What Is a Selling Group?
A selling group comprises all financial institutions involved in selling or marketing, but not necessarily underwriting, a new or secondary issue of debt or equity.
- A selling group includes the brokers, dealers, and other financial firms collectively involved with the selling or marketing of new or second-issued securities.
- The group typically includes members of the original underwriting syndicate and members who are not underwriters.
- The underwriter, or syndicate manager, buys the securities directly from the issuer and sells them to members of the selling group.
- The underwriter charges the members a markup on the securities from what they paid to the issuer, but still less than market price.
- The members, mostly brokers and dealers, sell the securities to investors, making money on the difference between the price they paid to the syndicate manager, and the price they charged investors.
- Unlike the members, the underwriters benefit by receiving syndicate profits, but on the downside, they are also accountable for any unsold securities.
Understanding a Selling Group
A selling group includes a number of financial institutions, including brokers and dealers, whose sole focus is to sell an allotment of new or second-issue securities to the public. This group often includes members of the original underwriting syndicate. Underwriters, who have purchased securities directly from the issuer, sell them at a markup to other members of the selling group, who buy them for less than the expected market price.
Members of the selling group make money on the transaction in the spread between their buying price and the market price. Selling group members who were not underwriters do not receive residual syndicate profits and are not responsible for unsold securities.
Alternatively, the selling group can simply be the underwriting group alone: those responsible for underwriting a portion of the new issue. In this scenario, underwriters are unwilling to welcome participation in the selling process from competitors who bear none of the risk.
A selling group can vary in size proportionally to the size of the issue. As a result, a group can sometimes be made up of several hundred brokers and dealers. There will often be a lead dealer or broker, joined by participating broker-dealers as well as other distributors. The senior manager of the underwriting syndicate appoints the selling group. A selling-group agreement, or selected dealer agreement, governs the group and establishes terms such as whether the account will be divided or undivided, otherwise known as western or eastern accounts.
The agreement also covers selling concession, or the commission on sales, and the termination date, which is usually within a period of 30 days.
Hypothetical Example of a Selling Group
Let's say that Goldman Sachs, Merrill Lynch, and Wells Fargo Advisors are syndicate members, or underwriting firms, and JP Morgan Chase, the originating firm, acts as the syndicate’s senior manager. As underwriters, all of these firms are liable for unsold securities, but also gain the lion’s share of profits.
JP Morgan Chase, acting as syndicate manager, invites a wider range of brokers and dealers that include smaller investment firms across the globe, to make up the selling group. This approach bolsters the distribution of the shares and increases the chances that they will sell quickly. In turn, members of the selling group each earn a concession. They are not liable for the risk of unsold securities.
The profit that syndicate members make on the selling group's shares or bonds is called the additional takedown, which is added to the concession for the total takedown.