I want to ask a question about the purpose of the chinese wall in Investment Banks.
As far as I’m aware, the idea of a “Chinese Wall” or an “Ethical Wall” in Investment Banks is to prevent insider trading, where the sales & trading side of the bank for instance has no idea of the deals that the investment bankers are working on.
The intuition I gathered is that (in the example above for sales and traders) people working in sales can’t buy a stock of a company that’s not yet public nor can they influence the decision of the clients that they provide a service for.
However, I haven’t found any real reason about why a Chinese Wall exists in the first place between the different functions of a bank. Why can’t a Salesperson buy the stock before it goes up, or tell their clients about it ahead of time? Are there any other reasons that the bank would choose to put up a Chinese Wall aside from leaks to the public domain, for instance?
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> Why can’t a Salesperson buy the stock before it goes up, or tell their clients about it ahead of time?
Suppose the salesperson picks a stock and buys up a bunch. Then they tell their clients to buy the stock, knowing that they will end up buying that stock from the salesperson at a higher price!
The clients were manipulated by the salesperson into making purchases which directly benefited the salesperson. That isn’t legal, the clients could be cheated out of huge amounts of money.
By keeping the salesperson ignorant of the investments the bank makes they can’t take advantage of their clients that way, and so even if the banks end up winning in trades vs. clients it isn’t intentional.
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