note that High-Water Mark etc protections should apply, just as in most hedgefunds, which effectively eiminates most of the zero-cost-call-option arguments.

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