Investment banking operations are very different than the traditional banking functions of seeking cash deposits from customers in the form of checking and savings accounts in order to making interest-bearing loans that many people think of when picturing the operations of a bank. Instead, investment banks perform operations which have to do with the creation of corporate securities, facilitating mergers and acquisitions, and brokering, or selling, securities to investors. Generally, investment banking operations are split into front office, middle office, and back office activities.
Front office operations are the revenue generating operations of an investment bank. Front office operations include corporate finance, sales and trading, and research.
The corporate finance operations of the front office offers services which help corporations raise funds in capital markets. Corporate finance operations also deal with mergers and acquisitions, advising corporations on mergers and acquisition deals, and completing the actual transaction.
Sales and Trading
The sales and trading operations of the front office include market making activities, sales and trading desk activities, and proprietary trading. Market making activities include buying and selling financial products to increase liquidity in the market and make money on the bid-offer spread. The sales desk contacts potential investors to suggest trading strategies which have been developed by the bank’s strategists, then the trading desk prices and executes these trades. Proprietary trading activities take place when an investment bank trades its own money using complex proprietary trading strategies.
Lastly, the research operations of the front office reviews companies and offers “buy” or “sell” ratings in written reports. This research may serve inside the bank to assist its traders and sales force, or be sold to outside clients.
Middle Office Operations
The main function of the middle office is risk management. In the middle office, the corporate treasury of the bank manages the bank’s funding, ensuring that the bank has enough funds to continue to operate. In addition, a risk management team analyzes the market and credit risks that the bank’s traders have taken positions in, and monitors overall economic risk.
Back Office Operations
The back office data checks trades that have been conducted, and handles the transfer of funds into and out of the bank. The back office operations also includes all technology support and solutions for the investment bank, as well as compliance with government and internal regulations.