Sell Side vs. Buy side

[Zack Zarr 5]

Sell Side vs. Buy Side

 

I mentioned about the importance of understanding the role of sell side vs. the buy side in the previous post. I would like to expand a bit more on this topic because I think it is an important concept which should be understood when analyzing the COT data.

 

The two categories of sell side and buy side are the common terms used in the investment banking industry. Half of the entire financial market comprised of the sell side entities while the other half belongs to the buy side, very obvious. But what are these two sides of the market? What does it mean to be on the sell side or the buy side?

 

What is Sell Side? What is Buy Side?

 

Sell Side is the commonly used term for the firms and institutions that facilitate the decision making process for the Buy Side.

 

Buy Side are the firms and entities who actually make the investment decisions for either themselves or their clients.

 

The Sell side is comprised of the firms including investment bankers, commercial bankers, large corporations which physical assets, stock brokers and market makers.

 

The But Side includes the money and asset managers, hedge funds, institutional and retail investors.

 

Structure of the firms

 

On the Sell Side, the structure of the firm consists of the director, vice president, associate and analyst. On the other hand, the Buy side firms have marketing people, researchers/analysts and portfolio managers.

 

The role of each side is what makes it very important to understand when looking at the CFTC reports. The Sell Side is the one who monitors the performance of each asset class and individual assets, creates models based on the data to predict future performance and makes recommendation and target prices. In brief, the Sell Side promotes their idea in order to sell them to the Buy Side. These ideas are often publicly available for FREE. This is an important bit.

 

The Buy Side utilizes the ideas from the Sell Side as well as the public recommendation by the Sell Side, and also does their own analysis to come up with their investment decisions. The results of the Buy Side analysis and research are NOT public. It is only available to their clients. So, weather the Buy Side decides against the Sell Side recommendation, or when they do and do not decide to act on the Sell Side recommendation remains unknown until they make that decision. In other words, we only see the results of their research after they make that decision. That is the essence of understanding the role of institutional traders when looking at the chart data and analyzing the position size reports. We ONLY see the aftermath of the Buy Side decision process.

 

Think about it

 

So whenever you see an analyst recommendation or a bank report on the future performance of a certain currency or stock, think about it in terms of the interaction between the two sides of the market. For example, when Citi Bank says the CAD has still some potential to the upside, i.e. sell the USDCAD, it does not mean that they are not telling the truth. It also does not mean that you sell USDCAD right now. All it means that the Citi analysts have done their research and still see some potential in CAD. They obviously have a potential client which benefits from selling the CAD. It could be a big corporation with some business in CAD and wants to hedge against its risks by selling the CAD. So they need to find buyers. You and I and every retail traders are not the main target. They are presenting their research results to capture the Buy Side’s interest. If you are a money manager and also think there is upside potential in CAD, would you buy right now? With a large amount of money at risk and under management, you rather wait for the right price to get long in CAD, or sell the USDCAD.

 

This is a hypothetical example and only represents a thought process when hearing such recommendation. All you need be aware of is the dynamics of the financial market and how the two sides think about their goals. Thinking in the mind of these big institutional traders is always a good practice to perform on a routine basis. It will help change your mindset on the long term.

 

Zack