DNB: Market makers to curb bonuses
Market maker bonuses under fire of the financial authorities – in effect over results over 2010. Bonus capped, stretched over three years and partly in non-cash items such as shares.
After several rounds of nice chit chat and popcorn moments reading the Quote 500 list and the who’s earning/losing what amount in which currency discussions – here’s a serious topic again. Everybody will remember the trouble with the housing bubble related financing stuff which have brought down scores of banks. Broad subject, in depth analysis elsewhere.
The thing is the Dutch national bank (DNB) and other European regulators intends to solve the perceived problem of bankers taking too much risk in search for a higher bonus reward. Betting the firm by bankers for a bigger boat with Christmas is called the moral hazard – and politicians and regulators will try to curb this behaviour.
Back to our plain vanilla, low leverage, listed option market making business. The DNB intentions can be found on their boring website, and the market makers weren’t really warned for the third document (pdf – Dutch). It basically says all measures for limiting speculation by bankers and hedge funds apply to all firms with a cash market maker license as well. Heard through the grapevine ; the market makers were surprised to read this, and had just one week to file their objections.
It isn’t a long term story beyond your horizon though- the new regulations will come into effect January 1st, 2011. That’s pretty soon. And here comes the part which may catch your attention if you’re expecting a bonus for trading in 2010 : bonuses for your trading result will already feel the pain from the new regulation. This new guidelines will even overrule your current contract with your employer. Paying a smaller bonus, would sound like a dream for some management teams – but their own bonuses will be harmed as well. Furthermore, it also says the shares of the company should be given as bonus to the traders.
The highlights of the proposed regulation:
- risk managers can’t receive a bonus linked to the results of the trading department they supervise (okay, makes sense)
- bonusses should be linked to the results of the trader, the department and the total firm and cannot be derived from the P&L alone anymore
- at least 50% of the bonus will have to be payed out in non-cash items, such as shares.
- at least 40% of the bonus will have to be payed out after at least three years, and pay out is conditionally.
- the above percentage of postponement of bonuses will be 60% when “very high” bonuses are involved
- any bonus, including the conditional part, will be retained if company isn’t doing well
- traders are not allowed to hedge themselves for the exposure of the bonus in shares
- regulation overrules individual contracts, so all contracts need to be renegotiated
- everything is applicable to foreign divisions too, including off shore accounts
- the ratio between fixed salary and bonus cannot be very high. For many traders their bonus will be capped at one years basic salary
As mentioned before, only the firms with a license to be a market maker in the cash market (stocks) will be affected. These firms are for example Optiver, IMC, Flow, Tibra, Liquid and All Options. Under Mifid I the smaller market makers in the options business have an exemption in this regulation by the DNB and AFM. However, next year they will be forced to comply with the bonus regulation as well as MIFID II will start somewhere in 2012 under which they will lose their exemption. As it looks now, also the leverage they can use might be impacted as they will be subjected to the same capital regulations as banks, but that’s another topic for another day.
Liquidity providers didn’t create any trouble last time I checked. Maybe some firms widened their quotes in the long term options, and others simply went bankrupt or had to cut staff. Nothing in systemic risk over here. In 2009 there was an agreement the market makers wouldn’t be hit with new regulations. Nobody knows what happened, but rumor has it the hedge fund industry has pushed government to take action against the market makers too. Hedge funds see market makers as unfair competition.
Question remains whether the measures will really be this as though as they seem now. Can’t imagine that, but it’s only a few weeks till Christmas. Time is running out, and management at the big market maker firms will try hard to avoid this nightmare scenario. At least the payment in shares will be first on their list to fight. Time will tell. In the mean time, I’ve put up for sale my Sinterklaas presents on eBay.
Looks like no more speedboats for dowson and his crew
What is this market maker license in the cash market for? Act as a Designated Sponsorship
for rather illiquid stocks and/or for Market Making in ETFs/ETCs? Or do the new rules apply to any member of Euronext?
