The fight between the buy side and the sell side

June 10, 2009

The age-old fight between the buy side and the sell side is flaring up again:

In the US, William Dudley, president of the New York Federal Reserve, is trying to give investors a louder voice. The Fed used to garner almost all of its market feedback from the sell side – groups such as JPMorgan Chase, Citigroup, Goldman Sachs or Merrill Lynch. But in recent months the New York Fed has started including asset managers in advisory committees and created an informal advisory group of hedge fund, private equity and asset managers. “Our aim in this is not to disenfranchise the dealers but to enfranchise the buy side. We want the whole market to be part of the decision-making process,” says Mr Dudley.

Whether the “whole market” can be corralled into making collective decisions remains unclear: though groups such as Sifma and the Fed itself stress that it is in everyone’s interest to co-operate, the turf wars are likely to grow more rather than less intense. “All over the place, there are fights going on about who will control the system. It’s ugly,” observes one Wall Street financier.

What’s happening here is that the sell side has been weakened by the financial crisis, and the buy side sees no reason why the big banks should continue to dominate both the markets and industry groups, to the detriment of the people who are actually investing money over the long term. If the banks won’t provide investors with the kind of leverage and liquidity that they could offer at the height of the boom, then investors, quite reasonably, want more say in how the markets operate.

The banks are likely to win this game, though, if only by being obstructionist for the time being. There have been numerous efforts over the years to organize the buy side, but they’re generally doomed to failure just because hedge funds and other investors generally view each other as competitors rather than natural allies, and they’re never good team players at the best of times. Indeed, a large part of the history of the success of the sell side over the years is a function of the fact that the sell side seems to have more ability to organize the buy side into things like dark pools than the buy side has to organize itself. Plus, of course, most of the largest buy-side institutions are owned by banks, so there’s a limit to how bolshy they’re ever going to be allowed to be.

Still, it’s good to see the buy side getting a voice in these matters, even if it only lasts a year or so. After all, decisions made in the coming year about the fate of capital markets going forwards are going to have very long-lasting implications.

No comments so far

Comments are closed.