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Derivatives

Equity Stumbles As M&A, IPO Markets Idle

The U.S. equity derivatives market was particularly hard hit in 2001 as initial public offerings and mergers and acquisitions slowed to a trickle. The lack of business translated into about a 30% decline from 2000 in the average notional size of trades and forced firms to look toward cutting costs. With the decline also came a focus on high-net-worth investors who were looking to hedge losses from the fall in underlying stock prices through innovative products, such as Banc of America's PEACS product, which allows investors saddled by the restrictions of insider trading rules to capitalize on stock sales in a volatile market. PEACS gave investors, such as those who sit on the board of directors at corporations, a chance to lock in a price of their shares and avoid downswings in the market, said Christopher Innes, managing director and global head of equity financial product sales at BofA in New York.

As a result of the slowed business, the market began to change in 2001, as heavy-hitters, who would see their annual compensation dwindle by nearly 50% took their exit either voluntarily or with a little help from their firms. One of the biggest people shocks of the year came in late September, when the tenured Salomon Smith Barney duo of Charles Miller, head of U.S. institutional sales, and Ken Farrar, global head of equity derivatives institutional sales, left amid a reorganization of the firm's U.S. equity sales team (DW, 9/23, 10/7).

As the big hitters left the stage, hiring continued in the equity derivatives market despite the downturn in the cash markets. Firms such as Credit Suisse First Boston and Deutsche Bank brought in new sales and trading professionals (DW, 10/14). Even at CFSB, where reports of staff cuts circulated almost daily during the later half of 2001, firm officials said that although their equity derivatives hiring plans had been somewhat watered down, they still were looking to hire several professionals and shuffle internal staffers as part of an ongoing expansion into the U.S. market. The build up was prompted by the firm's decision to form a close link between its equity market team, investment banking and equity derivatives group. "Our goal is to make a one-stop shop for clients," a CSFB official said (DW, 10/7).

It was that close connection to the cash markets in 2001, however, that industry professionals blamed for the slash in bonuses in equity derivatives groups at U.S. bulge bracket firms. Equity derivatives traders and marketers, who just a year earlier received bonuses that were 20-33% higher than 1999's lofty levels (DW, 11/13/00), saw their bonuses cut by 20-50% as investment banks looked to cover loses incurred by a plummeting stock market (DW, 10/7).

But the setbacks seemed to do little to the market's allure, especially for foreign boutiques that missed the high times of 2000 and were looking to get in by the late months of 2001. These includedCDC Ixis and Toronto-based BMO Nesbit Burns (DW, 10/21, 11/18).

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