Mostly… fixed income and cross product eTrading

November 2, 2007

Innovation and Incentivisation

Filed under: 2015, etrading, Nuts and Bolts — holky @ 3:18 pm

The firms that will survive and prosper will not be those that adopt the latest technology – the survivors will be the firms that make the organisational change to utilise new technology in the right way.  

Focussing on etrading – yes of course there will be a continued uptake as the world gets their OMS/EMS in place and connectivity evolves, but big, bold, fundamental changes in sellside offering will only come when that firm makes the organisational change to correctly support the offering.   Now I’m not talking about tech support here,  I’m actually talking about overall organisational support to make the offering work from a business perspective. How doo you ensure your firm consistently and thoroughly supports their electronic offering?  – the first thing to get right is the sales credit.

1. Sales credit for salesguys

In current form the institutional salesforce may (or may not … depends where you work) be rewarded with a sales credit for their clients’ electronic trades.   With a sales credit generally expressed in money terms, even though we all know that money amount does not reflect the value in the trade, especially as margin is ever-shrinking in electronic trades, should the salesguy sitting on a gazillion quids worth of sales credits by year end get a whopper of a bonus based on that?    The answer of course is that they may indeed deserve to get that whopper, but it needs to be because of the work they have done to secure that business, in the context of the work everyone else has done to secure that business, in the context of the value of the business to the firm. 

  • Example 1; If the salesguy doesnt ever talk to the e clients, doesnt ever need to cajole or convince them to execute a particular trade, and indeed the only trades the client does are simple trades in flow products, pretty much to the level that you’d expect for the year, then why is the salesguy rewarded in any way for those trades?  
  • Example 2; If the salesguy has been out on the road all year executing a sales strategy to get N of the firms’ target clients signed up and using the platform, then a measurement of the number of clients doing even simple trades in euro benchmarks really should be significant in terms of their incentivisation.

The tough thing is the value to be attributed … so for these examples, what’s the value of that 10m client buy of euro benchmark back in April?   Don’t forget to add to the calculation the fact that the trader had to quote choice price at the time to win the RFQ , and as the price on their next hedge was a bit higher they ended up in terms of flash out of the money for that trade.  Oh, also adjust the value because the IT department is going to put in a charge for team of 20/200/2000?? supporting that part of “the business” in terms of development, tech-support, connectivity, licence fees, and so on, and the ops guys have costs coming out of their ears to process all of this. On the other hand, the guys dealing with this client in the primary markets have a splendid relationship with them and the client clearly appreciates the choice price on their admittedly boring secondary market stuff, and from a bank perspective the only reason they run a secondary market desk in this product is to support the originators.   Hooray – lets say the quants crunch some numbers and we reach some form of value for this.  So how should that compare to the sales credit on an electronic trade in a 15 year credit? 

2. Sales credit for all !

In this article about some banks’ recently adjusted compensation plans we can see that UBS say they are looking at rewarding support staff for the capture of efficiency gains (“we will enforce discipline in the way we manage costs, allowing us to direct our investment spending where it makes the greatest difference for our clients and investors. To do this, we will change the incentive structure within UBS to reward people who deliver efficiency gains as well as people who deliver increased revenues.”).

There really are many banks who struggle to align the interests of the different divisions in delivering a strategy to make the bank money – I often hear that the technology and or operations divisions dont seem to understand that without the business, there is no business for them to support.  So by delivering on the sentiment of the UBS words above you should develop a shared interest in making sure the business is done.. 

All of this boils down to (a) having a strategy regarding what business you want to get in the door, (b) having plans in place to get that business in, and (c) incentivising everyone involved in executing those plans to ‘go get em tiger’. Of course to fully incentivise there also has to be an element of personal risk.  Therefore if you do something (or dont do something you should) and the business doesnt get done as a result, you get a negative sales credit.  So the worst case for your bonus isnt necessarily a doughnut … but isn’t that the point of the capital markets;  the return you get for the risk you take?




  1. Banks paid full sales credits at the advent of e-trading. They had to, sales people would have never promoted the business (many are still reluctant to do so). Also, the buy-side feared the loss of coverage and less price discovery if they latched on to e-trading without a give-back to their salespeople. But how things have changed in the last 5-8yrs.

    No one gets paid if traders are not making money. Let the desk take a loss in e-trading if there’s a mandate to be hyper aggressive in rates so voice sales people can cross-sell other high margin products sold over the phone and exceed the difference. Merrill did this through LMS in the mid ’90s, DB with tsrys/agcys in early ’00s, Barclays more recently, all to great success. How is this e-rates business rewarded as part of a broader sales campaign? Take a Pimco or a Tudor or an Ellington that only trade on the best price; is any bank measuring the loss in e-trading rates with these firms versus the profit in trading higher margin products over the phone? I don’t think so.

    Your example #1, section 1, above: increasingly, clients don’t need another opinion on rates and are happy not speaking to salespeople. But the desks see client flow and can adjust their books accordingly. IR swap e-trading is picking up but is in the very low single digits of the daily total. Smart traders are putting steepeners or flatteners on voice trades after seeing flows on Tradeweb or elsewhere. This business is almost impossible to tie back to e-trading, let alone to a specific sales person, whether voice or e.

    Incentivization is made more complex through e-trading, not less. Measuring and applying sales credits and rewards to voice sales, e-sales and support groups will become more subjective than ever as much of the profit in e-trading, and the overall P&L on the desk, cannot be summarized by a number on a spreadsheet.

    Comment by Boast-er — November 2, 2007 @ 6:55 pm

  2. FOX 2! Right on TARGET!

    I agree on all the points made in this post regarding etrading in relation to the sales credit.

    One missing aspect of the post/argument(s):
    Traders using etrading to trade as well. In markets where there is FI electronic trading at major dealers its all click to trade. Most do not use any type of EMS to trade interbank/interdealer. In markets where there is no electronic IDB, traders are not even asking when there will be etrading via IDB or via IDB API. This must change. Management must see this void and get on it ASAP.

    Only then will there be the trader who wants to work with an esalesperson to get anywhere.

    Notably DB and its traders seem to have caught on to these notions for the last few years, but it did take a while to catch on…

    Regarding “measurement” I have one thing to say…Risk management must require the ability to separate PL and identify the precise profitability of each etrade just as it does with voice flow trading.

    Comment by lacidar — November 4, 2007 @ 4:17 pm

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