Red-Blooded Risk: The Secret History of Wall Street

Front Office

I'll start with a front-office risk manager, which is what most people think of as a risk manager. A century or so ago, brokerage firms had physical front and back offices. Customers came into the front office to do business with Ivy League graduates in suits and polished shoes. The furnishings were expensive and the atmosphere was aristocratic. At the conclusion of the deal, the broker would write a trade ticket or other order document and toss it into the back office.

The back office was a different world in which accountants, clerks, and other support staff shuffled papers to execute trades and keep accounts. The furnishings were basic and the atmosphere was clerical. People might work in shirtsleeves amid piles of paper. They usually looked harassed, as they had to deal with trades that the parties disagreed on the terms of, or that one party denied altogether, or for which one party could not be found, or for which deliverable securities could not be found or any of a hundred other potential problems. Then they had to make it all add up so the customer and brokerage accounts could be maintained. In many cases, such as margin deposits with futures clearinghouses or net capital calculations for reports, everything had to add up every day, so no one went home until it was finished. The next morning brought a new pile of screw-ups.

Today the terminology has generalized, ...