A bank's markets business — variously called the investment bank, the Corporate and Investment Bank (CIB), or the Global Markets division — is unlike any other part of the bank. It operates in real time, across multiple asset classes and geographies, with a cost structure dominated by technology and human capital, and with revenues that can swing violently with market conditions. Understanding how it is structured, how it generates revenue, and how risk moves through it is the foundation for understanding every product and role within it.
The Four-Layer Model
A markets business can be understood through four interconnected layers, each performing distinct functions that depend on — and serve — the others.
Layer 1: Client-Facing Functions
This is the front office in the narrowest sense: the people who interact directly with external clients. It includes:
- Sales: Covering institutional clients (asset managers, pension funds, insurers, hedge funds) and corporate clients across product areas — rates, credit, FX, equities, commodities. Sales generates revenue through client relationships and the flow of trades they bring to the bank.
- Structuring: Designing bespoke solutions for clients where standard products cannot meet their specific needs. Works closely with both sales (to understand the client requirement) and trading (to understand what the desk can risk-manage).
- Research: Producing investment research consumed by clients to inform their trading and investment decisions. Post-MiFID II, research is priced and sold separately from execution in European markets.
- DCM/ECM origination: In banks with capital markets capabilities, the origination teams that bring bond issuances, equity offerings, and loan syndications to market sit at the intersection of the markets and banking businesses.
Layer 2: Trading and Risk-Taking
The trading desk is the risk warehouse: it prices products for clients, takes on inventory when clients buy or sell, and manages the resulting market risk. Trading desks are organised by product area: government bonds, interest rate swaps, credit (investment grade and high yield), FX, equity derivatives, structured products. Each desk has a Head of Trading and individual traders who manage specific books — defined by currency, maturity, or product type.
The trading desk earns money in several ways: the bid-offer spread on client transactions; the carry earned on positions held in inventory; and the P&L generated from managing the risk book intelligently — hedging some risk, retaining other risk where the desk has a view. Structuring desks embed additional margin in complex product pricing. The trading desk is measured on net revenue: revenues minus hedging costs, funding costs (FVA), counterparty credit charges (CVA), and capital charges (KVA).
Layer 3: Risk and Control Functions
The second line of defence functions sit alongside the front office, providing oversight and challenge:
- Market Risk Management: Sets and monitors risk limits (VaR, DV01, CS01, vega, notional), reviews model assumptions, and escalates breaches. Reports to the Chief Risk Officer, not to the trading desk head.
- Credit Risk: Manages counterparty credit exposure — approving credit lines, monitoring exposure against limits, and calculating CVA. Works with the XVA desk on pricing and hedging.
- Compliance: Advises on regulatory obligations, reviews new products for compliance with applicable rules, conducts surveillance of trading and communications, and manages regulatory relationships.
- Finance / Product Control: Responsible for the independent verification of P&L, ensuring that the valuations produced by the trading desk are accurate and consistent with independent market data. Also produces regulatory and management reporting.
- Legal: Reviews and negotiates documentation on transactions, manages litigation risk, and advises on the legal enforceability of novel structures.
Layer 4: Operations and Technology
The operational infrastructure that makes everything else possible:
- Trade Support / Middle Office: Processes and verifies trades booked by the front office, resolves booking errors, ensures that confirmations are sent and received, and manages the trade lifecycle.
- Settlement: Manages the actual exchange of cash and securities at settlement, resolves settlement failures, and manages nostro accounts.
- Collateral Management: Manages the posting and receipt of variation margin on derivatives positions, optimises collateral usage, and resolves collateral disputes.
- Technology: Builds and maintains the trading systems, risk management platforms, connectivity infrastructure, and data management tools. Technology investment is among the largest cost items in any major markets business.
Revenue Drivers and Cost Structure
Markets revenues are volatile. In benign conditions with active client flow and reasonable volatility, the business generates strong returns. In periods of very low volatility (which reduces trading activity) or extreme stress (which can generate large losses on inventory), revenues can collapse or turn negative. The key revenue drivers are: client flow volumes and the bid-offer captured on that flow; structured product margins; financing income from repo and securities lending; and prime brokerage fees.
The cost base is dominated by compensation (which is typically 40–60% of revenues in a good year), technology (a large and growing fixed cost), and regulatory capital charges. The regulatory capital framework — Basel III market risk capital requirements, the leverage ratio, and the NSFR — has significantly increased the cost of running a markets business since 2010, compressing returns on equity and driving consolidation among smaller players.
What Makes Markets Businesses Different
The markets business is fundamentally different from retail or commercial banking. There are no depositors, no loan books in the traditional sense, and no net interest margin. Revenue is driven by activity, sophistication, and risk management skill rather than by scale of deposit base or loan portfolio. The business operates at high speed, with significant information asymmetry between participants, and requires both quantitative rigour and commercial judgment. It is also more exposed than any other banking business to regulatory change — every major financial crisis produces new regulation that reshapes the economics of market making.