The license rule applies to every firm that on a regular and systematic basis publishes bids & offers in financial instruments either on or off exchange. LP / DS is an indication for this criterium but it is not a one-to-one relationship. Under MIFID I options don’t count as financial instruments, that’s why option market makers are exempt. Under MIFID II options will be financial instruments as well, leading to all you guys needing to have a license. Besides that all firms doing proprietary trading on a full time, structural, and continuous basis will be required to have a license.
Since nobody is making any money right now, this won’t hurt anyone. It will only lead to higher base-salaries, which we all love 🙂
its Christmas, not Christmass
is that effective from 1st of jan 2011 for MM?
yes it is, and it also applies to your 2010 bonus.
“It basically says all measures for limiting speculation by bankers and hedge funds apply to all firms with a cash market maker license as well.”
Based on what part of the document do we assume that this applies to all firms with a cash market maker license? Please quote.
waar preceis in het document staat dat optiehuizen er ook onder vallen?
artikel 1b
1″b. financiële onderneming: een beleggingsonderneming, betaalinstelling, clearinginstelling, entiteit voor risico-acceptatie, kredietinstelling, premiepensioeninstelling, verzekeraar of bijkantoor als bedoeld in artikel 3:17, eerste en derde lid, 3:22, 3:23, 3:24a, 3:24b, 3:26 of 3:27 van de Wft en een beheerder van een instelling voor collectieve belegging in effecten;”
Which of these includes “firms with a cash market maker license”?
Indeed. There new rules and procedures are not accountable for market makers.
Another reason to stop being a market maker. No money and narrow spreads. The smart guys left the business after 2008, abandoning the sinking ships as many call it
Jack is not just guessing here. Ask your boss..
I dont think the smart guys left.
There is still possibility to earn a lot. It all had to do with the low volatility. When it gets higher like last week, the spreads become larger and more money is made. MM’s find ways to construct new bonus structures. No problem.
I believe that the upcoming years of market making can be very profitable.
Lets vote.
I say that MM is not dead and that the upcoming years can be high profit years.
Say yes or no to this opinion and explain!
Looks like a high dividend coming up on those new to issue shares 🙂
A broader shareholder structure will imply that more traders gain the right to open their mouths in this forum and voice their opinions, having made the transition from employees to stakeholders and enterpreneurs.
it is going to be busy on the Olympus….
Isn’t this just management propaganda to curb all the mm bonusses he has to pay out otherwise?
I still haven’t seen proof that these rules apply to market makers..
All the guys working for MM firms in London were exempt from the bonus tax which hit all the bankers last year. This sounds like a similar set-up. But I agreed with the last comment – what bonuses (or is it boni)?
I guess some private banks will have some fun if half their employees demand shares from the owner. Looks like the government finally succumbs to full blown open socialism after doing this in hiding for some years now.
Forced collectivisation. Uncle Joe would love it! Was very successful in the old SU.
I guess you are better off working for a market maker in Australia / Asia Pacific or something… lower taxes…. higher bonusses and nicer weather too!
if this new ruling has an effect on bonuses, i wonder how international firms such as tibra/imc and optiver treat traders located in different offices? surely this bonus restriction wont apply in asia and the US? these traders would be quite angry if their bonuses were effected. already optiver aust traders are subjected to delayed bonuses compared to their US/Dutch peers. also they are subjected to longer non competes. aust traders receive their bonus in july/dec ( half each) compared to april for US/Dutch traders
thank you for your concern. If you would like to donate to my bonus fund I take paypal deposits and bank wires.
i saw in the document that these new bonus rules also apply to foreign offices. So they will apply to Asia and the US.
Great that DNB finally found the culprits and has the attention turned away from the real problems. Mainly caused by dickheads like Wellink. What a wanker, like all the people working at DNB.
@ 8.25 They don’t apply to Optiver’s US and Australian operations, for example, because these entities are not regulated by DNB, unlike some of their Amsterdam operations. The rules do extend to the Swiss operations of IMC Trading, whose parent company in Holland is regulated by DNB. Etcetera.
