Understanding Sell-Side: Role in Financial Markets and Investment Banking

What Is Sell-Side?

The sell-side of finance involves creating, promoting, and selling stocks, bonds, and other financial tools. It also includes private capital markets, like private debt and equity placements. Sell-side firms create and manage products for the buy-side of finance.

Sell-side players are investment bankers and market makers who connect issuers to the public and provide market liquidity. They also handle private debt and equity issues.

Exploring Sell-Side Dynamics in Financial Markets

The sell-side and buy-side of Wall Street are two sides of the same coin. One is dependent upon the other and could not operate without the other. The sell-side tries to get the highest price possible for each financial instrument while providing insight and analysis on each of these financial assets.

Buy-side players in the public market include money managers at hedge funds, institutional firms, mutual funds, and pension funds. Individual investors are technically on the buy-side. In the private market, private equity funds, VC funds, and venture arms of corporations investing in startups are on the buy-side. However, the term mostly applies to professional money managers. On the sell-side of the equation are the market makers who are the driving force of the financial market. For example, any individual or firm that purchases stock to sell it later at a profit is from the buy-side. 

The Role of Sell-Side in Foreign Exchange Markets

The FX market is the world's largest financial marketplace, with more than an estimated $6.6 trillion changing hands daily, as of 2019. Here, the sell-side is dominated by top multinational banks, led by JP Morgan Chase, Citibank, Deutsche Bank, and UBS. Bank trading rooms are divided into two groups:

1. Interbank traders who buy and sell large amounts of currency on the spot and forward markets.
2. The salespeople that sell securities to buy-side customers including hedge funds, mutual funds, and large corporations.

Many interbank traders take proprietary positions, but salespeople generally do not.

Navigating Sell-Side Activities in the Bond Market

The global bond market is the world's second-largest financial marketplace, with an estimated value of over $100 trillion. The U.S. bond market is estimated to be valued at approximately slightly over $40 trillion.

Investment banks dominate the sell-side, with the largest being Goldman Sachs and Morgan Stanley. JP Morgan Chase and Bank of America, which combine commercial and investment banks under a single holding company, underwrite and manage bond issues. Many are also primary dealers of U.S. Treasury bonds, which means that they buy directly from the U.S. Treasury. The investment banks are very active, both trading and taking positions in the bond market.

Understanding Sell-Side Influences in the Stock Market

Investment banks also dominate the sell-side of the stock market. They underwrite stock issuance, take proprietary positions, and sell to both institutional and individual investors. One of the most high-profile activities of the sell-side in the stock market is in initial public offerings (IPOs) of stocks. Companies can't go public themselves. They must enlist the services of an investment bank for underwriting. Underwriters are typically brokers, who act as a buffer between companies and the investing public, and who market and sell those initial shares.

Sell-Side Example: Investment Banking and Wealth Management

A wealthy individual worth millions of dollars is looking to invest a significant portion of his capital. He heads to an investment bank for some options. The private wealth management division of the investment bank takes a look at the individual's assets and risk tolerance and comes up with an investment strategy for the individual as well as certain financial products they can sell to him.

The individual takes on the business of the investment bank, paying it commissions and fees for managing his money. The business that the investment bank has offered the wealthy individual is considered the sell-side of the business as it is selling to the client services and financial products.