May 3, 2019
Bank shall not conduct prop trading and misuse client data. Buy side shall worry about their data privacy. Sell side can use client data for researching proprietary trading signals. Central risk book used client data for creating alpha trading signal. Many banks central risk desk used to be their prop trading desk. For example,BAMLs CRB desk used to be firms prop trading desk QSA. Majority of people in this desk engaged prop trading before. If bank convert prop desk to central risk book, the danger is these are people who know all about regulation and its circumvention.Such team can muddle from model validation and use sensitive and confidential client data to back test and research principal trading strategies. For example, in some banks low touch child order facilitation they used sensitive client order fill ratio information which can potentially cause front running. central risk desk shall not able to see client order detail in real time. This desk has a high level of visibility of flow data and they trade against this data. Ultimately, the danger is that central risk book will reverse engineer clients' transaction information and use it to trade against them. Needless to say, clients have no idea that this is going on.central risk books in banks are employing many people researching and analyze client data for their own principal alpha trading strategies. Buy side and regulators need to work together to fight against inappropriate use of client data.Central risk desks are supposed to be about risk internalization and as such they shall not conduct principal trading facilitation. Many of such principal facilitation involve misuse of client data and prop trading.