Investment bank: Encyclopedia II - Investment bank - The main activities and units

Investment bank - The main activities and units

Large, global investment banks typically have several business units, including Investment Banking, concerned with advising public and private corporations; Research, concerned with producing reports on valuations of financial products; and Sales and Trading, concerned with buying and selling products both on behalf of the bank's clients and also for the bank itself. Banks undertake risk through Proprietary Trading, done by a special set of traders who do not interface with clients and through Principal Risk, risk undertaken by a trader after he buys or sells a product to a client and does not hedge his total exposure. Banks seek to maximize profitability for a given amount of risk on their balance sheet.

An investment bank is split into the so-called Front Office, Middle Office and Back Office, with Front Office widely deemed as having the highest-calibre employees in terms of intellectual and/or interpersonal capital, and Back Office the least. The individual activities are described below:

FRONT OFFICE

• Investment Banking, is the traditional aspect of investment banks which involves helping customers raise funds in the Capital Markets and advising on mergers and acquisitions. Investment bankers prepare idea pitches that they bring to meetings with their clients, with the expectation that their effort will be rewarded with a mandate when the client is ready to undertake a transaction. Once mandated, an investment bank is responsible for preparing all materials necessary for the transaction as well as the execution of the deal, which may involve subscribing investors to a security issuance, coordinating with bidders, or negotiating with a merger target. Other terms for the Investment Banking Division include Mergers & Acquisitions (M&A) and Corporate Finance.

• Financial Markets is split into four key divisions: Sales, Trading, Research and Structuring.
  • Sales and Trading, is often the most profitable area of an investment bank, responsible for the majority of revenue of most investment banks. In the process of market making, traders will buy and sell financial products with the goal of making an incremental amount of money on each trade. Sales is the term for the investment banks sales force, whose primary job is to call on institutional and high-net-worth investors to suggest trading ideas (on caveat emptor basis) and take orders. Sales desks then communicate their clients' orders to the appropriate trading desks, who can price and execute trades, or structure new products that fit a specific need.
  • Research, is the division which reviews companies and writes reports about their prospects, often with "buy" or "sell" ratings. While the research division generates no revenue, its resources are used to assist traders in trading, the sales force in suggesting ideas to customers, and investment bankers by covering their clients. In recent years the relationship between investment banking and research has become highly regulated, reducing its importance to the investment bank.
  • Structuring has been a relatively recent division as Derivatives have come into play, with highly technical and numerate employees working on creating complex structured products which typically offer much greater margins and returns than underlying cash securities.

MIDDLE OFFICE

• Risk Management involves analysing the risk that traders are taking onto the balance sheet in conducting their daily trades, and setting limits on the amount of capital that they are able to trade in order to prevent 'bad' trades having a detrimental effect to a desk overall.

BACK OFFICE

• Operations involves data-checking trades that have been conducted, ensuring that they are not erroneous, and transacting the required transfers. Whilst it provides the greatest job security of divisions within an investment bank, it is widely known to involve the most monotonous work at relatively low pay [1].
• Technology - Every major investment bank has considerable amounts of in-house software, created by the Technology team, who are also responsible for Computer and Telecommunications-based support.

Adapted from the Wikipedia article "The main activities and units", under the G.N U Free Docmentation License. Please also see http://en.wikipedia.org/wiki