Sell Side

Sell-side is a term used to describe firms that process orders for buy-side firms. They typically employ research analysts, traders and salespeople.

A sell-side firm makes its living processing transactions for investment banks, buy-side firms, publicly traded companies, other institutional investors and retail investors. The firms typically earn a commission for handling such transactions. Thus it’s in their best interest to generate churn, as the more transactions they handle the more money they make. An example of a sell-side firm would be the brokerage houses most investors are familiar with such as UBS and Merrill Lynch.

Sell-side firms also have an inherent conflict of interest in that the subject of many of their research reports are in many cases also their clients. It’s not uncommon for companies to pressure sell-side firms to publish positive research, whether by threatening to move their business to a competing firm or threatening to withhold information from their analysts. This can lead to some significant overly positive outlooks for the firms in analyst opinion. In the nineties, sell-side firms were accused of spinning research in favour of their institutional clients and were subsequently charged by New York attorney general Elliot Spitzer.

Importance To Investors

An investor should never take an analyst’s opinion as gospel due to the conflicts of interest these analysts face. As noted above analyst’s are often pressured by companies to publish positive reports. Analysts of sell-side firms have a long history (and sometimes sordid) of being overly optimistic in their projections. Analysts also have a reputation for missing downturns in the economy.

Sell-side firms do service the retail investor but the institutional investors represent the bulk of their business, so it’s important for investors to know that this part of wall street machinery is not intended to necessarily help them. Nonetheless, analyst projections are worth noting because they generate the expectations that quarterly earnings are judged upon by the street. An investor should always know what consensus estimates are for his or her stocks, but not consider those projections to necessarily be accurate. “Growth at reasonable price” investors use analyst projections into figuring buy/sell decisions so they need to be especially wary.

Savvy investors, aware of these conflicts of interest, tend to buy independent research when looking for a professional opinion. Independent research houses typically publish reports through subscriptions and charge customers equally so presumably they are not as subject to the whims of their large clients as all are charged the same.

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