@ 9:43. article 24 states that they expect the top holding, if regulated by DNB, to impose these rules on all foreign subsidiaries including off-shore entities (read non-EU countries, including US and Australian). Although they have no jurisdiction over Oz and US, they will penalize the holding if the Oz and US subsidiaries don’t comply with these regulations. If Optiver US & OZ are not majority owned by Optiver NL this could be a different story, maybe that’s what you mean?
@ 9.54 Optiver Holding (“Optiver NL” as you put it) is not regulated by DNB (only Optiver v.o.f. is) – it wouldn’t make any sense for the Holding to be regulated, it does not engage in trading activities itself. As such, it is unlikely DNB can extend its reach to Optiver US / Asia [which are legally separated from Optiver v.o.f.]
@10.19.
When optiver Holding is not regulate by DNB, can they regulate it for the office in Amsterdam?
But moreover the market makers have no option. They need to pay the money to the employees any way. Otherwise they can better leave the country. Because talent wont go working for the lower bonuses. A possible thing to do for MM’s is:
When employee A would have earned 200.000 bonus in year 1. He just gets the bonus as extra salary in year 2. Simple as that. Is he failing in year 2. He just gets his old salary in year 3.
Problem solved?
Whether a holding has any activities doesn’t matter to the regulator. The regulator looks to the highest entity in the chain, and that entity is the one that is regulated. And from there they go down again, and all those entities are regulated as well. I don’t know exactly how Optiver is structured so maybe since you seem to know more you can tell us how exactly?
yes, that’s the v.o.f. that holds the MM license
obviously, since DNB always have been on top of the game, it will be absolutely impossible to circumvent these new rules
/sarcasm
@10.31 Optiver Holding does not appear in DNB’s register of regulated firms, only Optiver v.o.f. If Kaemingk holds his Optiver shares in Kaemingk Beheer B.V., do you really believe DNB regulates that as well?
@10.30 It’s difficult (for the employer) to reduce a salary. The trader will go on to earn 200k a year regardless of his future performance.
Who thinks the rules can be made less strict by complaining?
@11.12 the consultation process clearly demonstrates that DNB could not care less about the industry’s opinion. Good luck with your complaining.
Congratulations Europe. Your bloated welfare states are closing in on the last vestiges of free market capitalism. It’s time to surrender to Big Brother, rollover, and be a compliant little serf.
You thought you were free to negotiate the terms of a contract between two willing parties to the exclusion of other randoms? Wrong. The State has something to say about that.
Your overlords own the fruit of your labor and will only allow you to keep as much as they see fit.
In the meantime the ECB is making the Banking Oligarchs whole by reimbursing them on the toxic Irish paper they shouldn’t have been buying in the first place.
Atlas is fucking shrugging.
So many ways around it. Quite easy to pay a bonus pool to some specially set up company somewhere offshore. That company pays out a dividend, on which nyou pay a normal tax. A lot more creative things are possible.
When introducing tax on employeeoptions. Some companies quickly introduced stockoptions which you legally received before the rule applied, but practically each year. Heineken, VDM and I believe Royal Dutch did this.
Many ways around it. But illegal to do so in any way by the proposition.
article 23 is what @1:22 means
Market makers in Nederland opereren onschuldig en zonder veel risico. Laten we ze straffen voor het feit dat ze met een paar honderd man een paar honderd miljoen euro de Nederlandse economie in pompen. Omdat ze de kruimels oprapen op de internationale markten.
Ik weet niet wat ze precies doen, maar het lijkt me sterk dat ze goed presteren in deze tijden.
Anders gaan ze toch lekker in London werken. Wat boeit ons dat we onze internationaal leidende positie verliezen.
It does not matter if they are allowed to pay US/Asian employees bigger bonuses, they simply won’t because it would destabilize the company. However they are quite happy to give the aust/Asian office a raw deal on other matters such as leave entitlements and bonus payment timings. A Dutch employee can wait until April and leave when the money hits his bank account. An aust employee must wait until December which means he has worked a whole year for no bonus. He also has a one year non compete to wait out after that. I am glad I took a job elsewhere
@11.35.
