- Buy-side trading firms have poached a slew of star derivatives traders from investment banks.
- The defections, which follow blowout volatility trading hauls in 2020, leave some banks shorthanded.
- Large funds like Citadel and Millennium have recently prioritized building volatility strategies.
- See more stories on Insider’s business page.
“These guys have no clue,” a senior volatility trader at a top Wall Street bank recalled thinking last March, after President Donald Trump announced a travel ban to Europe and erroneously said that trade and cargo would be blocked — causing global markets to convulse.
For weeks the trader, and others on equity derivatives desks across Wall Street, had watched the public-health calamity unfolding in Wuhan, China, with alarm. As they purchased options to put on protection trades that pay off in rare cases of intense volatility, most of the rest of the world trudged on, complacently assuming the virus wouldn’t rear its head in the US and Europe.
The S&P 500 cruised to an all-time high in mid-February, but Covid-19 was already in the US, quietly but swiftly spreading.
“When I saw what was going on in Asia, I thought it was inevitable it would happen here,” the trader told Insider last year.
On Thursday, March 12, the day after Trump’s ham-handed speech, an already jittery market started ringing the alarm bells. The CBOE Volatility Index spiked nearly 22 points, or 40% — the largest single-day increase ever. That record only held till Monday. The day after a surprise rate cut from the Federal Reserve, with a national emergency in effect and the spectre of a full-blown global pandemic short-circuiting the economy, the VIX surged 25 points, or 43%, while the S&P 500 dropped a staggering 12%.
The volatility traders who’d feared such an outcome and positioned their books accordingly saw massive windfalls. As Wall Street circuit breakers triggered over and over again, individual bank desks were reaping nine-figure trading days.
“By far, the craziest market in history,” a head derivatives trader at a big bank told Insider on March 19, several days before the stock market hit its nadir last year.
A full year later, the derivatives traders that thrived during 2020’s once-in-a-decade market shock have become some of the hottest commodities on the street. But unlike recent years, where Wall Street banks snatched senior talent from each other, marquee hedge funds like Balyasny, Citadel, and Millennium are plundering the rosters at Bank of America, Citigroup, and Goldman Sachs as they deploy their massive hordes of capital and chase riches with expanding volatility strategies of their own.
Volatility hasn’t died down in 2021, with frenzied trading in January around GameStop and other meme stocks causing market gyrations and helping banks once again produce robust equities results — Citi, JPMorgan, Goldman, and Morgan Stanley each lauded equity derivatives performance in first-quarter earnings calls.
Whether volatility remains elevated or fades away like it did after the financial crisis remains a question mark, but the talent war has left some sell-side firms shorthanded. Firms that haven’t suffered defections are primed to grab market share — if the talent war doesn’t reach their doorstep in the coming months as well.
Banner years
Traders often reevaluate their options and make moves after stellar performance, when they can leverage their elevated market value for more money, responsibility, or a more prestigious firm.
There was no shortage of strong performance at investment banks last year — the $194 billion in revenues across the largest firm was the highest mark in a decade, with substantial gains across dealmaking and sales and trading, according to Coalition. But derivatives traders generated strong results not just in March but throughout the year.
The last time bank equity derivatives desks were raided en masse was 2018, when the VIX unexpectedly lurched to life in early February — producing the largest single-day spike on record to that point — after sitting idle the previous year. Traders who believed volatility would rebound from record lows reaped enormous gains, and many exchanged their chips for new roles.
But back then, it was primarily other banks poaching from each other — hedge funds weren’t involved in the talent war in a meaningful way.
“Usually it’s just sell-side musical chairs,” one veteran volatility trader told Insider. “This is making things more interesting as the buy-side is scooping up so many people,” leaving fewer senior traders at the banks.
For many traders who wager on volatility, 2020 was a career year, far eclipsing 2018 or any other year in recent memory.
“First and foremost, last year a lot of these derivatives desks, specifically the vol teams, had very good years,” Dyllan Beck, a partner at search firm Carrington Fox with expertise in recruiting equity derivatives traders, told Insider. “You’re talking 100% to 200% markups compared to previous years.”
Barclays, for example, recorded a $250 million trading day in March, aided by its volatility desk. The global derivatives team at JPMorgan generated $1.1 billion in a little over a month — on par with what it made in all of 2019 — after the market began to swoon, Insider previously reported.
But it wasn’t just the initial sell-off and volatility surge that boosted derivatives teams — volatility remained elevated throughout the year, with an average VIX closing level of 29.25, nearly double the average of the previous five years and the highest mark since 2009.
Meanwhile, options trading in aggregate scorched its way to new records. The Options Clearing Corporation cleared an all-time high 7 billion equity options contracts in 2020, up 59% from 2019.
Equity derivatives revenues doubled in the fourth quarter compared with 2019, and for the year equity derivatives volumes at the 12 largest banks reached their highest mark in a decade, according to industry data firm Coalition.
While overall heightened trading activity contributed to the boon, the revenue uptick wasn’t simply expert market making and execution for clients. Traders who positioned their books with specific views that paid off when volatility struck demonstrated trading chops and instinct that hedge funds naturally prize.
“The years where you have these outsized P&Ls, you’re always going to get the demand,” a sell-side equities exec told Insider.
With a banner year in the books, volatility traders were well positioned to cash in — and this time around, deep-pocketed hedge funds were ready to pounce.
After blowout performance, a string of departures
At least eight senior sell-side traders have resigned in recent months, with seven going to the buy-side.
Traders told Insider the bids from the buy-side were considerably higher than previous years — no surprise given the blowout performance in 2020 — with one trader noting offers from hedge funds were twice as rich as previous years.
