Sell-Side

What is the Sell-Side? 

The sell side serves as an intermediary between potential investors, who tend to be on the buy side, and issuers of securities. It is important in financial markets.

Stocks, bonds, foreign exchange, and other financial products are structured for and brought to the public market on the sell-side of the financial industry, as well as private capital placements (such as debt and equity placements).

These professionals are tasked with generating maximum profit through the sale of securities, such as stocks, bonds, private debt and equity, and foreign exchange.

On Wall Street, the sell-side is mainly represented by investment banks. They offer services through their subdivisions. These subdivisions include:

• M&A advisory
• Capital markets
• Sales and trading

The article outlines various aspects of the sell-side and explains its role in the financial market sub-sectors.

Sell-Side and the Buy-Side

Sell-side institutions, mainly investment banks, extend to buy-side firms a range of services. They include equity research, trading, underwriting, and advisory services. They also provide merger and acquisition (M&A) services.

Investment banks provide analysis, research reports, and recommendations on a range of securities. They assist buy-side firms in making sound investment decisions.

Investment banks provide capital-raising services, including initial public offerings (IPOs) and secondary offerings. This allows the buy-side companies to invest in new firms.

Private equity (PE) companies are a large part of the buy side that works regularly with investment banks for numerous services. Some of the prominent PE companies working regularly with investment banks are Blackstone, KKR, and Apollo.

This connection with the buy side, and more so with PE companies, is marked by mutual dependence and cooperation.

Investment banks provide PE firms with essential services, insights, and expertise. They facilitate informed decision-making, deal execution, and value creation for all stakeholders.

Let’s take a look at the table below:

Foreign Exchange Sell-Side

The foreign exchange market is one of the most liquid in the world - currencies are bought and sold 24 hours a day, five days per week. 

The average daily trading volume of the foreign exchange (FX) market is usually well over 5 trillion USD, making it the largest market in the world. 

At Wall Street’s big banks, FX traders buy and sell currencies at spot and forward rates. Salespeople provide the currencies that buy-side customers need, including central banks, hedge funds, and pension funds. 

As of 2022, the top institutions in the foreign exchange market include: 

• Deutsche Bank 
• UBS
• JPMorgan 
• State Street 
• Bank of New York Mellon 

The most traded currencies are as follows: 

1. United States Dollar (USD) 
2. Euro (EUR)
3. Japanese Yen (JPY)
4. British Pound Sterling (GBP)
5. Chinese Renminbi (CNH)
6. Australian Dollar (AUD)
7. Canadian Dollar (CAD)
8. Swiss Franc (CHF)
9. Hong Kong Dollar (HKD)
10. New Zealand Dollar (ZKD)

Bond Market Sell-Side

Private and public corporations frequently sell bonds to finance themselves. Many institutions, pension funds, and individuals purchase the bonds.

Market makers are a key part of the bond market. They make it easy to buy and sell bonds by providing bid and ask prices, increasing market efficiency.

Investment banks usually lead in the underwriting process. They help issuers sell their bonds into the market through the management of their issuance and distribution.

IB firms both underwrite and advise on bond issues. They also actively deal in buying and selling bonds and influence the dynamic of the market.

These banks are also keenly engaged in purchasing US Treasury bonds. These banks bid at government bond auctions and end up getting huge amounts of Treasury securities.

Investment banks invest in US Treasury bonds as a strategic investment. This is also a sign of their role in helping to sustain financial markets.

Their involvement in the Treasury bond market means they play a vital role in shaping the overall financial sector.

Here is a list of banks gathering a considerable part of their fee income from bonds:

1. BNP Paribas SA (52% of fees YTD 2023)
2. Wells Fargo & Co (39% of fees YTD 2023)
3. Barclays (38% of fees YTD 2023)
4. Citi (36% of fees YTD 2023)
5. Mizuho Financial Group (36% of fees YTD 2023)

Debt securities have expanded sevenfold within the past four decades. This growth is propelled by government and corporate debt issuances in significant economies and emerging markets. 

Notably, China’s bond market has experienced an annual growth rate of 13% over the last three years. 

The United States has the largest bond market, valued at over 51 trillion USD. China’s bond market has a value of 20 trillion USD and holds a 16% share of the total market.

Stock Market Sell-Side

Investment banks play a key role in enabling companies to trade on the stock market, specifically by providing (equity) capital markets advisory.

Investment banks provide services for both the primary and secondary equity markets. They underwrite new securities and execute trades for their clients, including buy-side clients. 

Underwriting is in need of an investment bank. The underwriter plays a very critical role. They provide assurance of successful offering of new securities, including stocks or bonds, to the public.

Underwriting process within an Initial Public Offering (IPO) is intricate. Investment banks work in conjunction with the issuing firm to decide on the offering price, the size of shares to offer, and the structure of the deal in general.

This cooperative process involves thorough due diligence on the financial status of the company. It also examines the operations and market status of the company.

The underwriter evaluates potential risk, market, and investor sentiment. They apply this to strategically position the client for success.

Once the terms are set, the underwriter commits to buying the securities from the issuing company. Then, the underwriter sells the securities to the public. 

These activities are meant to share the story of the company, its finances, and growth opportunities with institutional investors and analysts. They also make presentations to prospective retail investors. They aim to create a good story and have a mix of investors.

After the IPO is over-subscribed, there are more buyers than there are stocks available. The underwriter sells the stocks to the investors.

This distribution is affected by investor demand, the category of investor (institutional or retail), and the company's long-term strategic objectives.

Sell-side M&A

Sell-side M&A refers to the process in which a company engages an investment bank or advisory firm. This helps the company sell its business or assets to external buyers. 

The image explains the M&A process, covering organization, diligence, and deal negotiation:

The vendor or "seller" firm aims to extract the highest value from its assets. This is usually motivated by strategic objectives, financial reasons, or alterations in ownership status.

The M&A process involves several key steps. 

• The company and its advisors assess the business. 
• They value their assets and prepare relevant financial information. 
• The investment bank markets the business to potential buyers. 
• They conduct negotiations and manage due diligence. 
• Once a suitable buyer is identified and terms are agreed upon, the deal progresses to closing. 

Investment banks play an important role in leading the selling firm through the process. They optimize the value of the deal and ensure a seamless transaction.

As of November 2023, the leading investment banks by deal value for M&A are:

1. Goldman Sachs & Co
2. JP Morgan 
3. Morgan Stanley 
4. BofA Securities 
5. Citi 

Free Resources

To continue learning and advancing your career, check out these additional helpful WSO resources:

• M&M Theorem
• Marginal Propensity to Save (MPS)
• Middle-Market Investment Banks
• Negative Correlation
• Operating Risk