Few respectable professions will make you a multi-millionaire by your late 20s. Proprietary trading is an option for the financially ambitious who do not excel at football, aspire to join a pop band or turn to crime. A job on a proprietary desk used to be regarded as the pinnacle of a trading career. While traders buy and sell securities for clients, proprietary traders use hedge fund strategies to make money for their employers. Banks are increasingly reliant on their activities as a profit source and pay handsomely for their efforts.
Of course, hedge funds pay better still. Thanks to a steady flow of seasoned proprietary traders to hedge funds, banks have little choice but to promote junior staff. So proprietary trading desks beckon increasingly early for young traders. Gene Shen, vice-chairman of search firm the Options Group, said the average age of proprietary traders had fallen to 26. "Banks are cultivating bench strength. Junior individuals are brought in to shadow and learn from senior traders in case they leave."
The need to cultivate talent has led to a raft of job advertisements. Huxley Associates, a London-based recruiter, is advertising for a junior proprietary trader with a year's experience to join an equity derivatives desk. Ciaran Healey, the consultancy, said recruitment of junior proprietary traders had increased. "People are typically 26 or 27, with a Master's degree in a financial subject," he said.
Banks are reluctant to talk when it comes to their proprietary trading activities. Goldman Sachs, Credit Suisse First Boston and Deutsche Bank declined to comment on their traders' experience but there can be little doubt that some are given substantial responsibility early on. Paul Donnelly, a proprietary trader at JP Morgan, joined the bank's graduate programme in 2001. Three years later, he was managing up to $250m (€205m) of the bank's risk.
He said: "I was working in sales, when the head of our business asked if I would be interested in working as a junior trader on the prop desk. I jumped at the opportunity." Healey added that success in proprietary trading was not a question of age and experience but of trading strategy.
Davide Taliente, a director at Mercer Oliver Wyman in New York, believes proprietary traders' performance should be monitored in the same way as the performance of fund managers. He said: "Individual proprietary traders are increasingly important for banks. If they leave, they may take a trading strategy and its profits with them." However, the chances of anyone producing a performance ranking of proprietary traders are slim. Even more than hedge fund managers, they lack visibility. Their results are buried in a bank's divisional figures.
Only when things go particularly well, as at Morgan Stanley in the second quarter, or as badly as at the US bank in the third quarter, do proprietary trading desks make themselves felt. Even then, the contribution of individual traders is opaque.
As a result, top proprietary traders are most likely to come to the public's attention when they resign. In the past three months, the exodus to hedge funds has included Christian Siva Jothy, Geoffrey Grant and Dinakar Singh at Goldman Sachs.
Banks are fighting back and top traders have contractual guarantees to receive a share of the profits they make, which can be as much as 20%, according to Shaun Springer, chief executive of Napier Scott, a London recruitment firm.
Meanwhile, banks have ring-fenced profits made by proprietary desks to be shared between them instead of subsidising other less profitable divisions.
Professor Narayan Naik, whose hedge funds course at the London Business School attracts would-be defectors, said hedge funds appeared to offer more money and a better life, unfettered by a large institution. However, he said many proprietary traders did not adapt well to hedge funds because of their lack of experience in dealing with investors, and their inability to solve computer problems in the absence of a bank's extensive technical support team. Anecdotal evidence from headhunters supports this. They said many hedge fund employees were keen to return to banks, which would be well advised to emphasise their advantages. It may be the difference between relying on experienced and inexperienced staff to generate a healthy profit flow.