Sell Side
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Sell side is a term used in the
financial services Financial services are the Service (economics), economic services provided by the finance industry, which encompasses a broad range of businesses that manage money, including credit unions, banks, credit-card companies, insurance companies, acco ...
industry. The three main markets for this selling are the stock, bond, and foreign exchange market. It is a general term that indicates a firm that sells investment services to asset management firms, typically referred to as the
buy side Buy-side is a term used in investment firms to refer to advising institutions concerned with buying investment services. Private equity funds, mutual funds, life insurance companies, unit trusts, hedge funds, and pension funds are the most comm ...
, or corporate entities. The sell side and the buy side work hand in hand and each side could not exist without the other. These services encompass a broad range of activities, including broking/dealing, investment banking, advisory functions, and investment research.


Use

In the capacity of a
broker-dealer In financial services, a broker-dealer is a natural person, company or other organization that engages in the business of trading securities for its own account or on behalf of its customers. Broker-dealers are at the heart of the securities and d ...
, "sell side" refers to firms that take orders from buy side firms and then "work" the orders. This is typically achieved by splitting them into smaller orders which are then sent directly to an
exchange Exchange may refer to: Physics *Gas exchange is the movement of oxygen and carbon dioxide molecules from a region of higher concentration to a region of lower concentration. Places United States * Exchange, Indiana, an unincorporated community * ...
or to other firms. Sell side firms are intermediaries whose task is to sell
securities A security is a tradable financial asset. The term commonly refers to any form of financial instrument, but its legal definition varies by jurisdiction. In some countries and languages people commonly use the term "security" to refer to any for ...
to investors (usually the buy side i.e. investing institutions such as
mutual fund A mutual fund is a professionally managed investment fund that pools money from many investors to purchase securities. The term is typically used in the United States, Canada, and India, while similar structures across the globe include the SICAV i ...
s,
pension fund A pension fund, also known as a superannuation fund in some countries, is any plan, fund, or scheme which provides retirement income. Pension funds typically have large amounts of money to invest and are the major investors in listed and priva ...
s and
insurance firm Insurance is a means of protection from financial loss in which, in exchange for a fee, a party agrees to compensate another party in the event of a certain loss, damage, or injury. It is a form of risk management, primarily used to hedge ...
s). Sell side firms are paid through commissions charged on the sales price of the stock to its customers because the firm handles all the details of the trade on the customer's behalf. Another source of money would be the idea of a spread. A spread is the difference when one sell side firm sells to a client and then goes on to sell the security to another client. Clients of the sell side can be
high-net-worth individuals High-net-worth individual (HNWI) is a term used by some segments of the financial services industry to designate persons whose investible wealth (assets such as stocks and bonds) exceeds a given amount. Typically, these individuals are defined ...
or institutions that include retirement funds for cities or states, as well as mutual funds. Sell side firms employ research analysts, traders and salespeople who collectively strive to generate ideas and execute trades for buy side firms, enticing them to do business.


Roles of sell side analysts

Sell side analysts have many roles. Sell side analysts rank stocks on a regular basis with three main options: buy, sell and hold. Part of the research analyst's job includes publishing research reports on
public companies A public company is a company whose ownership is organized via shares of stock which are intended to be freely traded on a stock exchange or in over-the-counter markets. A public (publicly traded) company can be listed on a stock exchange (list ...
; these reports analyze their business and provide recommendations on the purchase or sale of the stock. Often, research analysts on the sell side cover an entire fund with a specific purpose or devoted to a specific sector. Sometimes a different approach is taken whereby multiple committees are in charge of different parts of the investment making process. Sell side analysts generally get their information for their reports from a variety of sources including public and private sources. The research reports ultimately published contain earnings forecasts, future prospects and recommendations as previously mentioned. In addition to the aforementioned, sell side analysts have the responsibility to take time and develop relationships with their clients as well as the companies they are researching. There has been research into the relationship between the quality of the research and the amount of capital that the firm collectively raises for its many clients. Many research analysts focus on one particular sector or industry such as telecom, technology, or healthcare, among many others. Sell side analysts are responsible for creating a pitch, usually in the form of a book, that is then presented to prospective clients usually for new stock. In 1975, the structure of sales commissions underwent significant reform when the US Congress ended the SEC's requirement of having a minimum commission, also known as deregulation. One recent trend in the industry has been the unbundling of commission rates; simply put, this is the process of separating the cost of trading the stock (e.g. trader's salaries) from the cost of research (e.g. research analyst salaries). This process allows buy side firms to purchase research from the best research firms and trade through the best trading firms, which often are not one and the same.


Tracking analyst performance

Analyst performance is ranked by a range of services such as StarMine owned by Thomson Reuters, '' Institutional Investor'' magazine, TipRanks, or Anachart. In particular the ''Institutional Investor'' categorizes by many subdivisions including leading analysts, global rankings, and leading executives. Analyst accuracy has been measured as well in studies involving forecast information. Generally analyst forecasting is measured by absolute forecast error. Generally absolute forecast error and overall inaccuracy are smallest when institutional investors are present. This also applies to future performance because when analysts have reasonably small forecast errors they will tend to have smaller forecast errors in their future predictions as well. It has been proven that higher analyst ranking and reputation leads to more trading volume, and when analysts are accurate in predictions they end up with better reputations at the end of the set period being measured by the ranking system. In addition to the above, Analyst Performance is housed in Financial/Nelson Information Directory of Fund Managers. This is a bit different, as it contains information on fund structure, investment style, and performance, as well as the decision making process behind the investment choices.


