Sell side

Sell side is a term used in the financial services industry. It is a general term that indicates a firm that sells investment services to asset management firms, typically referred to as the buy side, or corporate entities. 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, "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 or to other firms. Sell side firms are intermediaries whose task is to sell securities to investors (usually the buy side i.e. investing institutions such as mutual funds, pension funds and insurance firms).

Sell side firms are paid through commissions charged on the sales price of the stock. 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.^[1] Part of the research analyst's job includes publishing research reports on public companies, these reports analyze their business and provide recommendations on the purchase or sale of the stock.

One recent trend in the industry has been 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.

Analyst performance is ranked by a range of services such as StarMine owned by Thomson Reuters, Institutional Investor magazine, or TipRanks.

Conflict of interest

After the bursting of the dot-com bubble, many US sell side firms were accused of self-dealing in a lawsuit brought by New York Attorney General Eliot Spitzer. In addition to the business done with buy side firms as described above, sell side firms also performed investment banking 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 demanding equally lucrative shares in IPOs - 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's notable that the lawsuit only went after sell side firms, leaving the arguably equally culpable corporations relatively unscathed.

References

Corporate finance and investment banking Capital structure Convertible debt Exchangeable debt Mezzanine debt Pari passu Preferred equity Second lien debt Senior debt Senior secured debt Shareholder loan Stock Subordinated debt Warrant Transactions (terms / conditions) Equity offerings At-the-market offering Book building Bookrunner Corporate spin-off Equity carve-out Follow-on offering Greenshoe Reverse Initial public offering Private placement Public offering Rights issue Seasoned equity offering Secondary market offering Underwriting Mergers and acquisitions Buy side Control premium Demerger Divestment Drag-along right Management due diligence Pitch book Pre-emption right Proxy fight Sell side Shareholder rights plan Special situation Squeeze out Staggered board of directors Super-majority amendment Tag-along right Takeover Reverse Tender offer Leverage Debt restructuring Debtor-in-possession financing Financial sponsor Leveraged buyout Leveraged recapitalization High-yield debt Private equity Project finance Valuation Accretion/dilution analysis Adjusted present value Associate company Business valuation Conglomerate discount Cost of capital Weighted average Discounted cash flow Economic Value Added Enterprise value Fairness opinion Financial modeling Free cash flow Free cash flow to equity Market value added Minority interest Modigliani–Miller theorem Net present value Pure play Real options Residual income Stock valuation Sum-of-the-parts analysis Tax shield Terminal value Valuation using multiples List of investment banks Outline of finance