Trading floors are traditionally reserved for front office activities. This is where financial professionals come together to create markets in the global economies through executing trades on behalf of investors. There is also accountability that must be assigned to trading activity that occurs in the front office, and many of these tasks, ranging from the clearing and settling of trades to accounting procedures, take place in the back office of a firm. A convergence of certain of these separate activities has made back office trading something of a reality as well.
The back office is not host to the most intense aspects of trading. Professionals who carry out trades on behalf of investors and who interact with clients are prominent in the front office at a trading firm. This area is considered the hub where the lion's share of a trading firm's profits are generated. It is here that trades are carried out from the research and analysis stage to the execution of a buy or sell order.
Back office trading activities are also carried out at financial firms. Professionals in the back office are typically responding to the acts carried out by the traders in the front office. It is here that risk management procedures are enforced, and accounting practices are performed. Trades that are executed in the front office must be cleared and settled in the back office, and the value of trades and profits generated need to be confirmed. It is possible for certain back office trading functions to be outsourced to third-party firms.
Securities lending was designed as a function of the back office. It is here where agreements are drawn between two parties, including a lender and a borrower. In securities lending, shares of a financial security are extended to a trader in order that the trading professional may bet on that security's decline or short that investment. The borrower offers some type of collateral for the shares.
A transformation in the financial markets toward greater disclosures and more transparency has pushed securities lending from a back office trading function to the front office. Not only has the process of approving and facilitating securities lending procedures transitioned to the forefront of trading facilities at financial institutions, but so too have the investment professionals been relocated to be part of the front office trading operations. In essence, traditionally back office trading has been accepted as a front office activity.
