A migration: transitioning from the sell-side to the buy-side

While exploring career moves across the industry, Annabel Smith uncovers that compensation, juniorisation and automation are key forces behind the decision to move from the sell-side to the buy-side.

When addressing the key differences between the lifestyle of a sell-side or buy-side trader the phrase ‘the grass is always greener’ has never been more appropriate… or has it? Every year individuals make the move from the buy-side to the sell-side or vice versa. But why do more traders transition to the buy-side instead of the other way around?

According to Michael Werner, director of global markets at executive search firm Sheffield Haworth, which recruits for the buy- and sell-side, more people shift from sales trader positions to buy-side trader roles because because of smaller compensation margins across the board. The working environment is also generally perceived to be more stressful at banks and brokers.

“There is a growing consensus that a buy-side trading seat is more attractive than the sell-side. The reality is you are dealing with the flip side of the coin and that comes with different pressures and a new set of challenges,” says Werner. “The buy-side is seen as a less stressful place to work – although a number of hedge fund traders and a few long only dealers will strongly disagree. Everyone is being forced to do more with less and feel threatened by automation, but these themes play out over a longer time on the buy-side and there can be a greater sense of job security.”

Sales trading is driven by individual sales targets and profit and loss statements. This creates a subsequent pressure to perform and makes job security less certain, explains Adrian Biesty, head of trading at Lombard Odier Investment Managers.

“Not having the relentlessness of a sales target on your back is probably one thing that pushes a lot of people [to the buy-side]. You know, not having to make a figure every single year. There is a lot more security on the buy side,” he adds.

As a trader on the sell-side, working hours are longer than on the buy-side due to the nature of the business. However, this is not a one size fits all situation. If, for example, you work in a more deal driven role at an investment bank, then an individual could be expected to work up to 80-hour weeks to meet the needs of clients.

On the other hand, working hours for a role in public markets are more predictable as you operate during market hours. Moreover, when examining the realm of private equity on the buy-side, there is a similar expectation that individuals work longer hours when deals are on the table. That being said, working hours on the sell-side are marginally longer regardless.

Balance on the buy-side

Flexible working hours have been at the forefront of many market discussions across the institutional industry in 2020 and are becoming increasingly desired by those working in trading. But this can be more difficult to implement across front-office functions at banks or brokers due to the short-term reactive nature of the client relationship, says one global head of trading on the buy-side, speaking on condition of anonymity.

US investment bank Goldman Sachs was the first major sell-side institution to address the issue of working hours for its traders with its ‘Saturday Rule’, which was implemented in 2013. The rule requires that employees are out of the office from 9pm on Friday until 9am on Sunday.

Likewise, JP Morgan introduced its ‘Protected Weekends’ scheme in 2013 whereby juniors were forbidden from working for one full weekend per month. Bank of America Merrill Lynch and Barclays both implemented schemes in 2014, among others.

“The work/lifestyle balance is better on the buy-side when compared to bulge bracket or tier two players, particularly where they are involved in capital markets,” explains Alex Jenkins, head trader at Polar Capital, who formerly worked on the sell-side. “The length of your day if you have a few deals over the course of the week will be from 6am and that is a lot to ask of people.”

Historically, longer hours expected of sales traders have been justified by larger compensation. But in recent years, compensation has been driven down across both the buy- and sell-side by a lack of trading activity across the Street and the rising cost of trading. At the same time, bonus deferral schemes have forced traders to commit to longer periods of service to access the cash bonuses owed to them: “With stock interest, you have to stay at firms for much longer,” adds Jenkins.

This means that generally, traders can make more money on the sell-side but no longer a significantly larger amount, making the weigh up between working on the buy-side and sell-side more difficult. With banks and brokers no longer offering the promise of quite so significantly bulging (but bulging none the less) paycheques, the lifestyle balance of the buy-side has become increasingly more attractive.

“For senior people on the sell- side, the job is certainly not as lucrative as it used to be and there are fewer and fewer managing director seats out there,” adds Werner. “With pay on the buy-side converging you may be looking at 10 to 20% less take home pay [on the buy-side] which is a lot easier to get your head around than a 50% pay cut. Depending on your personal circumstances, a move from the sell-side to the buy-side can start to look very attractive.”

Bonuses in equities, particularly in 2020, are expected to be unpredictable. Markets have performed well despite volatility caused by the pandemic, but banks at a group level have not necessarily performed as well. This could mean some traders are left out of pocket.

“How banks with hard hit corporate and consumer businesses compete for talent with specialised brokerages and the buy-side will be a challenge, and not everyone will get it right,” warns Werner.

As bonuses for sales traders are dependent on the overall performance of the firm, efforts can sometimes go unrewarded if other business divisions are struggling, according to Jenkins. But on the buy-side, everyone is working towards the same goal.

“At the end of the year, you could have given absolutely everything to the firm, not taken any holidays or sick days but your bonus is affected by the fact that one of the other teams had a bad year,” she says. “That’s a hard pill to swallow. On the sell-side, there is more of an individual aspect whereas on the buy-side there is more of a team aspect – but still with a feeling of individual achievement.”

Greater longevity

With margin compression and rising trading costs across the board, a wave of juniorisation has swept trading as organisations look to become more cost efficient and firms try to do more with less. Across trading floors, there has been juniorisation for the past decade as people leave positions and are not replaced, which can be very demoralising.

Furthermore, traders tend to stay in roles on the buy-side for longer, meaning access to the buy-side is limited as there are fewer roles available. Biesty reveals that Lombard Odier Investment Managers has teams within the business that have been together for more than 20 years, adding weight to the idea that the buy-side is generally more stable.

“You probably have greater longevity in a seat on the buy-side once you are in a nice role working with good fund managers. There is no way that someone like me in a seat like this would be looking for my next role,” Jenkins echoes.

However, this stability can lead to a lack of new DNA entering the buy-side talent pool. Werner explains that new hires tend to be incremental upgrades rather than transformational, which can be frustrating when you are looking to drive change and integrate the latest trading technology.

“With the buy-side taking more accountability for best execution this can result in some real tension with the dealing desk and broader business,” he adds.

Banks and brokers, however, have significantly more opportunities available at entry level for aspiring analysts because of juniorisation and the sales nature of the business, and this constant injection of new talent is the lifeblood of firms’ success.

Both Jenkins and Biesty agree that the skills they learned while working on the sell-side have been invaluable to their roles on buy-side trading desks.

“Maybe my thought process on this is different because I’ve come from the sell-side but having a trader who is used to covering multiple accounts, knows different parts of the industry, how the operations on the sell-side works, how prime works, would be incredibly useful for a trading desk on the buy-side,” says Jenkins.

Not many traders make the move from the buy-side to the sell-side, largely because client relationships restrict them from doing so. Sales trading desks at banks and brokers are unlikely to hire from asset managers as they can’t be seen poaching from clients that supply chunks of their revenue.

“We don’t see a lot of moves from the buy-side to the sell-side unless it’s someone returning after a buy-side stint,” Werner explains. “Often, they miss the buzz of the floor or the dynamism of a bank they never quite appreciated. Banks are also nervous about poaching top talent from their clients although the reverse is seldom true. 

The sell-side offers a greater volume of opportunities to hopeful individuals with an appetite for glory. And while the grass is certainly considered greener, it is perhaps a rite of passage traders must go through before migrating to the buy-side for winter.