Front office

Middle office

Back office

INTRODUCTION

Investment banks are broadly split into three sections: front office, middle office and back office. This division is necessitated partly by the operational needs, allowing the common functions to be grouped together, thus functioning more efficiently. However there is also a statutory requirement to separate investment-making divisions from the compliance, control and risk management departments. This ensures the impartiality and objectivity of all reporting lines.

There is a common perception that the most interesting jobs can be found in the front office, but each investment bank department plays a crucial part in the successful business operation, offering a broad range of varied, interesting and challenging roles.

FRONT OFFICE

Front office is the profit-making section of investment bank. It is typically organised according to the business lines, i.e. product ranges the bank is offering to its clients. Each department is further split into sales and trading desks.

Sales desks

Sales desks are in regular contact with clients, suggesting trading ideas and taking orders. Their role is essential in acquiring new clients and maintaining good relationships with existing ones. The sales force tends to comprise young, energetic and articulate individuals who work well under pressure and keep their composure in stressful situations. Attention to detail is also important, as they have to ensure that all details of the client order are accurately recorded and passed on to the trading desks.

The sales team is mostly focused on relationships with clients – analysing, exploring and marketing new financial offers that they believe will be attractive and profitable. The typical activities of a sales person include:

• Gathering information and analysing the market
• Identifying issues affecting clients
• Developing client relationships and presenting ideas to clients
• Securing deals with existing and new clients
• Keeping market-making traders informed of the relevant issues and requirements relating to their customers.

Trading desks

Trading desks price and execute trades, or structure new products that fit specific needs. They are constantly monitoring market information dissipated through market data providers (such as Bloomberg, Reuters and Telerate) to ensure that their decisions are timely and backed by the latest available information. Depending on the product type, they can either work on volume, as in money markets where market prices are readily available, volumes are high and there are virtually no valuation uncertainties; or they can trade tailor-made securities (such as exotic derivatives) that involve complex valuation, and hence take time to price and execute. Thus trading roles vary widely across different departments. Volume-driven trades require individuals who think and act fast, keep their composure under pressure and multitask well. In contrast, complex and exotic trades are usually executed by more analytical types with the ability to create innovative strategies and structure client’s requirements into a suitable product, whilst being aware of the risk exposure.

The traders can be proprietary or market makers. Market makers buy and sell products in the financial markets on behalf of banks’ clients. The product range varies and individual desks typically specialise in only one class of products. They make prices and execute trades, seeking to maximise profit or minimise financial risk. Proprietary traders trade on behalf of the bank itself. Their aim is to buy low and sell high. They do this by analysing economic data, performing technical analysis, exploiting cross-asset correlations and identifying undervalued and overvalued prices.

There are many similarities between the roles of market makers and proprietary traders. Their main focus is on executing trades at the right price. Markets can move rapidly and trading can be hectic. Their success relies on making instant decisions, informed by in-depth market reports provided by the investment researchers and analysts and by the sales desks, as well the constantly updated market news. Traders also use their own technical analysis.

The typical activities of a trader include:

• Market making in their relevant product range
• Executing trades electronically or by phone
• Liaising with sales desks on market movements and client requirements
• Anticipating market moves, buying and selling accordingly (this is particularly relevant to derivatives traders who are dealing with future values carrying implicit uncertainty).

Structuring

Structuring is a relatively recent concept necessitated by the increase in derivatives trading. It provides bespoke, often complex, products that meet specific client needs; including, but not limited to, payment schedules, required returns, exit clauses, credit and market risk exposure and/or mitigation. Structuring is provided by a specialised, highly educated team who take on client orders that trading desks are unable to structure, either due to their complexity or the time pressure. The typical duties of the structuring department include:

• Liaising with quantitative analysis, risk and finance teams to ensure suggested structures can be priced, risk managed and booked within the existing framework
• If that is not the case, providing joint solution for the innovative product, in terms of valuation, risk exposure quantification and capture, and setting the trading limits and reserving policy.

Quantitative analytics

Quantitative analysts are highly technical and numerate employees, creating mathematical models for complex structured products that typically offer much greater margins and returns than underlying cash securities. Quantitative analysts (also known as ‘quants’) tend to work in teams specialising in product classes, typically: interest rate derivatives, FX and equities, commodities and credit derivatives. Most ‘quant’ teams are further split into analytics and IT, whereby the former write the complex mathematical models and the latter ‘translate them’ into software further used within proprietary IT systems. These positions are highly sought after, as they are interesting and challenging. As there are only a few in each investment bank, competition is fierce and only the best succeed. Typical requirements are a PhD in maths, physics or a technical subject and excellent IT skills.

