It depends. A lot of bank prop desks were shut down or downsized, but they still exist. All different asset-classes and methods are used. The prop desks are not backed by flow... at all. Essentially they are internal hedgefunds.
There seems to be some confusion here. So let me clarify. There are prop desks, and agency desks where their traders are allowed to trade a limited "proprietary book", these are very different things. The pure prop desks, and I have a few friends who are head of some of these in ibanks, are almost cut off from agency business. As some1 pointed out, they almost act as internal hedge funds, except using the "platform" (transaction processing, order routing, systems) of the bank. These desks are forbidden to have any interaction with any client at all. And these desks usually only have a VaR limit, not really a "capital limit". Now, over at agency desks (market making, structuring, execution, etc), a lot of the traders are also allowed to maintain a "prop book" to try to make "extra" profits. And obviously a lot of the trading here do use information gleamed from flow, algos, etc. Although compliance is supposed to keep track of all potential conflicts, since it really is the same trader doing both, lines definitely gets blurred. These "prop book"s, are subject to both a size limit and a VaR limit. However, in some say strict offset desks like index replication, the position limits can run well into billions. Hope this clears things up a bit.