It's on. As cannily predicted by J.P. Morgan back in January, 2016 is proving to be the year of the macro trader. The lean years are over. All hail Trump, and Brexit, and the Bank of Japan.
In a report out today, research firm Coalition predicts a 9% increase in fixed income currencies and commodities (FICC) revenues this year. By comparison, Coalition predicts that equities revenues will fall by 15% and that IBD revenues will fall by 10%.
While you clearly don't want to work in cash equities, equity derivatives, ECM and (probably) M&A now, Coalition's figures suggest you absolutely do want to work in G10 rates. This is where the action is.
Coalition's predictions for fixed income revenues, 2016
But if rates trading is on fire, why is it that the senior rates traders and salespeople let go by Credit Suisse in May are still out of the market? Headhunters point to three things: capital costs, automation, and juniorization. Thanks to this unhappy trio, the spurt in rates revenues is unlikely to generate a comparable spurt in hiring.
As reflected in the famous Credit Suisse bubble charts, rates businesses are capital hungry - this is why Credit Suisse has pulled back from macro trading under Tidjane Thiam. Notional values are to blame: "The notionals are large for rates trades so the balance sheet side is expensive," says one senior rates salesman. "The same is true on the derivative side: the notionals are so large that the nominal credit charges start to add up quickly in an uncleared world."
For this reason alone, banks are unlikely to rush to build up rates desks. And, in any case - they have no need to add human beings - it's mostly done automatically now.
As the chart here from the Bank of International Settlements shows, around 70% of standardized rates swaps were traded electronically in 2013, up from 20% in 2012. Three years later, it's safe to assume that almost all of the flow rates business is automated. The big U.S. flow traders (Goldman, Citi and J.P. Morgan) have need of excellent electronic execution systems, not excellent human beings.
Which leads to the last factor: juniorization. Those director-level Credit Suisse salespeople and traders are all highly capable, according to headhunters. It's just that in the new automated world, they're surplus to requirements.
"The way banks organize their macro trading businesses has totally changed," says one rates headhunter in London. "All they need now are some mid-level people to manage the flows and call people across products when necessary, plus a tiny handful of senior people to call top clients. The world has altered - banks just don't need the volume of people they used to."
In fixed income trading, revenues have therefore been decoupled from headcount. As James Gorman wryly observed in October, Morgan Stanley is now making strong FICC revenues with 25% fewer staff.
The upshot is an increase in productivity. As the chart below, from Coalition shows, productivity per head in FICC is now back to 2012 levels. Machines and mid-level staff are the future. Higher pay to reflect the higher productivity is not a thing.
If you want to ride the rates resurgence, you'll therefore need to be an excellent associate or VP who can work on automated systems and do a bit of 'voice' (actually call clients) when required. Alternatively, you'll need to be incredibly senior with some strong client relationships. Some banks are hiring: BNP Paribas is building its U.S. rates business and Deutsche Bank made a few rates hires in London earlier this year. On the whole, however, most headhunters say the action is on the buy-side and in smaller banks like Mizuho and Mitsubishi as they try to scale up to take advantage of the new opportunity.
Even if hiring does happen, you'll have to wait. “We’d expect banks to target hiring post bonus announcements and Q1 end – and to prioritize sales rather than trading headcount,” says Kumaran Surenthirathas, MD of Rosehill Search in London.
Productivity per head in banking, 2012-2016
Photo credit: Quick! by Andy Cross is licensed under CC BY 2.0.