Let’s talk about how securities folk get paid at big banks. First, a toy example of  trading with the client:

Jack the salesperson convinces the client to do a trade with the bank. Jack the salesperson asks Jane the trader for a price. Jane the trader hems and haws for a bit, before quoting a price. Jack the salesperson then goes back to the client, who likes the price and says “Done”. The client is duly appreciative of Jack’s client service and the trading desk’s favorable price. In the future, the client will be favorable towards doing more business with the bank. Rinse and repeat, and you’ve got yourself a franchise business.

There’s a few pieces that gets baked into the price that Jane the trader quotes. Jane the trader starts with her conception of “mid,” the market value of that trade. She adds a premium dependent on her risk management strategy for that trade. If it’s a very volatile piece of risk she doesn’t feel comfortable holding onto, she’ll charge a larger premium to offset her hedging cost. Other times, she’ll want that piece of risk on her books (we say she’s “axed”) and might be willing to that trade with a very small or even no premium.

In addition to the risk management strategy, the price quoted is also client dependent. The bank may want to grow business with certain clients. Clients are often tiered in such a way that targeted clients get better prices to encourage them to do more trades with you. Jane the trader may be willing to make less on this trade if there’s more coming in the future. Additionally, Jane may have a view on how “well behaved” is the client. Best prices do not go to clients that routinely “pick off” Jane’s analyst or puts Jane into risk that always moves against her. From Jane’s experience she knows which clients are poorly behaved for which she has to charge defensively to avoid losing money. For trades that have multiple recurring payments or have longer terms, counterparty credit risk also comes into play. Clients may have different credit worthiness, and the bank needs to control counterparty risk exposure of any one client. A particularly risky client that already has many recurring trades on with Jane may be charged a credit risk premium because the bank needs to price in the client defaulting.

Jane must also price in a kickback to Jack the salesperson. For every trade that Jack the salesperson brings in, he receives a “sales credit.” Think of this as a commission rewarding Jack the salesperson that gets backed into the price that Jane the trader quotes for the client. This commission is usually proportional to the size of the trade, so Jack is incentivized to do as many trades as possible.

Now we have all the pieces to understand how sales and trading gets paid at a bank. Jack the salesperson gets paid on a commission basis by adding up all the sales credits he has accrued. Jane the trader gets paid for her risk management and market making ability.