What the divisions do

Spring week interviewers rarely expect technical depth, but they do expect you to know what the part of the firm you are applying to actually does. A clear, concrete answer to "what does this division do?" shows you have done your research, and it gives you a much better answer to "why this division?" This lesson walks through the four areas you will hear about most, and how each one makes money.

Banks often describe themselves in three layers. The front office faces clients and takes risk: investment banking, sales and trading, and research. The middle office controls that risk and checks the numbers. Operations, sometimes called the back office, make sure every trade and payment actually happens. Asset managers, whether independent firms or divisions of a bank, sit on the other side of many of those trades.

Investment banking

The investment banking division, often shortened to IBD, advises companies, governments and financial sponsors such as private equity funds on big, infrequent decisions. It has two main kinds of team.

• Coverage teams own the relationship with clients in a sector, such as consumer and retail, industrials, or financial institutions
• Product teams bring specialist skills: M&A advisory, equity capital markets (ECM), debt capital markets (DCM) and leveraged finance

M&A advisers help a company buy another business, sell itself or a division, or defend against an unwanted bid. ECM teams help companies raise money by selling shares, for example in a listing on the London Stock Exchange or a follow-on offering. DCM teams help them borrow by issuing bonds. Leveraged finance arranges the loans and high yield bonds behind private equity buyouts.

Investment banking earns fees. Advisory fees are usually a percentage of the deal value, and most of the fee is only paid if the deal completes, which is why it is called a success fee. For capital raising, the banks that underwrite an offering share a fee that is a percentage of the money raised, split between them according to their roles.

Markets

The markets division, also called sales and trading, deals in financial instruments with investors such as pension schemes, insurers, asset managers and hedge funds. It is usually split into fixed income, currencies and commodities (FICC) and equities.

• Salespeople look after investor clients, share ideas and bring their orders to the desk
• Traders price those orders, manage the positions that result, and hedge the risk
• Structurers design tailored products, such as a hedge for a company's currency exposure
• Research analysts publish views on companies, sectors and economies

Much of the division works as a market maker. It quotes a bid price, at which it will buy, and an offer price, at which it will sell. The gap between them is the bid-offer spread. If the desk buys from one client at the bid and sells to another at the offer, it keeps the spread. In practice the desk often has to hold a position for a while, so it also earns or loses money as prices move, which is why risk management matters so much.

Asset management

Asset managers invest money on behalf of others: pension schemes, insurers, charities, and individuals saving through funds or a stocks and shares ISA. They are the buy side, because they buy the securities that banks help create and trade. Banks are the sell side.

Fund managers decide what a portfolio holds. Analysts research companies and bonds to support those decisions. Other teams handle client relationships, risk and product design. Active funds try to beat a benchmark such as the FTSE All-Share by picking investments. Passive funds, such as index trackers, simply try to match the benchmark at low cost.

Asset managers mainly earn a management fee: a percentage of assets under management (AUM), charged every year whether the fund goes up or down. Fees are often quoted in basis points, where 1 basis point is 0.01%. Hedge funds may also charge a performance fee on gains. Because revenue depends on AUM, a fall in markets or clients moving money elsewhere hits revenue directly.

The middle office and operations

The middle office protects the firm. It does not face clients or take risk, but the front office cannot operate without it. Common teams include:

• Market risk, which measures how much a desk could lose and sets limits on its positions
• Credit risk, which judges whether clients and counterparties can pay what they owe
• Product control, which checks and explains each desk's daily profit and loss using independent prices
• Compliance, which makes sure the firm follows regulation, including rules on inside information
• Treasury, which manages the bank's own funding, liquidity and capital

Operations make sure trades settle, meaning the securities and the cash actually change hands, and that payments, collateral and corporate events such as dividends are processed correctly. Technology teams run the systems behind all of it. These roles are often more stable and less cyclical than front office ones, and many offer structured graduate schemes.

How to use this in an interview

When asked what a division does, give three things: who its clients are, what it helps them do, and how it earns money. Then add one example of something it has worked on or would work on. For markets, you might mention how a rates desk helps a pension scheme hedge its liabilities. For the middle office, explain why a bank needs independent checks on its traders.