Typical duties within this department are:

• Development of innovative pricing and valuation methodologies for the existing product range
• Creating innovative trading and structuring strategies backed up by mathematical valuation methods
• Full understanding of strengths and weaknesses of their models and providing strategies for resulting risk exposure capture through hedging strategies and reserving policy
• Liaison with trading desks to keep abreast with the clients’ requirements
• Collaboration with market risk and financial control departments in ensuring appropriate management of trading activities, through risk capture, setting trading limits and reserving policy
• Maintaining close links with relevant IT departments to ensure that the models are accurately incorporated into the IT systems.

Strategists

Strategists advise external as well as internal clients on the strategies that can be adopted in various markets. They specialise in market sectors, enhancing their expert value to the client. Their role involves diligent monitoring of market trends and developments, and creating innovative ideas that provide advantage both to the bank and to its clients.

Their duties typically involve:

• Producing strategies and analyses that lead to capital markets transactions with clients
• Using models to simulate and evaluate corporate income statements, balance sheets, funding and risk management strategies
• Performing capital structure optimisation and strategic risk management analysis for corporate and sovereign clients
• Taking an active role in the innovation and development of quantitative tools for corporate finance analysis.

Research

Responsibilities of the research department involve providing critical analytical support to investment banking, sales and trading activities. It incorporates economic research (interest rates, market trends), and individual company research (credit ratings, equity valuation). The research department is further responsible for providing written and verbal updates on market trends and company analysis to sales and traders, as well as analysing company and economic data and making forecasts.

Typical duties include:

• Closely monitoring and summarising business trends, competition and regulatory policies that might affect the bank and client performance, as well as recommending any potential business opportunities this may present
• Analysing markets, industries and clients to proactively identify revenue growth opportunities
• Delivering market research and data analysis focusing on key markets and sectors as well as existing and prospective clients, in an accurate and timely manner.

MIDDLE OFFICE

Middle office comprises control, analysis and management functions required for a successful business operation. It offers a wide variety of interesting and challenging roles, mainly to those with a background in finance, accounting or business.

Risk management

The risk management department analyses the market and credit risk of daily positions the traders are creating. It also sets the trading limits in each product class, depending on their potential to adversely affect the bank. Another key middle office role is to ensure that the risks are captured accurately, correctly and in a timely manner. Risk managers often work directly on the trading floor, to ease communication with the trading desks and facilitate a timely response to potentially high-risk exposures. Their background is typically in a numerical or technical subject, as the role requires the analytical processing of highly complex information.

The market risk team is typically responsible for:

• Market risk monitoring and ensuring compliance with market risk limits imposed by trading mandates
• Development of innovative and enhancement of existing risk metrics
• Working on market stress scenarios and analysis of their impact on P&L
• Liaising with the quantitative analytics team in order to understand weaknesses in valuation models and finding practical solutions/compensating controls to mitigate the weaknesses
• Working with financial controllers on P&L analysis.

Credit risk roles and responsibilities include:

• Surveillance and monitoring of the bank’s investment portfolio
• Credit analysis of individual credit exposures
• Evaluation and reporting on current market conditions in terms of credit ratings and exposures
• Evaluation and active participation in management of large credit exposures
• Working with trading desks, finance and quantitative analytics to provide joint solution to credit exposure management.

Corporate treasury

The corporate treasury is responsible for funding, capital structure management and monitoring of liquidity. Its responsibility is to enable the smooth operation of trading departments, by providing finance and credit lines. It also monitors overall expenditure within the bank, including non-profit-making parts of the business. The roles within this department are most suited to those with a finance and accounting background. Most employees study for professional certification and are members of professional bodies.

The key aspects of corporate treasury roles are:

• Ensuring that the bank’s cashflow is adequate for effective operation
• Forecasting future cashflow requirements and anticipating potential challenges arising from limited cashflow
• Undertaking risk management activities to protect and progress the bank’s financial wellbeing and reputation
• Making decisions on funding of various sectors within the investment bank
• Evaluation of proposed new projects and investment strategies to ensure that they are beneficial to the bank.

Financial control

Financial control tracks and analyses the trading positions and capital flows of the bank and acts as the principal adviser to senior management on the profitability and structure of its various business units. It usually encompasses corporate strategy, risk and treasury. Product control function is a major part of the finance department and is most directly linked to the trading business. It is responsible for monitoring all daily positions, their independent pricing and the production of daily, weekly, monthly and annual P&L reports. Its structure is aligned with the trading units, enabling more efficient communication and control. The valuation (pricing) of all open positions is done independently from the front office book management to ensure impartiality in P&L reporting. Depending on the type of product, it is done either by using market prices, or, for less liquid and more exotic products, by analysing and pricing product components or factors that affect its market value. This can be a very complex process, thus product control staff tend to be very numerate and highly skilled individuals, typically with a maths, finance or accounting background and further professional qualifications.

