What’s the Difference? Sales and Trading vs Equity Research vs Global Markets
Continuing from a previous article that highlighted the difference between Investment Banking and Investment Management, this article will be exploring some of the other, perhaps lesser-known roles, within the sell-side of the Financial Services industry.
Sales and Trading
Within this division, there are a variety of roles, including some front, middle and back-office roles. This division relies on public information; in fact, there exists a ‘Chinese Wall’ between these activities and those that happen in M&A and IPOs, where they deal with private information. This is the division that engages in market making. This is where a firm quotes bid (from those buying the security) and ask prices (from those selling the security) for securities. They also are responsible for buying, selling, and holding securities to facilitate trading by firms and individuals, whilst making a profit from the bid-ask spread. The Sales area of this division is responsible for building relationships with clients and then pitching ideas to them to buy or sell securities. These are often high-value quantities of securities, which can then be passed on to the Trading section to act on. Clients include institutional investors (including portfolio managers and pension funds), but also high net-worth individuals, and even retail investors depending on the firm. The information they use to pitch ideas often relies on the Research areas within this division and from movements in the market, in fact, staff usually come in early each morning before the market opens to ensure that they are up to date with the latest market movements and decided on where they see potential investment opportunities, with some sort of consensus between Sales and Trading teams to ensure that trades can be carried out efficiently and successfully. The Sales team also plays an integral part in IPOs, where they have to sell large quantities of new stock in order to reduce the burden on the bank as an underwriter. While Sales teams may be split depending on the product, there tends to also be further division based on the type of client they are dealing with. [1] [2]
Trading, on the other hand, consists of quick decisions and calculations, rather than relationship management. Traders are positioned at particular desks, which each have their own list of stocks, ‘trading books’, which they trade, often grouped by industry or sector. In London, based on the different markets globally, there are certain desks that work on altered hours to make allowances for the opening hours of overseas markets. Traders are also allowed to take positions to satisfy trades and make a profit from arbitrage. ‘Quants’, i.e. Quantitative Analysts are in charge of maintaining electronic trading platforms, which trade based on pre-programmed algorithms and metrics. This is a growing area, which currently works alongside traders, often in lower value trades though, as its results are not always reliable; accuracy has been increasing with technological advancements. [3]
Once traders have completed their side of the trade, it goes through certain validation processes (middle-office), before being passed to back-office roles such as clearing and settlement to ensure all trades are placed correctly. It then may go to a clearinghouse, which acts as insurance against one or both parties being unable to proceed with the transaction (counterparty risk). Various back-office roles also go over what the overall trading position of the firm is at the end of the day, to ensure it adheres to compliance measures and that all positions can be covered in the event that certain stocks do not move according to expectations.
Further roles in this division include structuring roles. This involves creating bespoke products for clients, whereby they need to hedge against a particular risk, a service that is not already adequately provided by existing products. These are less day-to-day projects so much as longer-term ones where teams have to engineer new products, which are both compliant and the best option for clients without costing them more than the value it provides.
Equity Research
While there are research roles and research skills involved in various roles within the Financial Services industry, as an area we will focus on the Research department which sits on the public information side of the ‘Chinese Wall’. Bear in mind that on the private side, research may include talks with management and further primary research to complement any secondary research. Research analysts will conduct fundamental analysis (should include some quantitative analysis and qualitative analysis) on companies and come up with equity reports for various stocks and shares, reviewing them over time, to ensure the information is up to date. This will include a factual representation of the business, but also some forecasts as to the future direction of the business, based on the underlying factors affecting the company’s profitability and growth. The general structure is often divided into the following sections: industry research, management overview, and commentary, historical financial results, forecasting, valuation, and recommendations. Forecasting often utilises complex financial models. This information is then published to clients-however, the fee structure has recently seen some changes due to the implementation of new regulations (MiFID II) in the European Union, making it a less profitable division and squeezing jobs in the sector. All reports based solely on public information can also be made available to the Sales and Trading department, which will then base their trades and recommendations on the ‘Buy’, ‘Sell’, and ‘Hold’ recommendations from the Research team. This team is also divided based on sector. [4]
Macroeconomic Research tends to be completed by other employees, sometimes in a separate division entirely, where they are also able to advise clients of the bank. This looks at wider factors affecting whole industries or economies. Economists are also employed by banks to help guide their overall direction through different economic climates and to spot any particular risks that may come about in their various lines of business as a result of macroeconomic changes and conditions. Credit Research is another area that looks at companies through a similar lens, except that instead of worrying about a company’s stock, it is looking at a company’s debt. This, therefore, focuses on the bond market and interest rates. This is also known as the fixed income section. [5] [6] [7] [8]
Global Banking/Markets
This is sometimes slightly synonymous with the two above divisions, depending on the structure of the individual firm. However, it can also include a number of other operations, some of which are mentioned below.
Securities Services
This includes custody services (safekeeping of assets and corporate actions), fund accounting and administration (the support activities behind certain investment products offered), clearing and corporate trust, and loan agency services (where the bank has some sort of fiduciary responsibility for certain investors and facilitates borrowing for businesses). They also include increasing the availability of a company’s shares on the equity side and collateral management (to meet complex financing and liquidity requirements). [9] [10]
Markets Operations
This corresponds to some of the back-office operations which facilitate transactions made by Sales and Trading teams. It also comprises of operations such as Risk and Compliance, which respectively ensure the bank is not exposing itself to overly many external or internal risks that could lead to a bank’s failure and that it is in line with regulations, to reduce financial and reputational risk. There is also often a technology department to both deal with any technological issues incurred through the day-to-day operations of the business, and to also improve existing processes and create new ones which improve efficiency and perhaps drive revenue directly, i.e. in the electronic trading space. Operations may be a separate division in itself, to support certain business lines more directly. Treasury is responsible for managing the bank’s liquidity and financial risk. [11] [12]
Roles here may vary in nature, with some being more day-to-day based and often centered around firefighting any issues which arise. Others are based on longer-term client projects and facilitate changes to external factors, such as regulation. The main similarity between these roles is that they often require meetings to discuss what has happened in the markets and any other pertinent changes to their function. However, besides this, roles tend to vary greatly. Note: global transaction services and corporate banking services tend to be another separate area within large full-service banks. [13]
[1] https://www.wallstreetprep.com/knowledge/the-ultimate-guide-to-sales-and-trading/
[2] https://corporatefinanceinstitute.com/resources/careers/jobs/sales-and-trading/
[3] https://www.mergersandinquisitions.com/day-in-life-options-trader/
[4] https://www.wallstreetmojo.com/equity-research/
[5] https://www.wallstreetmojo.com/equity-research-vs-credit-research/
[6] https://corporatefinanceinstitute.com/resources/careers/jobs/equity-research-overview/
[7] https://www.investopedia.com/articles/personal-finance/082815/day-life-equity-research-analyst.asp
[9] https://www.jpmorgan.com/solutions/cib/securities-services
[10] https://www.bbva.com/en/global-securities-services-great-unknown-investment-banking/
[11] https://www.goldmansachs.com/careers/divisions/operations/index.html
[12] https://www.hsbc.com/who-we-are/our-businesses-and-customers/global-banking-and-markets