It's not often that MiFID II is credited with creating jobs in investment banks. The European legislation is more commonly associated with the loss of jobs in research and in sales as buy-side customers find themselves charged for things they previously got for free. When it comes to central risk trading desks, however, MiFID II has been a gift.
"Everyone is hiring for their central risk books," a senior central risk trader at one U.S. bank in London tells us, speaking on condition of anonymity. "I personally have interviewed people from every single bank on the street. Even before MiFID II there was a trend towards reducing costs using the central risk book, but MiFID II has made the central risk desk more important than ever."
We've written about central risk trading desks before. They're where banks centralize the execution of trades for their entire operations, and hedge against the aggregated risks in the process. Central risk desks are high quantitative. They have, until now, also been treated with a degree of skepticism by traders who resent the interference of a group of quants in their interaction with clients. Under MiFID II, however, central risk desks increasingly have the upper hand.
MiFID II's bounty for central risk desks is partly thanks to its more stringent reporting obligations. Under the new regulations, which came into force in January but were partially delayed until March, banks are obliged to conduct enhanced transaction analytics reporting showing that "all reasonable steps" have been taken to ensure trades take place in the most efficient way possible. "Far more data is needed," says the senior central risk trader. "Banks have set about capturing this data in a systematic fashion, and central risk books are at the heart of that."
More importantly, though, MiFID II has encouraged banks to set up their own "systematic internalisers." These quantitatively match buy and sell orders from clients in-house instead of sending them to publicly visible central exchanges or privately available "dark pools" (use of which is heavily restricted under MiFID II). At many banks, staff responsible for the systematic internaliser have simply been bolted on to the central risk team. "Thanks to MiFID II, central risk has matured into a different kind of function," says the trader.
Niki Beattie, a former MD at Merrill Lynch and founder of market structure partners, a consultancy firm specializing in the structure of capital markets, says the new MiFID II systematic internalisers are already being used in ways that weren't envisaged. "There seems to be more desire than was expected to use the systematic internalisers to make big block trades," she says. These larger trades mean longer holding positions, and therefore more need to use the central risk desk to manage the risks associated with them.
As central risk desks grow in importance, Beattie says they're also gaining power. Previously, central risk professionals complained about their lack of control over the pricing of trades being sent to them for execution. Now, Beattie says central risk desks are gaining the upper hand: "The client-facing side of the market making process had too much power - they were able to demand that execution teams made a good price for a top client even where it didn't make sense for the bank." Now, Beattie says central risk desks are better able to push-back, and to be smart about the price offered for a trade from the outset.
"Before, banks were focused on providing the best price to clients. Now they're more focused on managing their risk," Beattie adds.
As sales-traders and salespeople have lost authority, therefore, central risk desks have gained it. Banks are keener than ever to hire top central risk takers as a result. "The entire systematic market making approach is underpinned by the people on the central risk desk," says one electronic trading headhunter, speaking on condition of anonymity. "Without a doubt, there's a huge emphasis on it."
The result is ever greater demand for quantitative trading talent from banks. Only last year, central risk traders were quitting for hedge funds. As their importance increases, they're more likely to stick around.
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