Sell-side
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People Anatomy™
A spotter’s guide to the men and women of finance.
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Sell-side
sɛl saɪd (n.)
A broker, dealer or market-maker: one given to offering financial services and products with a view to selling them — hence, the sell-side — to the rapacious class of institutional investors and their agents and investment advisors whom, since they buy these things, we generally know as the “buy-side”.
The sell-side are also known as brokers, dealers, and broker-dealers. Brokers act as agents to put a buyer and a seller together and charge a commission. Dealers act as principal, buying from a seller, and on-selling to a buyer, but the economic upshot of what they do in either case is the same. They take a commission (brokers), or a spread (dealers), but try not to take on market risk.
Three important things to bear in mind about the sell-side:
- Dealers aspire to be market neutral: Typically the sell-side dealers provide market exposure to customers without taking a market position themselves.
- Dealers delta-hedge: since a swap contract is inherently a principal-to-principal contract and not an agency arrangement, and since entering it necessarily means the dealer does change its market position, the dealer will execute an offsetting delta-hedge in the market to “flatten out” that position.
- Dealers are regulated: Because their role tends to be systemically important and they aggregate a lot of risk taken on by their customers, dealers tend to be heavily regulated, both in terms of their conduct of business — with whom they can do business, and on what terms, and prudentially — in how they manage customer and market risk and how much capital they must hold.
If dealers fail, it tends to be more or less apocalyptic for the market. But the market is getting better at managing the stress of dealer failures (Credit Suisse caused a lot less dislocation than did Lehman), and in truth dealers do not fail that often.