Conflict of interest

After the bursting of the
dot-com bubble The dot-com bubble (dot-com boom, tech bubble, or the Internet bubble) was a stock market bubble in the late 1990s, a period of massive growth in the use and adoption of the Internet. Between 1995 and its peak in March 2000, the Nasdaq Compo ...
, many US sell side firms were accused of
self-dealing Self-dealing is the conduct of a trustee, attorney, corporate officer, or other fiduciary that consists of taking advantage of their position in a transaction and acting in their own interests rather than in the interests of the beneficiaries of ...
in a lawsuit brought by
New York Attorney General The attorney general of New York is the chief legal officer of the U.S. state of New York and head of the Department of Law of the state government. The office has been in existence in some form since 1626, under the Dutch colonial government o ...
Eliot Spitzer Eliot Laurence Spitzer (born June 10, 1959) is an American politician and attorney. A member of the Democratic Party (United States), Democratic Party, he was the 54th governor of New York from 2007 until his resignation in 2008. Spitzer was b ...
. The charges were formally brought against several Bank of America Merrill Lynch analysts. In addition to the business done with buy side firms as described above, sell side firms also performed
investment banking Investment banking pertains to certain activities of a financial services company or a corporate division that consist in advisory-based financial transactions on behalf of individuals, corporations, and governments. Traditionally associated wit ...
services for corporations, such as stock and debt offerings, loans, etc. These corporate clients generally did not like to see negative press put out about their own companies. To try to prevent the publishing of negative research, corporate clients would pressure the sell side firms by threatening to withhold lucrative banking business or equally lucrative shares in
IPO An initial public offering (IPO) or stock launch is a public offering in which shares of a company are sold to institutional investors and usually also to retail (individual) investors. An IPO is typically underwritten by one or more investment ...
s - essentially bribing the sell side firm. While the $1.4 billion settlement of this lawsuit made significant progress in cleaning up the industry in the US, it is notable that the lawsuit only went after sell side firms, leaving the arguably equally culpable corporations relatively unscathed. In the past few years the role of a research analyst has changed. After the dot-com bubble, more research has been completed to see the actual roles and duties of a research analyst to get a better idea behind their decision making process. Other provisions such as the
Sarbanes–Oxley Act The Sarbanes–Oxley Act of 2002 is a United States federal law that mandates certain practices in financial record keeping and reporting for corporations. The act, (), also known as the "Public Company Accounting Reform and Investor Protecti ...
(2002) and other regulations were enacted by the Securities and Exchange Commission in response to public outcry following the legal concerns. The Sarbanes–Oxley Act (2002) limits the relationship between investment banking and research analysts and prohibits promises of favorable research, as well as restricting and inciting pre-clearance requirements for traders' personal trading. Sell side analysts can also have conflicting duties. One issue that has been brought up has been the idea of sell side stock rankings and maintaining a positive rating for an extended period of time. This was addressed in the New York Attorney General's case against Bank of America Merrill Lynch. It also has been proven that the longer an analyst has been following and researching a stock, the more and more favorable the recommendations become. The idea behind this is that the sell side analyst may become too comfortable and lose objectivity, something known as the capture hypothesis. Other
conflicts of interest A conflict of interest (COI) is a situation in which a person or organization is involved in multiple interests, financial or otherwise, and serving one interest could involve working against another. Typically, this relates to situations i ...
include opposing incentives for sell side analysts. Sell side analysts generally have a personal need for a good reputation, and if an analyst cares about their reputation he or she will try to report truthful information. However, analysts also have the desire to receive incentives to make positive recommendations because brokerage firms in and of themselves have internal conflicts of interest between differing departments such as trading, underwriting and sales. One conflict of interest would be the need for an analyst to provide this research mentioned above, i.e. research that is unbiased and reliable, which could lead to higher trading business for the firms for which the analysts work. Hence the trade-off or conflict of interest for an analyst would be the need for generating their firm business and their own personal career goals. Under
Chinese wall A Chinese wall or ethical wall is an information barrier protocol within an organization designed to prevent exchange of information or communication that could lead to conflicts of interest. For example, a Chinese wall may be established to sepa ...
restrictions there is a threat of litigation, leading analysts to have less of an issue with bias in their research. A Chinese wall restriction is used to make sure important and private information is not inadvertently shared or "leaked" and that all clients within large multinational firms are protected. The actual idea stems back decades to the
Great Depression The Great Depression (19291939) was an economic shock that impacted most countries across the world. It was a period of economic depression that became evident after a major fall in stock prices in the United States. The economic contagio ...
, and has allowed the financial services industry to maintain one entity between investment banks and brokerages as opposed to requiring firms to have those two departments be separate entities. Another conflict of interest is the idea of performance rankings. The ''Institutional Investor'' All Star Poll, one of the most popular ranking systems, facilitates a conflict of interest in that a high ranking on their platform can influence analyst career paths and their compensation. However, it also forces analysts to produce the best research and ensure it is timely as well. Another conflict of interest would be the presence of institutional investors. Sell side analysts taking the larger institutional investors into account leads to the issue of giving the larger investors more influence over stock recommendations. Potential conflicts of interest in terms of biased research by sell side analysts are an issue on the sell side. There are recommendations that brokers use to help curb conflicts of interest. Suggestions include putting client commitments first, disclosing information as to how the broker is paid to clients, and providing the proper help so clients understand the level of risk they are undertaking with their investments.


References

{{Corporate finance and investment banking Stock market