Financial services professionals are moving out of London. So far, however, the exits do not involve a) traders, or b) people forcibly relocated by banks. The two most recent movers are in-house private equity professionals at Goldman Sachs who decided to join a private equity fund in Madrid; Brexit-meltdown it is not. Meanwhile, it's starting to look like traders in London might even benefit from the effects of Britain leaving the EU.
The clue to London traders' potential post-Brexit uplift came in the recent report from consulting firm Oliver Wyman. Oliver Wyman said banks currently employ between 55,000 and 65,000 people across sales and trading jobs in London. It also suggested that trading jobs specifically could be immune to the effects of Brexit, however hard, because banks will be able to book trades in Europe while still using London-based traders (and writers of trading algorithms) to make the actual trading decisions. In Oliver Wyman's words, 'EU entities could transfer positions to a UK entity for risk management purposes; products would still be priced from the UK'.
The lower the pound falls, the more appealing this option becomes.
Traders don't come cheap. Emolument, a real time pay benchmarking provider, says director-level traders in London earn anything from £221k ($269k) to £370k ($450k). Assuming, that there are (at least) 20,000 people employed in trading jobs in London and that they each earn a (comparatively modest) average of £125k ($152k), compensating London-based traders currently costs banks a total of £2.5bn ($31.bn) per annum - even before employment taxes and pension costs.
The lower the pound goes, the cheaper it becomes to pay London traders' wage bills out of dollars and euros. Gavyn Davies, macro economist and former Goldman Sachs partner, is in the Financial Times today pontificating about a potential sterling crisis. HSBC is predicting the pound will fall to $1.1 by the end of 2017. Parity with the dollar is being mooted in some circles. Every little helps: even if the pound 'only' falls to $1.1 by the end of next year, banks could save $900m a year on London traders' wages compared to the amount we estimate they were paying in January 2016.
The pound's weakness suggests a new future for the City of London post-Brexit: as an offshore centre of cheap (when denominated in other currencies) trading and risk talent. - Want to hedge your exposure to Italian government bonds? Go to London. Want someone to design a derivative solution for a German car manufacturer wary of a rising steel price? - Use Frankfurt-based salespeople to land the deal, use London-based traders to structure the product. In this model, London becomes a centre of financial manufacturing and risk-taking expertise, and Europe is all about relationships.
It may not happen, but it makes sense. The London offices of U.S. banks like Goldman Sachs are already heavily skewed towards sales and trading and London's already renowned for its trading expertise. So, why not play to its strengths? Unfortunately, regulators may have a different opinion...
@MadameButcher No way. Having substantial trading decisions made offshore is a world of pain, caused by regulators who, sensibly, want a say
— Darren Sharma (@DarrenFLA) October 17, 2016
Photo credit: Bargains Galore! by Roadsidepictures is licensed under CC BY 2.0.