I understand that some desks, particularly in fixed income, rely a lot on franchise value. Can someone explain to me what this means and what are the examples of such desks?
what’s the flipside? Is it desks that take prop risk?
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Take for example a high yield trading desk. The "franchise" desks like JP Morgan, GS, MS, etc. will generate substantial P&L from flow trading (crossing risk). This does 2 things: (i) it allows the desk to meet P&L targets without having to put too much balance sheet to work (taking risk), and (ii) it allows those banks to take risk knowing that a few trades blowing up wont blow a hole in the P&L. A desk that doesn't get much flow has to put more balance sheet to work to generate P&L. Having large dealer inventory and being able to cross risk (you are one of the go-to desks for the buy-side to work with) creates a strong flow franchise that smaller desks can't really compete with.
Agree with above but also liquidy. Your flow might help you be able to put positions on size without “fighting the screen”
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