This is basic, but could someone go over what Research, Sales, and Trading do at your typical wall street bank. More importantly, how are they connected? Is this about right? Research: performs the industry and company analysis, will also talk to big clients about specific issues in an effort to increase trades. __How are they paid—is it more on the basis of trading commissions or more on the “quality” of their research? __How much time is spent doing research vs talking to clients? __Is there any way for them to generate revenues other than getting clients to trade more? Sales: a little foggy on this one, I think they mostly use the research to make suggestions to their buyside clients? __So the expectation is that if the buysider likes the idea, he will use the bank’s trading group to execute the transaction? __What else to these guys do? Trading: executes the trades. __How is the performance (and bonus) of traders determined? Seems like they’re just waiting for the trade requests to come in. __What are the fees for trading? 5 cents a share? __So there must be some sort of distinction the proprietary traders and the execution traders, right?
I can only comment on research and this is based on my experience so could be different for others. Keep in mind that sell side research is usually a team of a senior analyst and one or more juniors so the roles, compensation and work are different for each. Senior analysts compensation is determined a lot by sector – an analyst in a “hot” sector like biotech will in general make more than an analyst in a “not hot” sector. Compensation is very subjective IMO. It is based on many factors including reputation of the analyst, clients rating the analyst, sales people rating the analst. Quantitative factors are also monitored including # reports published, # pages published, # phone calls made, days of marketing, days of non-deal roadshows, trading revenues, etc. Analysts cannot be compensated based on banking business, but an analyst who brings in deals will likely have a good reputation and may be indirectly rewarded for this. Senior analysts delegate most of the modeling and report writing to the juniors to leave their time open for client calls and client meetings. So maybe 50%/50% research vs client interaction but could even be 20%/80% research vs. client calls/meetings. So it is really all about the selling. Given that a lot of compensation is based on ratings by clients and sales people, good people skills are a must. Research doesn’t generate revenue directly, but better quality and quantity of research should translate into higher trading volumes.
The job of Sales is to essentially facilitate the buy-side. In other words, sales doesn’t push ideas, it’s their job to get the buy-side to come to them with their orders when the buy-side has their own ideas. Also, when a trader needs to execute a large trade for a client, they will have the sales person quickly shop it around to other clients so they don’t have to take down the whole thing. In a sense, sales isn’t selling ideas, they are selling and the representative of the firm’s execution abilities. Research is there to answer questions and provide quick facts and traders are tasked with actually executing trades.
how do the research guys get clients to trade a lot? or is the point to do quality research so more institutions bring their accounts to your firm, increasing trading volume that way? TIA
Thanks, these responses are super helpful. A few more questions: – This question probably reveals my ignorance, but are there “execution only” brokerages (i.e. no research) that charge substantially lower fees? Seems like those nickel charges could really add up, especially if you were turning over your portfolio multiple times per year. – I thought most larger hedge funds had their own traders, if this is the case, what do they need the banks for? Reconciliation of the trades? How would the role of a sellside trader differ from that of a buyside trader? – Is anyone willing to hazard a guess on what percentage of funds completely ignore sell-side research?
naturallight Wrote: ------------------------------------------------------- > – This question probably reveals my ignorance, > but are there “execution only” brokerages (i.e. no > research) that charge substantially lower fees? > Seems like those nickel charges could really add > up, especially if you were turning over your > portfolio multiple times per year. Sure, plenty of smaller broker dealers have bare bones research. They just don’t always have the access to other funds to get you the best executions, etc… > – I thought most larger hedge funds had their own > traders, if this is the case, what do they need > the banks for? Well, on the buyside, the trader is shopping around the trade to multiple banks/brokerage houses and seeing who is going to give him the best quote, so he’ll call sales people at various banks etc to see whose trader offers him the best execution. He can also try to trade it himself on the exchanges. At many funds traders are prop traders and are actually making investment decisions. > Reconciliation of the trades? How > would the role of a sellside trader differ from > that of a buyside trader? The sell-side trader takes the order from the sales person and has to give the sales person the appropriate bid/offer to give back to the client. He’s considering things like the following: * How many and at what price can I sell some of the 100,000 XXX’s I’m buying from the client? * What is my current XXX position, and how much can I afford to hold onto myself? Should I pay up for these as it compliments my position or should I bid low because I need to lay off the whole trade?
naturallight Wrote: ------------------------------------------------------- > – I thought most larger hedge funds had their own > traders, if this is the case, what do they need > the banks for? Reconciliation of the trades? How > would the role of a sellside trader differ from > that of a buyside trader? most sell side traders are strictly execution oriented. an order comes down the pipe, and they try to get the best price for it, buy or sell, for any internally managed account (i’m not talking about retail accounts – these are large block trades). at my old firm, they also facilitated syndication by managing the IPO process – not underwriting obviously, but trying to find buyers within the firm for the shares they were syndicating (i.e., retail or institutional accounts). i almost think trader is a misnomer, since trader always makes me think of prop traders, which is a totally different game (managing internal capital). sell side traders should be renamed order executors or something like that. a buy side trader also has a variety of roles. they execute orders for the PM(s), manage relationships with equity sales people to get / maintain research coverage, and, at my firm (hedge fund), also present bids and offers on large, over the count blocks of shares. our trader calls around on the street and tries to find a buyer or seller of XXX, which is done OTC so as to avoid impacting the market price (usually micro cap, illiquid stuff). he also fields calls of people calling us doing the same. and finally, he manages the process of locating shares for short sale. its not super exciting stuff, but its mission critical and a mistake can be extremely costly.