fx sales & trading compensation

Try this on for size, it's long but worth the read. From Jan 2001.
Sent to me by someone at Refco.


The Slow Death of the FX Salesman
FX salespeople are busy looking for an exit strategy as clients go electronic and spreads collapse. Banks, meanwhile, are still searching for superstar rainmakers. Does anybody have a real game plan?

By Barclay T. Leib

When new technology first started eating up jobs at foreign exchange voice brokers like Garban Intercapital and Cantor Fitzgerald, it didn’t take long for foreign exchange salespeople at dealer firms to figure out that they were next on the menu. The foreign exchange world—a huge, geographically disperse but ultimately simple two-way market that depends mostly on the speed of execution—was a natural to go electronic.

And today, electronic systems—most notably the Electronic Broking Services platform—dominate the interbank foreign exchange markets. EBS itself now captures more than 90 percent of the daily interbank trading volume. Traditional voice brokers in cash are all but dead.

Add the Internet age, and the pressure only gets worse. A dizzying array of new foreign exchange trading platforms, such as FXall.com, Atriax.com, Currenex and CFOWeb.com, promise that they’ll soon allow clients to do everything from research to execution on the web, leaving little room for the humans to work. Meanwhile, bid/offer spreads are shrinking quicker than a waif model for Calvin Klein.

The official line from the banks, even as they go electronic, is that there’s still an important role for salespeople to play. Good salespeople are still essential to cement client dealing relationships, they say. What salespeople might lose in spread revenue, moreover, can be made up by revenue from greater volume and sales of structured products. Banks even say that electronic trading is a good thing for the salesfolks. The more sales and trades done electronically, the more time salespeople have to analyze markets and cook up profitable, sophisticated hedging strategies. It also means they have more time to prospect for new clients, which should be great news for the salespeople. Who wants to be stuck in the office with five telephones on two ears when you could be out wining and dining?

But does anyone really believe that? Do the banks have a truly cogent game plan to sort all this out? At the very least, what new qualities must salespeople now possess to hold down a job?

Given that foreign exchange is ahead of other capital markets in its use of electronic price delivery, the answer to these questions could set the tone for the future of all Wall Street salespeople. So listen carefully.

I can see clearly now

First, it is important to put things in perspective. What exactly are the facts for foreign sales staffs?

“I can’t tell you how often I get a phone call from some foreign exchange person asking, ‘What do I do? Where do I go? How do I reinvent myself?’ ”
—Elaine de Flores
Flores International


Fact one: The recent spate of bank mega-mergers means that fewer banks are trading foreign exchange. Moreover, big banks seem to be getting bigger and more powerful in this area, while the small ones are slowly falling by the wayside. Banks like KBC Deutscheland, Daiwa and Nikko have all closed their spot foreign exchange trading in London; SG-Cowen New York has laid off part of its corporate sales force; and DG Bank recently shut down foreign exchange trading in New York. At the same time, after aggressively recruiting new salespeople in 1999, Deutsche Bank has stolen market share even from the likes of UBS Warburg and JP Morgan. The latter institutions reported lower foreign exchange volumes and profitability during the year, and specifically cited foreign exchange as an overall drag on their corporate profitability. JP Morgan will soon be folded into Chase; and a nascent foreign exchange effort at Donaldson Lufkin & Jenrette will soon be absorbed into Credit Suisse First Boston. According to headhunters, resumes from both Morgan and DLJ have already hit the street. In short, the number of bank players is down, and bank foreign exchange volumes have been static to slightly lower in the year 2000.

Fact two: Since the introduction of the euro last year, there are fewer currencies to trade. In the words of Adam Sorab, a former London-based foreign exchange salesman at CSFB, “The Rubix cube of currency risk management has been reduced to a much simpler match-the-shape type puzzle. With no more lira, peseta or other fringe-European currencies to worry about, risk management has generally become simpler.” Without fringe currencies to worry about and trade, many previously spreadable opportunities for the banks have also flown out the window.

Fact three: There are fewer customers. Large macro hedge fund managers and commercial speculators have, for a variety of reasons, stopped trading the way they used to. This may have more to do with losses in other macro bets gone awry—in equity markets and elsewhere—as opposed to problems within the foreign exchange market itself. But for whatever reason, it is making the business a tougher one for salespeople.

According to one London-based salesperson, “The foreign exchange market used to have three prongs to it: the hedge funds, the commercial speculative community and the commercial hedging community. Now, with the demise of Tiger Management and the downsizing of George Soros’ Quantum Fund, some of the biggest clients have simply disappeared. Speculative commercial accounts such as French corporates Batif, Aerospatiale and Thompson have also largely stopped trading in the aggressive style of yesteryear.” This still leaves the commercial hedgers with simple trade-flow repatriation, but foreign exchange in general is now a much lonelier and thinner market.

