An eye on equities

[Musicwhiz]

Sorry, just a quick question here? What are buy-sides and sell-sides? What stands do they hold? A little confused.

If I'm not wrong, sell-side are those brokerage analysts who issue free reports. Buy-side are a little more "prestigious", and write reports only for institutional investors.

d.o.g., maybe you can confirm if I am right on this? Thanks!

[kazukirai]

Hi Jon-san,

My understanding of the terms 'Buy-side' and 'Sell-side' are as follows:

'Buy-side' literally means the side that buys. In other words, these usually refer to the side that buy securities e.g. mutual funds, hedge funds etc.

'Sell-side' refers to the side that sells. Namely brokerages where their revenue depends on selling you something. I think the best example would be Bud Fox from the movie Wall Street.

Both sides, as I was told, require analysts chiefly because their business depends on it.

The sell-side issues analyst reports which act as a form of promotional material that encourages transactions to take place. The buy-side, as a natural extension, would have their analyst also sniffing trades or investments which they can make $$ from. After all, as Warren Buffett said, "Never ask a barber if you need a haricut."

I'm pretty sure I have the general idea right. As for more precise answer, someone in the industry e.g. d.o.g-san would be the best person to answer.

[d.o.g.]

Sorry, just a quick question here? What are buy-sides and sell-sides? What stands do they hold? A little confused.

In the investing world, "buy side" refers to the folks that actually invest money. So for example a fund run by Fidelity or Aberdeen, or me, would be from the buy side. We buy securities on behalf of our clients. The buy-side will normally do its own research, using the sell-side research as a check or secondary reference.

"Sell side" refers to the brokers who write research reports hoping that the buy-side will reward them with brokerage business. Sometimes the reports are freely distributed, other times they are sent to clients only. Both the brokers who serve retail investors as well as those that serve institutional investors are regarded as the sell-side. So for example both Phillip Securities and Goldman Sachs would be from the sell-side.

If you think about it, the sell-side arrangement is ridiculous. They provide research with no guarantee of business, and since they are paid by trading commissions the incentive is to always write a good story in order to drive trading volume and retain corporate access to information. Most broking houses also do investment banking, so there is yet another incentive to write a nice story, so that they can land investment banking business (secondary debt/equity offerings) from the company.

There were some attempts in the past to set up independent research houses but most found that the buy-side didn't want to pay for research even if it was clearly independent. The few outfits that survive today are mostly niche providers e.g. credit or forensic specialists who serve hedge funds looking for stuff to short.

The no-research brokers who provide cheap trading commissions have been more successful. E-trade, Charles Schwab and Interactive Brokers are some examples of brokers who have become very successful with a low-fee model. Most big buy-side operations still go through full-service brokers, as their size allows them to negotiate down the commissions and still retain the perks i.e. "free" research and corporate access.

[Jon-san]

Thanks to MW and Kazukirai and d.o.g., for the succinct explanations. Have learnt something new today!

[kazukirai]

Thanks to MW and Kazukirai and d.o.g., for the succinct explanations. Have learnt something new today!

Hi Jon-san,

No worries. I remember asking the same question to a presenter from Kaplan a couple of years back too so just sharing what I remember.

In fact, because I'm not in the industry, I was worried my explanation would be inadequate but I figured some reply might be better than no reply. After all, d.o.g.-san is probably one of the more appropriate forummers (at least that forummers publicly know of) to reply to this but he must be a pretty busy person given the nature of his work and might not have time to reply until much later.

Glad that my reply helped somewhat.