Citadel, the $35 billion hedge fund managed by Ken Griffin, has been one of the most aggressive hirers, bidding on several marquee traders, sources told Insider.
The fund poached both Daniel Baranovsky, Citigroup’s head of equity derivatives in North America, and David Kim, the head of equity client solutions at Bank of America and the firm’s most senior derivatives trader.
Those banks suffered other losses, too. Brevan Howard is said to have hired Seok Yoon Jeong, a managing director who joined Citi in 2018 as Americas head of flow volatility trading but was layered last year when Citi hired Mark Chen. A director and an associate in derivatives trading left Citi for Millennium and Citadel, respectively.
BofA meanwhile lost Mitchell Story, their No. 2 volatility trader, to Goldman Sachs — one of the few bank-to-bank moves reported thus far.
But Goldman suffered defections of its own. Travis Potter, one of the most coveted sell-side volatility traders according to industry insiders, left for Balyasny, Insider previously reported.
A rising star named Moran Forman, who was promoted to MD in 2017 and ran a team of seven equity index derivatives traders, resigned this month with a cryptic email, according to eFinancialCareers. Insiders said she will be joining Rokos Capital, the hedge fund run by former Brevan Howard cofounder Chris Rokos.
Her departure followed Goldman hiring Story in a more senior role, sources told Insider, and she was passed over for Goldman’s 2020 partner class this fall. A Goldman Sachs spokesperson declined to comment.
Goldman lost two other junior equity derivatives traders to BlueCrest and Jane Street.
Barclays lost Aaron Katzman, an MD in single-stock derivatives trading, to Jane Street, Insider previously reported, while Michael Hosana joined Millennium as a PM this spring.
Hedge fund hiring spree
Few buy-side firms came in to 2020 in better position to make a splash than multi-strategy funds, which collectively had fewer outflows and higher returns during the turbulent pandemic trading year than the rest of the hedge fund industry, led by strong performance at Millennium, Citadel, Balyasny, and Brevan Howard.
While equity volatility isn’t new to these funds, some have made concerted efforts to build out these strategies in recent years amid an overall uptick in hiring.
With tens of billions in capital to put to work, they’re constantly looking to add new traders, and their investors, especially pension funds, have increasingly clamored for uncorrelated strategies that provide exposure beyond the traditional equity and fixed-income markets, according to Don Steinbrugge, CEO of hedge fund consulting and marketing firm Agecroft Partners.
“These multi-strats are looking for managers often that add diversification to the portfolio and are focusing on markets that are somewhat inefficient,” Steinbrugge told Insider. “Trading volatility is a separate asset class that isn’t correlated with the equity or fixed-income markets.”
Citadel has more than tripled the number of portfolio managers in its global credit division since hiring Pablo Salame to lead it in October 2019. One of the first orders of business for the long-time Goldman partner and trading executive was hiring an old colleague — David Casner, also a former Goldman partner, who oversaw US equity volatility trading and co-headed global equity flow derivatives trading at the bank.
Casner started last June, tasked by Salame with running the fund’s convertible arbitrage strategy as well as building out an equity derivatives strategy.
Millennium branched into equity volatility in recent years amid a broader diversification effort, and it’s become a core strategy within its equity arbitrage group, according to sources familiar with the matter. Izzy Englander’s $49 billion fund grew to 265 investment teams in 2020 — the most in its history — amid a flurry of new hires.
The fund last month hired Paul Russo, who has a background in derivatives and served as the chief operating officer of equities at Goldman Sachs until 2018, to run risk in its equities strategies, the Financial Times reported.
Balyasny, the $9 billion fund run by Dmitry Balyasny, has been on a hiring spree the past year as well, bringing aboard 40 new money managers and nearly 100 analysts in 2020, according to a January report from Bloomberg.
Jane Street, the proprietary market-maker that dominates options and ETF trading, has also actively hired in recent years amid explosive growth. The firm traded $17 trillion worth of securities last year, according to the Financial Times.
“We are constructive on volatility strategies right now,” Kevin Lyons, senior investment manager at Aberdeen Standard Investments, told Insider, noting the explosion in options volume over the past two years. “We think there are going to be high levels of economic dispersion and it will provide a good opportunity across regions and asset classes.”
The caveat, Lyons added, is whether volatility will grind lower, as it did in the years following the 2008 economic collapse.
“Can the strategy be sustained? I think that’s to be determined,” Lyons said.
Depleted banks
While multi-strats are hoovering up traders, some investment banks have been left shorthanded. As one senior bank derivatives trader put it, there are lots of open seats and “not a lot of seasoned traders.”
Some may fill the gaps by promoting from within, but “at some point they probably do have to start looking externally for solutions,” Carrington Fox’s Beck said.
But the hedge funds, notorious for firing as quickly as they hire if performance isn’t up to snuff, could leak talent back to the sell-side.
Mitch Story, Goldman’s recent hire from BofA, for instance left JPMorgan for Citadel in 2018 but lasted less than a year at the hedge fund.
“Those places tend to churn pretty high at the end of the day,” the sell-side equities exec said. “If volatility settles in and the VIX goes down to 16 again, all of a sudden there’s not as much opportunity.”
Some banks are positioned to capitalize on their competitors’ misfortune and steal more business.
JPMorgan, the top derivatives trading firm last year, and Morgan Stanley, a consistent power player, haven’t suffered notable losses the way their competitors have — at least not yet.
While the sell-side’s ranks have been somewhat depleted, there are still talented volatility traders. Some will be promoted internally and given an opportunity to shine.
“It’s a cycle,” a veteran sell-side volatility trader said. “Then the next wave of standouts will rise up with the opportunity.”
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