“The only recent players with any step-up in activity are the banks doing one-off hedging for large M&A activities and global equity managers rebalancing their portfolios and currency exposures,” says this salesman. “If you don’t see those flows, you’re dead. Almost everyone else is gone.” He’s particularly incensed because the year 2000 has brought some good-sized moves in the market. “We’ve gone from 117 to 85 in the euro. Deutsche mark-yen for us old-timers has fallen off the charts to 46.70! But nobody cares. The hedge fund community is not around. It’s mind-boggling.”

“No one calls out to do spot business anymore. With the new platforms, one guy can watch more currencies at the same time.”
—Kenny Blonder
Integrated Management Resources


Fact four: Salary and bonus levels are stagnant. “Gone are the days of the mega-deal with big guaranteed bonuses,” says Elaine de Flores, president of the recruiting firm de Flores International in Stamford, Conn. “Some guarantees are still given, but it’s not like the old days. You really have to produce—put your money where your mouth is—to get paid.”

De Flores’ thoughts are echoed by foreign exchange recruiting specialist Kenny Blonder, senior vice president of Integrated Management Resources in Tempe, Ariz. “Salary levels have been flat,” he says. “The highest paid salesperson might make $150,000 tops as a base salary these days.”

 

Count your blessings

So what’s the good news? Well, salespeople may be surviving better than some traders are. Blonder says that in the last two years, he’s placed strategists, economists, quantitative people and a few salespeople, but he hasn’t been able to place a single currency trader during that time. “E-commerce and the EBS may be even tougher on the traders than the salespeople,” says Blonder. “No one calls out to do spot business anymore. Volume is just done on the machine. With the new platforms, one guy can watch more currencies at the same time. You don’t need hoards of trading staff.”

Having said that, there are still two factors keeping demand for salespeople firm for now. First, according to de Flores, banks still want a few “rainmakers” who bring a book of clients with them when changing firms. “All recruiters are looking for the same person,” she says. “He or she must have a loyal customer base that is transferable and must be well-versed in derivatives and other markets as well as foreign exchange. The interview process has also grown lengthier and fussier. Banks want to see more people. So while there’s still a demand, it’s not easy to close a deal.”

The second factor is, ironically, excessive and premature pessimism over the future of the business. A New York foreign exchange salesperson notes that “Because the death bells of this business were rung so loudly and so early, no fresh new blood has come into foreign exchange for three or four years, maybe longer.”

Unfortunately, he does not think this will help over the long term. “I don’t think we’re all going to die, but I think we will be in a reduced-salary, advisory role,” he says. “I certainly can’t promise to bring anyone a given amount of turnover and profitability anymore. The business no longer works that way.”

Looking for the path out

Given all of the above, what is the average foreign exchange salesperson or trader supposed to do?

The threadbare spreads are prompting a lot of people to contemplate switching careers. “Up to two years ago, I could make $6 million in spread revenue for my institution in a good year,” says one salesman at a U.K.-based bank. “This year, I’ll be lucky to make $2 million. That’s still enough to keep my job, but I’m working harder now to take home far less money. If something better came along, I’d take it.”

De Flores confirms that this is the overall attitude. “I can’t tell you how often I get a phone call from some foreign exchange person asking, ‘What do I do? Where do I go? How do I reinvent myself?’” she says. “Women in particular are getting out of the business in droves—taking the attitude that it is not worth it to come in day after day chasing the same small group of customers. I don’t mean to sound sexist at all, but they are leaving the industry either to go home and take care of the kids or do something completely different—sometimes in business-to-business commerce. There’s really a dearth of women in the industry now. Men, unfortunately, don’t quite have that luxury of just packing it in. More often, they are forced to at least try sticking it out.”

De Flores specifically says that many traders, quant-types and structurers inquire about the buy- or equity-side of the business. ”They’d be there in a heartbeat if I had more of these positions,” says de Flores.

But while business may be getting more difficult at the margin, people are still holding onto their jobs for now, mainly because now may be the worst time to jump ship to another firm. “As always, it’s easier to fill a position going up the chain than down,” says Blonder. “People are always happy to step up to a Chase, Citi or Goldman, as opposed to moving down to a smaller bank. But those making the step-up know that if they don’t perform once they get there, they risk not having a seat anywhere at all.”

Where to go?