Typical activities within the finance department include:

• Maintaining, tracking and improving the daily, weekly and monthly end-of-day processes
• Development and implementation of monthly and annual P&L reporting process
• Contribution to strategic business decision management
• Development and application of robust control processes
• Liaison with front office to ensure the work complies with regulatory standards
• Ensuring that issues and weaknesses are identified and dealt with in a timely manner
• Analysis of data to support the overall strategic objectives.

Compliance

The compliance department is responsible for the investment bank’s compliance with external (government and trading authority) and internal regulations. It performs regular audits of all departments by monitoring business procedures and daily roles and responsibilities of teams and individual employees. Extensive knowledge of legal and regulatory mandates is essential; thus members of the compliance team are constantly updating their knowledge to keep in line with new developments. The compliance roles are not particularly technical, but as they require involvement with all aspects of investment bank operations, they are versatile and challenging.

Typical duties involve:

• Implementation and maintenance of compliance systems and controls
• Monitoring standards of compliance across the business
• Providing solutions to business managers, supporting the commercial objectives and balancing the bank’s internal and external compliance obligations
• Raising staff awareness and understanding of compliance and risk management
• Promoting a positive culture toward compliance.

BACK OFFICE

Operations

The operations division is responsible for data checking trades that have been conducted and transacting the required transfers. The key aspects of daily operations department responsibilities are: input of all trade details, checking client information, credit lines, trading limits, ensuring that all the information is entered accurately and in a timely manner. It is a highly responsible job, requiring attention to detail, good organisation and time management, excellent verbal and written communication, numeracy, IT competence and diligence. Unfortunately it is perceived as the least attractive part of the investment bank, thus by most new entrants it is typically viewed as a starting point for further career progress.

Typical day-to-day duties involve:

• Dealing with client queries
• Clearing and settlement of daily transactions made in the front office
• Solving problems arising from incomplete documentation or trade data
• Interfacing with other divisions of the bank, finance in particular.

Technology (IT) department

The technology (IT) department provides technical support to all areas of the bank as well as writing the in-house software. Its role is becoming increasingly important, as most sales and trading desks are using electronic trading, whilst proprietary OTC products require bespoke software for trading and booking deals. Most investment banks employ several thousand IT staff in various roles, including:

• IT support
• Database administrators
• Network engineers
• Systems analysts
• Systems developers
• Application developers
• Web developers.

Their roles and responsibilities vary widely – from maintaining and upgrading the internal computer network, to creating complex trading platforms used by front office. Investment bank IT departments tend to be populated by young, energetic and highly technical individuals who thrive on pressure and tight deadlines. They have to be very innovative to produce fast and reliable IT solutions for the ever increasing complexity of the business they support.

The IT support team monitors and maintains the computer systems and networks within the bank. They are also on call outside business hours as the first line of support. Their further responsibilities include user account administration and security issues, as well as help with rolling out new systems or applications.

Database administrators are in charge of the performance, integrity and security of all databases within the bank. They are further responsible for strategic planning and development of new database solutions as well as troubleshooting during day-to-day operations. In addition, they control access permissions and privileges; develop, manage and test database back-up and recovery plans; and make sure that storage, archiving, back-up and recovery procedures are functioning correctly.

Network engineers are responsible for installing, maintaining and supporting computer communication networks within the bank. Their role includes:

• Monitoring network usage
• Installing, supporting and maintaining new server and network infrastructure
• Implementing, maintaining and monitoring network security, particularly internet access.

Systems analysts design new IT solutions to improve business efficiency and productivity. They examine existing business models and flows of data and design appropriate improved IT solutions, assessing them for both technical and business suitability and feasibility.

Systems developers solve computer internal hardware and software problems using existing systems or incorporating new technologies to meet particular needs. They test, diagnose and resolve system faults. As most investment banks purchase or lease all their IT equipment, there aren’t many jobs in this category.

Application developers translate software requirements into concise and robust programming code. Most specialise in a specific development environment and have in-depth knowledge of relevant computer languages. Their role usually involves writing specifications and designing, building, testing, implementing and sometimes supporting applications using programming languages and development tools.

Web developers are responsible for both internal and external (client-facing) internet applications. They are in charge of the functionality, design and visual appearance of all web applications, as well as compliance with security issues. This is the fastest growing IT sector, with new technologies and programming languages emerging daily.