Trading and Analytics

Why Commodity traders are heading to the trading houses

In the last 18 months, nearly all top tier banks in NY have lost at least a few of their senior commodity traders, as the flood of talent out of the major financial institutions continues unabated.

A significant issue for the banks in 2016, many hoped the tides would turn this year, but the exodus continues and has the potential to have a real impact on the trading landscape.

There are two principal reasons why talented commodities traders are leaving the banks: regulations, and pay. The increased regulations that the banks have been subject to in the wake of the financial crisis have significantly clipped the wings of the most entrepreneurial traders, who no longer have the flexibility they once did. The impact of the Dodd-Frank Act, and specifically within it the Volcker Rule, passed by the Obama administration in 2010 has been to change the face of commodity trading as we once knew it.

Banks vs Commodity Trading Houses

The Volcker Rule restricts US banks from making certain kinds of speculative investments that do not benefit their customers and places increased restrictions on proprietary trading. This has left many commodities traders sitting on their hands, or certainly not enjoying the liberty that they once had, and suddenly the trading houses and hedge funds look like much more attractive and exciting places to work.

But while the ‘push’ factors away from the banks are perhaps obvious, how have the merchants managed to ‘pull’ this talent in? The answer lies in the large physical activity that they have taking place, which commodities traders are able to leverage. These houses typically also have much more infrastructure in place to support their traders, and offer stronger platforms to trade on.

Commodity Trading Houses Bonuses

The clincher, however, and what we have seen change in the last 18 months, is the bigger bonuses now on offer. The pay differential that used to work in favor of the banks has been whittled away. Today, the larger financial institutions pay well – perhaps up to a discretionary 10% of a trader’s P&L – but between a third to half of that pay is going to be deferred. The larger merchants can typically pay more of the salary in cash, and it is often based on an agreed upon percentage of book rather than being completely discretionary. As for the hedge funds, they’ve always been able to make a compelling argument on the compensation side generally with a clear cut percentage of book.

There is no sign of the banks changing their compensation structures, and so the trading houses continue to successfully build out their talent. But a word of caution – trading houses hiring from banks need to be mindful that the P&L being generated by a candidate is largely proprietary rather than flow. If a candidate’s book is too orientated towards flow, they will struggle to continue generating revenues in a new environment, not least because the trading shops and funds do not have the flow business to replicate what a trader might have been used to in a bank.


Both hedge funds and merchants are proving highly attractive destinations for bank-based commodity traders, and we see no signs of that changing. Unless President Trump makes good on his plans to overturn the Dodd-Frank Act, or the banks significantly reform their compensation structures, it looks like we are witnessing a wholesale shift in the way the commodity trading market operates.

For analysis and advice on renumeration and retention for trading talent across your organisation, please get in touch.