With hedge funds, securities sales and brokerages in the news a lot lately, you may have heard a lot of talk about the “back office” of brokerage firms. The back office of a brokerage firm is where the deals take place. The term back office only serves to differentiate the back office of a firm from the front office, or “client-facing,” side of the brokerage business.
Back Office Basics
The back office is where the actual accounting, clearing and processing of trades happens. Shares of a security are sold to customers through the “front office,” and then the actual transaction of the purchase – the transfer or money, the acquisition of the security, and the tracking and accounting of these deliveries – happens in the back office.
“Short selling” – the practice of lending securities for a brokerage firm and then selling them short – is also generally the province of the back office, which locates the securities being sold short to ensure that they will be delivered. If there is a “failure to deliver,” that matter will be tracked and processed by the back office as well. It’s quite complicated, and most of this activity is invisible to the client, who only deals with the front office of the brokerage. Yet it is necessary to the continued operation of the brokerage firm.
So if you hear that your brokerage has a back and front office that conduct different operations, don’t be confused. It simply means that you might simply be dealing with sales people, rather than the accountants who manage your investment accounts directly.