Sell-Side firms are those that receive a transaction-based fee for providing institutional investors access to capital markets. These are the investment banks and broker dealers like:
- Goldman Sachs
- Morgan Stanley
- JP Morgan Chase
Buy-Side firms are institutional investors that are paid to manage the investments on behalf of principal investors (i.e., endowments, companies, and individuals). Examples of buy-side firms are:
- Mutual funds
- Hedge funds
The growth of High-Frequency Trading (HFT) has blurred the lines between buy- and sell-side somewhat. Investment firms using HFT strategies and acting on behalf of principal investors skim the market in the same way a sell-side market maker might.
Both buy-side and sell-side firms are professional “agents” who act on behalf of “principals” (i.e., owners of capital). The tension between the financial needs of principals and the compensation structures for agents often leads to agents making investment recommendations that are not necessarily in the principals’ best interests. These issues are what Framework Investing terms “Structural Factors in Investing”; we discuss them in-depth in the Framework Investing 101 course.