The expressions “Buy-side” and “sell-side” are a commonly-used piece of market shorthand to describe the kind of business a finance firm is involved in. The main activity of the financial markets is originating securities – bonds, shares and instruments like Syndicated loans – and distributing them to investors.  The originators are the “Sell-Side”, the buyers, the “Buy-Side”.

The financial markets involve many more activities, mergers and acquisition advice, trading of securities once issued, the trading of futures, options and derivatives and currencies, but this origination and distribution is the core.

Origination involves several different groups in an investment firm:

• A client coverage team will market a firm’s services to potential issuers
• Prior to a first issuance the firm may introduce the potential issuer to investors through a “non-deal roadshow” or “early-look” presentation
• Once the firm has secured a mandate a specialist debt or equity capital markets team (“ECM” or “DCM”) will work with legal advisers to prepare documentation, secure regulatory approval (“list” the securities), plan the timing and marketing of the securities
• In the case of equity securities, the arranging team will also bring together equity researchers from a number of firms to initiate research on the issuer
• The Origination team will then liaise with a syndicate team who will be involved in initial pricing decisions and coordination of the sales process. The issuer will do a roadshow to present to investors and during this typically 1-3 day marketing exercise, pricing will be proposed, and the deal launched
• Once launched the firm’s sales force will then collect orders – both price and volume for the securities from investors and field queries about the issuer. Demand from investors will drive the final pricing of the transaction
• Post completion of the issue, the trading and sales team of the bank will make a market in the securities, providing liquidity to investors

Article Contents

• What is the Buy-side?
• What is the Sell-side?
• Roles and Responsibilities
• Career Pathways
• Interaction Between Buy-Side and Sell-Side
• Real-World Applications

What is the Buy-side?

The buy-side refers to institutions that buy securities for their own account or as third-party fund-managers. Some of the main buy-side entities include mutual funds, pension funds, insurance companies, State superannuation funds and hedge funds. Their primary goal is to invest money on behalf of their clients and generate returns by making investments in various securities like stocks, bonds, derivatives etc.

What is the Sell-side?

Conversely, the sell-side entities are involved in creating, promoting and selling those securities to the buy-side. Investment banks, brokerage firms, and securities firms are examples of sell-side institutions. Their main role is to connect buyers and sellers, distribute securities, provide research and advisory services, provide liquidity to investors through their trading capabilities.

In essence, the buy-side buys and manages securities while the sell-side originates and sells those securities and related derivatives.

Roles and Responsibilities

On the buy-side, the main roles involve asset management and research. Portfolio managers and analysts conduct research on securities to identify investment opportunities. They determine which assets to buy, hold or sell to construct portfolios that aim to maximize returns for their clients. Traders on the buy-side then execute the trades to implement the investment decisions.

The sell-side connects the buyers and sellers to facilitate transactions. Key roles on the sell-side include investment bankers who provide capital raising and M&A advisory services. Brokerage and sales traders interact with buy-side traders to execute orders and manage client relationships. Equity research analysts publish research reports on securities to provide insights and recommendations to the buy-side.

Career Pathways

On the buy-side, roles tend to be more specialized. Many portfolio managers and analysts start their careers on the sell-side before transitioning. The career path often involves interning at a mutual fund or hedge fund, then becoming a junior analyst, and working up to a portfolio manager role. Traders also begin as execution traders before managing their own book.

The sell-side offers diverse roles from investment banking, trading, research, and sales. New graduates often start in analyst programs or internships. The career path usually involves progressing from analyst to associate, vice president, director, and managing director roles. Traders also progress from junior to senior trader positions.

Interaction Between Buy-Side and Sell-Side

There is significant interaction between the two sides. Sell-side firms pitch ideas and provide research to buy-side clients. Traders collaborate to execute orders and negotiate prices. Investment bankers interact with buy-side clients for deals like IPOs, follow-on offerings, and M&A.

The sell-side aims to provide services that are valuable to the buy-side in exchange for commissions and fees. Having buy-side clients is crucial for the sell-side in terms of league table rankings, bonuses, and overall revenue. The buy-side leverages the sell-side’s resources to identify opportunities and access liquidity.

Real-World Applications

A common example is a pension fund portfolio manager using research reports from a sell-side firm to inform investment decisions about investing in an IPO or in shares already in issue. The portfolio manager may then execute trades through the sell-side’s trading desk to implement their strategy.

In investment banking, a private company looking to go public would hire an investment bank for advisory services on the IPO. The process of going public is lengthy and labour intensive and is a complex project management exercise. The private company taps into the bank’s expertise on legal, marketing and pricing aspects to maximize value in the offering. The issuer also mobilises substantial specialised resources in preparing research, documentation and in distributing the securities.

For M&A, a private equity firm (buy-side) acquiring a company may hire an investment bank (sell-side) to underwrite and distribute syndicated loans or bonds to finance the acquisition. This leverages the bank’s origination and distribution resources.

In this case the bank might offer the following range of services:

• Acquisition strategy (in the case of a listed target) and advice on takeover regulation
• Execution of the share purchase
• Ratings advice
• Acquisition debt arranging and underwriting and refinancing of target debt
• Hedging execution
• Subsequent asset sales
• Co-ordination of due diligence

In summary, the buy-side and sell-side play complementary roles in financial markets. With the buy-side focused on managing investments and the sell-side on facilitating transactions, they interact extensively to enable efficient markets. Though differing in their roles, both are essential in the functioning of corporate finance and global financial markets.