Yes they are performing quite good these days!
Anyone know what the christmas gifts of the different clearings will be this year?
You have to pick up the KBC present yourself, they are either so broke that they have to save delivery cost or its just to big to deliver…
Free trading for a year!
energy trading not included 🙂
who knows who all the people are that are being fired from all options? must be more than 250 they have fired already if not more
Maybe I am the only one here who does not work in the financial sector but I think this is a great proposal.
Don’t get me wrong, I am pro bonus. People should get paid more if they do a good job. But lets face it, getting bonusses for work that will only stand up for a year or two after which they completely collapse is in my opinion NOT worthy of receiving bonusses.
I am no insider so I don’t know if these rules should apply for market makers, etc. All I know is people should get bonusses if they really earn it. Maybe you don’t see it. Maybe you get a blind spot if you work in the finiancial sector. In my view, the financial sector has a LOT to make up for.
To all you trainee pansies out there, you need to get a life and some dimitrification …. I bet all your tough bosses have allready done it !!
http://www.dimitrithelover.com/animation/worship.htm
Any truth to the rumour that Liquid dropped 2 million in Novartis today thanks to the doctor?
i highly doubt it, its only a 7% move. and i heard they dont even market make those stocks, just run long dispersion
@ 1:26
Rubbish. Liquid make markets in CH Equity options on Eurex (as well as DE, NL, ES, IT, FR and FI). I don’t think they are the only one suffering today according to some of the brokers I’ve spoken to. A couple of them are paying the price for the dec OTMs they sold last week.
That serves those gamblers right. The risk managers and company owners certainly applaud their traders’ trading accumen.
2 million on a 7% move is ridiculous, find it hard to believe that…if it is the case then the concept of risk management is patently non existent
7% move??? If that’s all it was, that’s crazy???
What about downside risk on a profit warning or if there was a takeover bid, nice job boys.
Don’t takeover bids usually result in nice upside? Unless it is Allard making the bid…
i believe it, doktor Neumann must have been on holidays and the trainee must have put the prices ( and dividend) in line with the market resulting in a 2 million loss
zo herkenbaar…ehh recognizable
so, is anyone making money this expiration?
me not
I heard that Liquid made 2 million on the move as they were massive long the shares and it went up , thats as easy as I can explain it to delta 1 guy who spread the opposite rumours.
Das ist sehr gut Novartis rocks, more money for Liquid, Sing Alleulia
that’s nice…
but who’s the pathetic little shit that puts in all the @0.01 offers in all the OTM calls and puts??
nice way to make a living!
@ 4.55 duh but the loss on the options was greater than what they made on the deltas. stop spreading rumours will ya
@ “but who’s the pathetic little shit that puts in all the @0.01 offers in all the OTM calls and puts?? nice way to make a living!”
Lot of rich retired MM;s in the market playing with their own money.
herr doktor wasn’t on holiday he was worrying about the quality of the bananas to much to care!
Take all the offers out then. Nice to see the haircuts explode with the next move…..
Selling options for as cheap a price as possible is a great idea. Options that far out will never become in the money, so just sell them, and in a few days even if it starts to move up, then you will be able to buy nearer strikes for the same money anyway. Win Win situation.
I like OTM options @0.01. You will never find a cheaper lottery ticket.
Stanley back in town ?
Selling options is the only way anyone ever made money in the market, as long as you get your money out before the blow up and the bank/taxpayers are left with the bill………
after u sold those options, u need to mtm, of course u can mismark ur book on huge positions, but people in general are very well aware of this now .. so unless there is edge or mismarking, selling options doesnt bring ur pnl up ..
do u work for bank or maybe van der moolen in past .. surviving mm would no the difference in above ..
[…] or not the new bonus regulations will apply to market makers as well – news expected […]
no it shouldnt apply to market makers .. technically .. not sure what populist govt is capable of
[…] trading watchdog AFM, the national bank DNB and all other sorts of (semi) government. Recently in focus was the proposed limitations in handing out bonuses to employees – talks are still ongoing. […]