End of the Sell Side

The "sell side" of Wall Street continues to become less and less relevant. Prevailing trends call into question whether is value in any of their services. Eventually, the sell side will disappear.

Sell side research, while it barely survived the IPO debacle of 99-00, when it was clearly revealed to be nothing more than a shill for investment banking business, will continue towards obsolescence for two reasons. First, because the "information" that is included in those reports has become ubiquitous, available to anyone with a browser, and secondly, because there really is no way to justify the economic model that keeps the analyst on the sell side. The analyst belongs on the buy side, along side of the portfolio manager, keeping the value of the research at it's highest point, closely held and captive to the buy side firm. As soon as research is disseminated, it loses it's value. The only reason why the buy side does not pay for the research analysts today is because the sell side continues to foolishly foot the bill. That is a broken model.

Direct market access trading, dark liquidity pools, and the rise of alternative trading systems like Liquidnet and Lava Trading have made the notion of sending order flow to smaller sell side trading desks as quaint as a buggy ride in Lancaster. There will come a day when buy side trading desk employees will be fired for sending order flow anywhere but into an automated black box, and it won't be too far out in the future.

So, why does the sell side even exist? Their product set includes four things, research, liquidity and trading, M&A advice, and IPOs. My firm has worked towards finding a disruptive model to break the traditional book-building process of IPO issuance, but even we haven't gone far enough. At the end of the day, the exchanges will handle the issuance of new issues (perhaps through an auction, something with which they are intimately familiar) and lawyers and consultants will provide M&A advice. Hedge Funds and buy-out funds will line up to provide the balance sheet to finance the transactions.

Goldman just raised a $19B private equity fund. What side of the street are they on again?