To survive within the industry itself, a foreign exchange salesperson today needs to know more than how to spread spot and forward foreign exchange trades. What’s required is a strategic ability to transact orders in a variety of markets, and to solve problems for clients using derivatives. “Three-way option deals are still going to require the human touch for quite awhile to come,” says one recruiter who is still bullish on the prospects for quality people within foreign currency sales.

Salespeople not capable of reinventing themselves also might find a niche selling the very technology that threatens them. “We may end up with two distinct groups of salespeople,” muses Craig Puffenberger, managing director in charge of foreign exchange trading at CSFB. “One handling complex trades and advisory functions, while the other just services the portal.”

In the meantime, to those thinking of leaving the business altogether, Ian Dow, president of Dow Consultants in New York, advises, “You’re going to have to reinvent yourself a bit, re-train, maybe take a pay cut.”

According to Blonder, “There are jobs in e-commerce, tech companies and foreign exchange trading software vendors, and I have made a few placements there. The only problem is that while many of these companies pay a competitive salary, they usually don’t come close on a bonus basis.”

Notwithstanding that caveat, electronic trading platform Currenex has recently lured several first-class veteran salespeople to its offices, hiring both Keith Hill from JP Morgan’s London office and Kendra Wisler, formerly of UBS Warburg. Perhaps stock options did the trick.

Others have found positions on the buy-side. Laura Munisteri, a veteran foreign exchange trader, options specialist and salesperson, formerly of Deutsche Bank’s Frankfurt office, joined the United Nations Common Fund in 1997 before moving in 1998 to join the global corporate treasury area at Philips AG.

Others have headed into consulting. One individual with a strong foreign exchange and treasury background decided in 1997 that the time had come to hang up his sell-side boots. He started out as a senior consultant at a Big Five accounting firm and says he’s never regretted the switch. “To make any real money as a consultant, you have to become a partner,” he says. “And even though I did not have the credentials to come in at that level back then, I’m much closer to that objective now. I’ve taken my capital-markets expertise and been able to apply it to a whole slew of new businesses—these days largely in the dot-com world.”

Others have gone into the regulatory agencies. Ernest Eckersdorf, who spent most of a seven-year career at Citibank running corporate foreign exchange sales, and then played a similar role at Societe Generale for eight years, now acts as a supervising risk management specialist for the New York State Banking Department. “I get to see a wide cross-section of institutions from the top down,” he says. “It is actually quite enlightening, and professionally it’s extremely satisfying. There is simply no comparison between what I do now and the single low-margin product that foreign exchange has become.”

Meanwhile, Sorab, formerly of Credit Suisse foreign exchange sales, leapt at an opportunity in 1996 (when Credit Suisse and CS First Boston merged their foreign exchange efforts) to shift his focus. He moved into the hedge fund marketing and investor relations group of CSFB’s leveraged funds group. Four years later, he is happy he did that. Sorab is soon to become a director of European sales at Deutsche Asset Management’s absolute returns group in London. “I still have a great many friends in foreign exchange, and many of them are looking to get out—if they can,” he says.

“We may end up with two distinct groups of salespeople. One handling complex trades and advisory functions, while the other just services the portal.”
—Craig Puffenberger
CSFB


Lastly, we find Christina Engelchor, formerly a 10-year ABN Amro foreign exchange salesperson, now happily at home in Nagele, The Netherlands, with her four-year old son, Cees. “I enjoyed what I was doing for a long time,” says Engelchor. “But then the technology started getting better and the clients more astute. Foreign exchange became too competitive. Money-making opportunities were declining, just as my personal priorities were changing. Being a woman working in Europe within a male-oriented business also wasn’t always particularly easy. Sometimes I felt like I was the only female member of a European football team.”

So there you have it. The impending death of the foreign exchange salesman was predicted by some as early as 1996, and has been acknowledged by more and more since then. Some banking models are less threatening (see “Wells Fargo Takes a Novel Approach,” Page 7), and a good salesperson who can also act as a strategist and derivatives expert will likely survive. But the very nature of e-commerce puts the pressure on the bottom line—and as that pressure builds, look for the sales community to change almost as much as the voice broking community has. While banks are loathe to admit it, shedding expensive foreign exchange sales staff and excess traders may be the only way they can survive and profit as e-trading truly begins to burgeon.

“Everyone has access to EBS now, even if they are not supposed to,” says a European salesman. “The banks are doing themselves a major disservice by providing such transparency. If this continues, within two years all flow transaction will go from a company’s corporate headquarters directly into an electronic system, bypassing salesman. The only exception will be very large-sized trades and structured options-oriented trading.”

“It’s obvious—we’re not necessary anymore,” agrees a Chicago-based salesperson as cheerily as she can.