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Capital

Every year, somewhere between $35 billion and $50 billion in capital is raised via initial public offering of company stock in the United States. According to Renaissance Capital, that accounts for around one hundred and two hundred new ticker symbols a year — not exactly standing still, but not exactly a torrid pace. It is, however, a steady pace. With the exception of the go-go days of the tech bubble in the late 1990s, trading in equities has been considered the sleepy, unimaginative end of the financial services sector. Certainly, it wouldn’t appear there’s a lot of room for investment banking job growth there, whether it’s in IPO advisory services, securities trading or company research.

So why is it that equity options is so hot right now? Then again, who cares why? It’s growing prodigiously, so maybe that suggests a more target-rich environment for finding Wall Street jobs.

According to an industry group called the Options Industry Council, almost 361 million contracts on equities or exchange-traded funds changed hands in October 2013, almost a 24 percent increase over same period the previous year. Even so, the year-to-date growth doesn’t quite break 2 percent.

Therefore does it make sense that, as the Aite Group reports, there were only seven U.S.-based equity option exchanges in 2010 but there are now at least 12? Consider also that volumes dropped — as you’d expect — during the early days of the Great Recession, and then dropped again — this time taking open interest with it — over the course of 2012. Further consider the technical glitches that have always been part and parcel of derivatives trading. Finally, consider the regulatory scrutiny that is currently being directed at Wall Street.  According to Aite senior analyst Howard Tai, the real question is whether or not 12 is enough.

While we puzzle that one out, let’s just roll with one takeaway: they are hiring.

You might want to make an inquiry at any of these young bourses:

As you might suspect, working at these exchanges involves a certain information technology savvy that goes beyond the typical analyst’s SAS and Microsoft Excel capabilities. Still, if you’re looking for an financial services career, maybe it’s time to embrace that the future is now and come to grips with the fact that programming skill is quickly becoming an integral part of the investment banker’s toolkit. That holds true even if you’re applying for positions at such venerable options exchanges as NYSE Euronext, Nasdaq OMX or the Chicago Board Options Exchange.

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With the ongoing decline in investment banking activities worldwide, compensation in the industry is increasingly being tied to tangible financial results. While top performers in terms of commissions and fees generally did receive larger bonuses, the focus on tying compensation directly to bottom line contributions has never been stronger. While in the past those working on initial public offerings or big merger and acquisition deals would likely see the highest incentive payouts; increasingly those in less glamorous roles, such as fixed income trading or syndication are seeing their actual bottom line contributions being rewarded with industry leading bonuses.

Simon Roberts, Managing Director of Recruitment for Sheffield Hawort told Finance Asia, “Banks have begun to realize that it is the less glamorous world of trade finance, securities services and cash management that actually generates the returns and pays for the headcount. We are expecting average total compensation in 2013 for investment bankers to continue the downward trend, though crucial relationship stakeholders in both debt capital markets and M&A are likely to fare marginally better.”

These comments reflect the value that institutions are placing on relationship management in today’s market, where banks are more interested in obtaining a range of client business rather than individual transaction fees. Under this approach, those working in debt origination or corporate finance are increasingly valuable to their institutions.

Corporate Banking Fees Offer Greater Revenue Potential for Institutions

One fundamental reality facing banks today is that fees for ongoing banking services are a much larger source of potential revenues than investment banking transactions. While the margins on a single trade finance transaction might be less than what a firm sees on a major IPO deal, the reality is these daily transactions add up to a lot more top line revenue for financial institutions. And employees that can bring that recurring business to institutions are being rewarded.

Debt Capital Markets Becomes Increasingly Important

One of the few areas of investment banking that has remained resilient over the past several years has been the debt capital market desks. This reflects much of the new reality facing financial institutions: debt capital market transactions are more frequent occurrences, allowing an institution to develop a relationship that generally involves greater ancillary fee revenue. While a firm may only look at underwriters once a decade for an equity transaction, many firms regularly access debt capital markets, some as frequently as monthly. Even more important to financial institutions is that regular debt issuers, such as utilities, infrastructure firms or large industrials, have been some of the most resilient companies overall in the highly volatile economic environment of the last several years. These high quality clients are highly sought after by leading financial institutions and employees that can build relationships with these regular fee generators are increasingly being rewarded.

All of this reflects an ongoing shift from within the banking community. Many firms are reducing or exiting investment banking all together in order to focus on core banking activities. While this does leave more market share for the remaining players, even those companies are increasingly looking to traditional activities to provide a baseline of revenues and cash flow in order to sustain their higher margin, but lower frequency, high profile investment banking operations.

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In what is widely being reported as the most expensive election in U.S. history, with a total of $6 billion being spent over the campaign, Wall Street is among the biggest losers when the election results were announced on November 6th.  After widely endorsing Barack Obama in the 2008 Presidential election, the industry turned to support one of its own, former Bain Capital partner Mitt Romney. After heaping nearly $61 million on Romney’s campaign (the financial services industry donated only $18.7 million to Barack Obama according to Forbes), Wall Street firms donated an additional $94 million to Super Political Action Campaigns (PACs), mostly aligned with Romney.

Employees of Goldman Sachs were among the most generous, donating $900,000 to Romney’s campaign and just $136,000 to Obama. This is perhaps one of the most surprising examples as Goldman had been a traditional supporter of Democrat candidates. Whether investment bankers were concerned about Obama’s policies or wanted to support someone from the Street, their money certainly was behind the Republican candidate.

Wall Street’s Partisanship Was No Surprise in this Election

There should be no real surprise to the partisanship seen on Wall Street during this past election. While the merits of Obama’s actions can certainly be debated politically, there is no doubt that regulation and oversight has dramatically increased on Wall Street since the financial crisis. Many investment bankers viewed Romney as someone with direct experience in the financial industry, and would know what regulations are appropriate and what regulations would simply be an obstruction to investment managers. Whether a Romney administration would have actually meant significantly less regulation is unclear, but the perception on Wall Street can certainly be measured by campaign contributions.

Dodd-Frank was Major Concern of Investment Bankers

One of the key issues facing investment bankers was the imposition of the Dodd-Frank financial reform law. The Act created a number of new federal agencies and related regulations designed to promote financial institution transparency while increasing oversight of systemic risk and speculative trading by financial institutions.

Mitt Romney had proposed to repeal Dodd-Frank, which would have been a welcome gift to investment bankers. However, he did also indicate that he anticipated a role for some greater federal oversight of financial institutions. But how different Romney’s plan was from Dodd-Frank, we’ll never know.

What Do the Election Results Mean for Investment Banking Job Seekers?

The reality is that most of the opportunities in the investment banking sector come from the underlying strength of the global economy. Whether Romney or Obama would have sparked more economic growth in the United States with their respective policies is a matter of political debate. At the margins, relaxing regulations such as Dodd-Frank would like be of some benefit to investment banks and therefore current and prospective employees.

But as the world’s economy becomes more globalized, the role that America alone plays in determining the strength of the investment banking sector has declined somewhat. Trouble in European economies has forced institutions such as UBS to lay off thousands. With the amount of labor mobility these days, those former UBS employees will be competing for American (as well as European and Asian) investment banking jobs. Those seeking employment in the investment banking space should be equally interested in the geopolitical situations in Europe and Asia as they are in the selection of a American President between two relatively competent men.

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