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Is this the best trading job in a bank? Or the worst?

Central risk desk

If you’re looking an exciting trading job in an investment bank, one where you actually get to take proprietary risk with a bank’s own balance sheet, where you’ll deploy some of the most complex algorithmic trading techniques, you might want to try the central risk desk. Then again, you might not. Central risk jobs can be good, or they can be awful.

Central risk desks first came to our attention in 2016, when banks like HSBC were busy building out their central risk functions. Banks like Barclays are still building in central risk now – Asita Anche, the former Goldman quant trader who joined Barclays last June, has been tasked with risk centralization, and is recruiting. Good luck to her: people working in central risk say roles can be very hard to fill because no two central risk desks are the same.

“The central risk desk, or central risk book is an extremely vague concept,” says the global head of central risk at one major bank. “When we look to hire and examine what’s going on at other banks, it’s become apparent that every bank treats central risk completely differently.”

As the places that (in theory) centralize the execution of trades for the whole bank, and offset the aggregated risks with hedging, central risk desks are always highly quantitative. They can also be highly powerful: most banks employ brilliant quantitative traders to devise central risk trading algorithms. Some banks, however, then reduce those quant traders to the role of mere administrators.

“Central risk is the only place now where you can really get to manage risk with the bank’s own capital,” says a senior central risk trader at one leading U.S. bank. “It can be a really great place to work – you can be the quantitative engine that drives the pricing and hedging power across the bank. But first you have to get through the politics.”

Central risks desks evolved along with program trading. As banks traded large portfolios of stocks together, they needed a way to price and hedge those trades in aggregate. From there, central risk moved into placing and hedging trades associated with exchange traded fund and delta one products. It’s now being integrated into banks’ systematic trading offerings (as at Barclays) and ultimately is expected to over both derivatives and cash trades. “There are only a few banks now that are sophisticated enough to be centralizing derivatives risk,” says the central risk head, “but this is the way that it’s going.”

Central risk is political, because as its purview expands other trading desks see it as treading on their turf. “There’s natural push-back,” says the global head. “We’re asking traders to give their flow to one central book, where technology does 80% of 90% or 100% of the work and of course they don’t want to give up that freedom.”

One central risk trader says the main point of dispute is pricing power: “If you just take the inflows that come from clients and put those into a bucket and manage them, it’s a halfway house. You need pricing power over the flows you get in the first place. If you can get that mandate, you’re in a pretty powerful position. If you can’t you’re just a utility function and all the innovation dies.”

That’s not all though. Central risk desks also charge other desks for their services. “If you’re a profit centre and you’re charging other desks for making money, they don’t like it,” says one central risk trader. “It’s game theory – I’m not making money, so neither can you.”

For both these reasons, some central risk desks aren’t seen as sources of P&L and are viewed as little more than utilities employing teams of programmers. Insiders say this is one reason why senior central risk professionals have left for hedge funds over the past year.  “Some people just see us an algo execution team who are complaining that we’re not getting a lot of admiration,” says the global head. He adds, however, that central risk desks’ time has come. They have been raised up by MiFID II.

Under MiFID II, banks are queuing up to become “systematic internalisers” which execute orders for clients outside regulated markets. As such, they do a lot more than just agency trade (matching buyers and sellers), but buy and hold for periods of time, however, short. This introduces them to execution risk, and with execution risk comes the need to manage risk centrally. “There’s a revolution taking place on central risk desks,” says the global head. “Everyone’s trying to become a systematic internalizer and everyone is trying poach from each other in the central risk space. It’s another MiFID II headache.”

As central risk desks become increasingly integrated and increasingly powerful, they are growing. “We used to be just four people when we were siloed and central risk was managed separately,” says one trader. “Now we’re nine and we’ve got headcount for more people. There will be fourteen or fifteen of us eventually and we’ll be managing all the risk that touches the bank’s balance sheet in our space. This is the only way to do it – you can’t have central risk desks managing some of the risk and desks doing the rest.”

While this is the way things are going, some banks still seen as dead-ends for ambitious central risk traders. Insiders say Goldman Sachs is ahead of the curve, as is Citi. By comparison, European banks en-masse are accused of not operating the “for profit” central risk desk model. In general, however, central risk desks in Europe are seen as more advanced than in the U.S.

“There’s so much liquidity in the U.S. that you can unwind the risk you facilitated quite easily,” says the global head of central risk. “In Europe it’s much harder to flush that risk out and so the central risk desk is more important.”

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Comments (6)

  1. “one where you actually get to take proprietary risk with a bank’s own balance sheet”

    I believe what you are referring to is called “bank prop trading” in US and it is notorious. Millions of people lost their house in 2008 because of bank’s speculative prop trading activities. Thousands of buy side fund managers were suffered from unfair competition because of order information leakage ( bank’s prop trading desk often have access to flow data and misuse them). Nice try, but no way bank’s prop trading can come back under the name of “central risk book”. Banks are better off to keep their “central risk desk” remain as utilities function.

  2. This article is slanted. What you consider to be “politics” is in fact “fairness”.Order flow are from client facing desks, and these desks work very hard to get flow. In contrast, “central risk desk” take advantage from other desks. At my firm, central risk people come to office late and trash talk all day. So, why do you think they deserve profit from “optimizing bank’s risk”(tweak parameters to conceal prop trading activity)? Besides, the desk itself introduce a lot of risk. They escaped from rigorous model validation, and subject to little business control. Not to mention risk aggression itself could also be dangerous if you still remember “London whale”.And,yes, they will expand as mentioned in article, because they want to “look good” by grabbing as many headcounts as possible.Central risk book should be a team in middle office or back office serve all other desks rather than trading against them.

  3. Central risk book is really different in US and Europe.
    In London, SI is more like market making and that could be desirable job.
    In New York, in particular, US banks, it is complete different story. Regulation still prohibit prop trading so central risk book is often gambling laws. And based on current feedbacks, it is unlikely to see Volcker will disappear anytime soon. So in most of American banks, this desk generate little revenue. Which in turn it is not hard to understand why other desk don’t like them, because paychecks of central risk book are from other desk’s revenue.

  4. There is no one answer on if “central risk book” is good or bad. While you should avoid US bank’s New York desk, you probably should go for their European desk. However, as a rule of thumb, you should definitely stay away from desk operated for years yet still haven’t generated enough revenue to cover its cost. These desks don’t need that many of people, they just want to keep their headcounts because people keep leaving.

  5. Central risk book is still doing very well in buyside like Virtu or Citadel. You just don’t want to do it in banks now, may be later when Volcker gone.

  6. My company don’t want traders lose motivation so we are allowed to decide whether or not trade with central risk book. I found it to be great because i know if central risk book can offer a price better than NBBO, chances are it would be a position i should keep because markets are likely in my favor. If not,I will go for market liquidity.

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