In the financial services industry, a sell-side firm is a term that describes companies in the financial services industry that offer investment services to asset management firms. They provide services like investment advisory, investment banking, brokerage, and research, but what does a sell-side trader do?
Sell-side traders work at brokerage firms and are responsible for trading in stocks and financial assets for their clients. They also perform proprietary trading, which means they trade to make money for their employer.
Why are sell-side traders regarded as high touch traders? Read on to learn more about their functions and what differentiates them from buy-side traders.
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What Is the Difference Between Buy Side and Sell Side?
When thinking of investment banking, it’s essential to understand the difference between the buy and sell sides as the two combine to make a complete picture. One side cannot function without the other.
Sell-side is a part of the financial market that deals with creating, promoting, and selling traded securities, bonds, foreign exchange, and other financial instruments to the public. Buy-side is the part of the financial market that buys and invests significant portions of securities for fund or money management.
Understanding Sell Side
The sell-side part of investment banking has the task of getting the best price possible for every financial instrument while providing analysis and insight on each of these assets. Market makers are on the sell-side of the equation, while on the side are individual traders. Sell-side traders are also known as high touch traders due to their multi-tasking capabilities and high energy.
An excellent example of a sell-side is when a wealthy person goes to an investment bank intending to invest a significant portion of his money. The private wealth management division of the bank checks the person’s risk tolerance and assets. They later come up with an investment strategy for the person and present some product options to him.
The part of selling a client the bank’s financial products and services is the sell-side. If the person agrees to the terms and gets into business with the investment bank, he/she will pay fees and commissions for having his money managed.
This side consists of advisory firms, banks, and other firms involved with selling securities on behalf of their clients.
What Functions Do Sell Side Traders Perform?
Provide Stock Research of Listed Companies
Sell-side traders are responsible for providing stock research and analysis for the buy-side. These professionals are responsible for creating reports and making recommendations that investment banks, firms, or individuals may be interested in.
An equity research analyst on the sell-side focuses on providing detailed financial analysis on whether to hold, buy, or sell a specific investment. Any firm or individual that purchases stock based on the analysis provided comes from the buy-side.
Create Liquidity for Listed Securities
A sell-side trader’s role is to provide liquidity when underwriting securities or act as a market maker—the sell-side acts as a stabilizing factor for the demand and supply.
Establish Relationships With Companies
The sell-side traders are part of the market makers who drive the force of the financial market. A good example is investment banks that make up the stock market sell-side. Apart from underwriting stock issuance, they also sell to institutional investors.
Sell-side traders’ primary role is in the trading of IPO stocks. Corporations will find it challenging to go public by themselves, which means they need to use an investment bank’s services for the underwriting process. Underwriters are part of the sell-side who acts as an intermediary between the companies and the investing public. They need to establish a relationship with these companies for them to sell their initial shares.
After completing an IPO, the analyst interacts with the company by doing ongoing diligence, spending time with the management team, and coming up with research notes.
Perform Financial Modelling and Valuation
The sell-side’s primary role is to generate earnings estimates, which means they have to be good at financial modeling. Thy is responsible for combining finance, accounting, and business metrics to develop an abstract model of a company’s financial situation.
Sell-side traders use financial modeling to inform their investment decisions and come up with securities pricing. The models also help with plans for corporate transactions like acquisitions, mergers, and divestitures. Equity research analysts will build financial models to make decisions about selling assets and raise capital in the form of equity.
A sell-side trader also develops a financial model and does a valuation of the business. This is not to share the model with anyone but to have a backup if one needs to know a specific business’s valuation. Creating financial models also allows the trader to determine the valuation range to get from potential buyers.
Provide Access to the Buy Side
You’ll discover that some sell-side analysts have better working relationships with leading firms, making them an asset. A good equity research analyst will make recommendations and host conferences that investors will want to attend.
Market and Sell Securities
The sell-side primary market functions include underwriting and investment banking. The work of sell-side traders is to raise capital for business expansions/operations and sell new securities. Analysts with this expertise help in structuring offerings of bonds, stocks, and other securities. They also prepare documentation for registering with state and federal regulators, which also involves planning the sale of securities to the public.
Sell-side traders assume part or all of the financial risk of selling the securities to the public to ensure the issuing company benefits from the sales proceeds. Before the sale, sell-side traders will market the securities to develop the investors’ interest. The securities that are provided are sold to retail clients and buy-side investors.
Assist Customers’ Enter and Exit Positions
Sell-side traders understand the warning signs that necessitate exiting a trade. They will advise their customers on the best time to enter a trade and the best time to leave to avoid making further losses. They also advise their clients on the best re-entry time as the recovery shows that the failure has been overcome.
Advise Mergers and Acquisitions
The sell-side process in mergers and acquisitions begins when an owner arrives at the decision to sell independently or when an unsolicited buyer approaches the seller with the aim of buying. Often, investment bankers are on the sell-side of mergers and acquisitions. One thing to note is that the sell-side in mergers and acquisitions refers to investment bankers working on a proposition where the investment bank’s client is the seller.
An investment banker will prepare a financial model and share it with potential acquirers of the business. These models are simple to understand, but they are presentable for the other parties to use.
Facilitate Transactions
The other role of sell-side traders is to facilitate transactions for large institutional clients. They work as market makers and provide further insights into investor’s intentions. A sell-side trader also understands the risks certain transactions hold, and they work to reduce this risk.
Experienced sell-side traders can spot what major institutions are doing and recommend the best time to get into a similar position to generate profit.
Careers in Sell-Side Trading
There are a variety of careers to explore on the sell-side part of trading. You’ll find more entry-level opportunities in this field than on the buy-side. Firms like JP Morgan, Barclays, Citibank, and Goldman Sachs hire sell-side traders. Some of the career paths you can pursue on the sell-side include:
- Sales and Trading
- Equity Research
- Investment Banking
- Corporate and Commercial Banking
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Conclusion
Sell-side traders are responsible for creating liquidity for listed securities, advising corporate clients on significant transactions, advising on mergers and acquisitions, marketing and selling securities, performing financial modeling and valuation, among other responsibilities. If you’re thinking of getting into the sell-side part of financial markets, you can be an investment banker, an equity research analyst, or get into corporate banking.
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