ER Business Model/Relationship

edit: okay, I'm getting a better idea of how things work, but I'm still a little bit confused.

Do equity researchers work with the S&T team? Or is there a separate group for institutional sales and traders?

Would this be an acceptable answer to number 3?: 1. Clients(institutional investors), 2. Bank(internal sales/trading team), 3. Companies you cover. Because you want to provide the best possible research for clients to drive sales for your bank's products. With quality work, not only will you be able to advance your career as a high ranking researcher, but you will create more commissions (better bonus).

I'm still confused as to how there isn't conflicts of interest:

  1. Companies in your sector push you to do buy rating or they will not talk to you.
  2. Bank pushes you to to buy/sell rating to benefit their own traders.

Sorry if I'm being totally dense about this..


I think someone of these questions have been answered before, but I was unable to find it through the search function..

  1. Rank the 3 in order of importance: companies you cover, clients, or internal trading/sales team (i think this is a common interview question and I'm not remembering it exactly.
  2. Isn't it a conflict of interest for equity researchers to push bank's products by giving them a buy rating?

I know that researchers create a report for bank's clients to buy products from them and the commission is split between sales/research. But that's all I know..

I would truly appreciate the insight. Thanks in advance!!

 
  1. Sell side research at a bank offers research to institutional investors who would then make trades through the bank that provided the research. This would generate revenue by increasing the trading volume
  2. Buy side research makes money by buying the equity(or other financial instrument) that their research has concluded will appreciate in value. They make money by the the appreciation of the financial instrument.
  3. depends?
  4. Yes and no. While the bank makes money from increased trading volume from a "buy" rating, it is possible that the research sucked and the product tanks therefore causing institutional investors to not buy from that bank or lower their volume.
 
Best Response

What you have to remember is that equity traders and buy side clients usually have a broad area of interest in regard to their work (perhaps an entire sector, several sectors, or even a whole market). This is a little different to a sell side analyst who will typically know ~20 stocks intimately.

If you are a fund manager, and you are interested in buying stock XYZ, wouldn’t you like to talk to someone who:

A) Knows the company intimately, understands their business, financial and operating environment

B) Has a strong relationship with the management of the company

C) Has already done the valuation legwork for you

So the buy side gets the good oil from a sell side analyst and this helps them make a good investment/trade saving them a shitload of time/money. The buy side would then probably do the trade through the analysts bank/broker compensating the analyst for his time and effort. They don’t have to, but if you don’t pay for advice the analyst will have less time for you in the future and you will be less likely to get that timely email before the stock tanks/explodes.

This is just one aspect of how sell side analysts create value. The other side is corporate deals (IPO's, offerings, placements and M&A) which are very lucrative for banks and brokers. Because of the potential fees from corporate work the competition for a part in these deals is fairly intense.

The company will be paying quite a big stack of money to one or a few banks for the privilege of getting a deal done and in return the company will almost always want research to be written and distributed to the world.

The company wants to be covered by a sell side analyst because it increases the visibility of the company to the market, helps prove its investment credentials which hopefully will be positive for the share price, and what is positive for the company's share price is usually very positive for the company’s management (both in terms of compensation and continuing employment).

So you see that a sell side analyst can take partial credit for bringing in investment banking revenue and brokerage revenue and this is why Research is considered front of house and the analysts earn comp reflecting that.

 
tabjockey:
What you have to remember is that equity traders and buy side clients usually have a broad area of interest in regard to their work (perhaps an entire sector, several sectors, or even a whole market). This is a little different to a sell side analyst who will typically know ~20 stocks intimately.

If you are a fund manager, and you are interested in buying stock XYZ, wouldn’t you like to talk to someone who:

A) Knows the company intimately, understands their business, financial and operating environment

B) Has a strong relationship with the management of the company

C) Has already done the valuation legwork for you

So the buy side gets the good oil from a sell side analyst and this helps them make a good investment/trade saving them a shitload of time/money. The buy side would then probably do the trade through the analysts bank/broker compensating the analyst for his time and effort. They don’t have to, but if you don’t pay for advice the analyst will have less time for you in the future and you will be less likely to get that timely email before the stock tanks/explodes.

This is just one aspect of how sell side analysts create value. The other side is corporate deals (IPO's, offerings, placements and M&A) which are very lucrative for banks and brokers. Because of the potential fees from corporate work the competition for a part in these deals is fairly intense.

The company will be paying quite a big stack of money to one or a few banks for the privilege of getting a deal done and in return the company will almost always want research to be written and distributed to the world.

The company wants to be covered by a sell side analyst because it increases the visibility of the company to the market, helps prove its investment credentials which hopefully will be positive for the share price, and what is positive for the company's share price is usually very positive for the company’s management (both in terms of compensation and continuing employment).

So you see that a sell side analyst can take partial credit for bringing in investment banking revenue and brokerage revenue and this is why Research is considered front of house and the analysts earn comp reflecting that.

wow wow , this is extremely helpful. What about conflicts of interest between the ER and each relationship? Also is institutional equity sales the same thing as the Sales in Sales and Trading?

 

The bankers doing a deal will usually very much want the analyst to write a positive report on a company to help them get the deal and the fees. This can be a bit of a conflict of interest when it comes to companies that don't have solid investment credentials, it can be hard for the analyst to appease his banker colleagues with a positive report if the company is shit. A sell side analyst has to protect his/her reputation so things can get tense in those sort of situations but at the end of the day the analyst wouldn't write anything they don't believe (in my limited experience).

Different banks/countries can have slightly different names for things but Sales and Trading includes all kinds of financial products (Bonds, Equity, Derivatives, etc), When I say institutional equity sales I mean someone who has relationships with the buy side which they use to sell the firms equity products.

 

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