Thread regarding JPMorgan Chase & Co. layoffs

Maybe it’s time for bank to bring back prop trading ? Volcker 2.0 encourage bank to aggregate risk to speculatively doing principal alpha trading? Even better, as long as you call yourself “risk management”, risk trading won’t be blamed for terrible P&L

Citi downsize central risk recently

Volcker today

Those benign orders and premium flow (example: retail flow) now goes to central risk book. Clients no longer have access to them because of central risk book

Central risk book is stealing P&L from other desks.

At this point, it’s hard to say if central risk book is a necessity in sell side. It’s hard to measure its overall contribution to firm’s revenue and efficiency. Not just that, DB’s failure suggest it may bring catastrophic disaster when it becomes too large. Its risk is much higher than its benefit. Central risk book, especially in US, is hard to prove its value if not useless at all. Central risk book doesn’t create value but try to cherry pick all benign orders to its book.

Is there any precedence of successful CRB!

Bank management should learn a lesson from DB’s failure, that is risk trading is a hype.

In US, risk trading doesn’t add additional liquidity for clients, it’s more like bank’s bet on Volcker . Once Volcker lift, it can become a prop desk.

Central risk book doesn’t increase revenue, it is really just reallocation of profit. Risk trading makes money from other desk.

Did you read this Bloomberg article?

Deutsche Bank Said to Lose Money on Risk-Management Trade

U.S. equity central risk book said hurt by algo performance

Book size once topped $2 billion; trader moved to other role

But DB’s not the worst. The bigger issue is central risk book,given its prop trading legacy,may hurt benefit of clients. Many central risk book were converted from its prop trading desk. For example, BAML’s CRB desk was its prop trading desk QSA.This team is poorly managed. Most of bank’s central risk book lost more than 20% YTD. The benefit of CRB is marginal. Yet the reputation damage it created is significant. Central risk book team is lazy. No new models or major model update since 2015. Current model come with many flaws,including some severe issues like principal orders took place while customers gave open orders in the same name (potentially front running) .It also misrepresenting natural liquidity when sending IOIs. Issues in CRB’s existing model caused significant info leakage for clients. Not only trading and quant strategies aren’t profitable,it is not entirely legal.Central risk book’s many activities are in grey area. CRB’s trading system isn’t robust neither. Client order info is widely visible in CRB including some data they suppose to secure safely.

Buy side and regulators need to work together fight sell side misconduct in central risk book. Many of sell side central risk books are secretly doing prop trading. For example, BAML’s central risk book was its prop trading desk QSA. Many people in this desk were prop trading professionals.These are people who know all about regulation and its circumvention. Even worse, client flow data is not safe in central risk book. In some sell side firm,central risk book has real-time visibility of client order details. Trade execution data stored in relation to IOIs may also be used for finding alpha to trade against client. As the nexus of client activity, the desks have a high level of visibility across the market. Some firm’s central risk book team is larger than any of its competitors, which is suspicious. This team talks about alpha trading everyday. They argue that they need the data for purely quant analytical purposes (maybe in a "strategy group"). Desk head instructed team to use client data to backtest and develop alpha trading strategies. Some of central risk book’s action is fraudulent. For example,sell side central risk book misrepresent “natural” liquidity when sending out IOI and it increased info leakage for customer. In low touch child order facilitation, some firm’s central risk book used sensitive and confidential client order fill level percentage done information as alpha signal without any disclosure to client. Clients have no idea that this is going on. With client order data, CRB team found several trading signals to cherry picking client orders in low touch facilitation. CRB’s hedging activities caused CRB frequently trade ahead of customers.The so called “hedge” often cause principal orders took place while customers gave open orders in the same name. Because central risk desks are automated trading teams, it's possible for them to analyze the client data they have access to and to incorporate the signals they find there into their trading models. Trader and the large “quant trading strategists” team found a new way to trading using client data by tweak alpha parameters they found from client data. CRB in sell side often advertised client can access premium liquidity like retail flow or internal derivatives hedging flow. However, clients used to have access through firm’s ATS with better price. Sell side central risk book shall not deprive customers. It's time both buy side and regulator wake up to the dangers. For the sake of stability and transparency in financial markets, central risk books need to be very heavily regulated. Central risk desks are supposed to be about risk internalization and monitoring and as such they don't need so many traders and trading "strategists". The more traders and "strategists" they employ, the greater the likelihood that these desks will simply become a foil for prop trading and the inappropriate use of client data.

Deutsche Bank Said to Lose Money on Risk-Management Trades

-U.S. equity central risk book said hurt by algo performance

-Book size once topped $2 billion; trader moved to other role

https://www.bloomberg.com/amp/news/articles/2018-11-21/deutsche-bank-said-to-lose-money-on-trades-meant-to-improve-risk