Services Offered by Securities Firms versus Investment Banks <ul><li>Investment Banks </li></ul><ul><ul><li>originating, u...
Size, Structure, and Composition of the Industry <ul><li>Size of the industry is measured by the equity capital of the fir...
Securities Firm and Investment Bank Activity Areas <ul><li>Securities firms and investment banks engage in as many as seve...
Investing <ul><li>Involves managing pools of assets such as mutual funds  </li></ul><ul><li>Compete with commercial banks,...
Investment Banking <ul><li>Refers to activities related to underwriting and distributing new issues of debt and equity sec...
Investment Banking Risk Example 0 Profit for BP Underwriter 311 Million Loss 10/15/87 Bid price = 3.265 10/15/87 Offer pri...
Market Making <ul><li>Involves the creation of a secondary market in an asset by a securities firm or investment bank </li...
Trading <ul><li>Closely related to market-making activities </li></ul><ul><li>Six types of trading </li></ul><ul><ul><li>P...
Trading  (continued) <ul><ul><li>Program Trading - simultaneous buying and selling using a computer program to initiate su...
Cash Management <ul><li>Securities firms and investment banks offer bank deposit-like  cash management accounts   (CMAs)  ...
Mergers and Acquisitions <ul><li>Frequently provide advice on, and assistance in, mergers and acquisitions </li></ul><ul><...
Other Service Functions <ul><li>Custody and escrow services </li></ul><ul><li>Clearance and settlement services </li></ul>...
Regulation <ul><li>The primary regulator of the securities industry is the Securities and Exchange Commission (SEC) establ...
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4/9/07 – Investment Banks/Securities Firms

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4/9/07 – Investment Banks/Securities Firms

  1. 1. Services Offered by Securities Firms versus Investment Banks <ul><li>Investment Banks </li></ul><ul><ul><li>originating, underwriting, and placing securities in money and capital markets </li></ul></ul><ul><li>Securities Firms </li></ul><ul><ul><li>brokerage services or market making </li></ul></ul><ul><li>The largest companies in the industry perform multiple services (e.g., underwriting and brokerage) and are generally called investment banks </li></ul>
  2. 2. Size, Structure, and Composition of the Industry <ul><li>Size of the industry is measured by the equity capital of the firms participating in the industry </li></ul><ul><li>Three major types of firms </li></ul><ul><ul><li>national full-line investment banks that service retail and corporate customers (e.g., Merrill Lynch) </li></ul></ul><ul><ul><li>national full-line firms that specialize more in corporate finance (e.g., Goldman Sachs) </li></ul></ul><ul><ul><li>the remainder of the industry and includes four classes </li></ul></ul><ul><ul><ul><li>specialized investment bank subsidiaries of commercial banks </li></ul></ul></ul><ul><ul><ul><li>specialized discount brokers </li></ul></ul></ul><ul><ul><ul><li>regional securities firms </li></ul></ul></ul><ul><ul><ul><li>specialized electronic trading securities firms </li></ul></ul></ul><ul><ul><ul><li>venture capital firms </li></ul></ul></ul>
  3. 3. Securities Firm and Investment Bank Activity Areas <ul><li>Securities firms and investment banks engage in as many as seven key activity areas </li></ul><ul><ul><li>Investing </li></ul></ul><ul><ul><li>Investment Banking </li></ul></ul><ul><ul><li>Market Making </li></ul></ul><ul><ul><li>Trading </li></ul></ul><ul><ul><li>Cash Management </li></ul></ul><ul><ul><li>Mergers and Acquisitions </li></ul></ul><ul><ul><li>Other Service Functions </li></ul></ul>
  4. 4. Investing <ul><li>Involves managing pools of assets such as mutual funds </li></ul><ul><li>Compete with commercial banks, life insurance companies, and pension funds </li></ul><ul><li>Manage funds either as agents for other investors or as principals </li></ul><ul><li>Objective is to select asset portfolios to beat some return-risk performance benchmark such as the S&P 500 </li></ul>
  5. 5. Investment Banking <ul><li>Refers to activities related to underwriting and distributing new issues of debt and equity securities </li></ul><ul><li>Industry is dominated by a small number of underwriting firms (1999 the top ten firms did 81% of the underwriting) </li></ul><ul><li>Securities underwriting can be undertaken through either public or private offerings </li></ul><ul><ul><li>Private placement - securities issue placed with one of a few large institutional investors </li></ul></ul><ul><ul><li>Public placement - may be underwritten on a best efforts or firm commitment basis and offered to the public </li></ul></ul>
  6. 6. Investment Banking Risk Example 0 Profit for BP Underwriter 311 Million Loss 10/15/87 Bid price = 3.265 10/15/87 Offer price = 3.300 10/26/87 Price = 2.65 Maximum Profit on 10/15/87 = 17.7 Million 10/15/87 U.S. syndicate commits to purchase 505,800,000 shares of British Petroleum Offer period usually shorter Periods of extreme volatility (stock market crash) are relatively rare
  7. 7. Market Making <ul><li>Involves the creation of a secondary market in an asset by a securities firm or investment bank </li></ul><ul><li>Either agency or principal transactions </li></ul><ul><ul><li>Agency transactions - two-way transactions on behalf of customers </li></ul></ul><ul><ul><li>Principal transactions - the market maker seeks to profit on the price movements of securities and takes long or short inventory positions for its own account </li></ul></ul>
  8. 8. Trading <ul><li>Closely related to market-making activities </li></ul><ul><li>Six types of trading </li></ul><ul><ul><li>Position trading - purchases of large blocks on expectation of favorable price move </li></ul></ul><ul><ul><li>Pure Arbitrage - buying an asset in one market and selling it immediately in another market at a higher price </li></ul></ul><ul><ul><li>Risk Arbitrage - buying securities in anticipation of some information release </li></ul></ul><ul><ul><ul><li>“ Fund of funds” example </li></ul></ul></ul><ul><ul><ul><ul><li>Announced merger </li></ul></ul></ul></ul>
  9. 9. Trading (continued) <ul><ul><li>Program Trading - simultaneous buying and selling using a computer program to initiate such trades </li></ul></ul><ul><ul><ul><li>Portfolio of at least 15 different stocks </li></ul></ul></ul><ul><ul><ul><li>Portfolio size greater than $1million </li></ul></ul></ul><ul><ul><ul><li>Objective – arbitrage discrepancies between the futures and cash market price </li></ul></ul></ul><ul><ul><li>Stock Brokerage - trading of securities on behalf of individuals </li></ul></ul><ul><ul><li>Electronic Brokerage - offered by major brokers, direct access via internet to trading floor </li></ul></ul>
  10. 10. Cash Management <ul><li>Securities firms and investment banks offer bank deposit-like cash management accounts (CMAs) to individual investors </li></ul><ul><ul><li>money market mutual fund sold by investment banks that offer check-writing privileges </li></ul></ul>
  11. 11. Mergers and Acquisitions <ul><li>Frequently provide advice on, and assistance in, mergers and acquisitions </li></ul><ul><ul><li>assist in finding merger partners </li></ul></ul><ul><ul><li>underwrite any new securities </li></ul></ul><ul><ul><li>assess the value of target firms </li></ul></ul><ul><ul><li>recommend terms of the merger agreement </li></ul></ul><ul><ul><li>assist target firms in preventing a merger </li></ul></ul>
  12. 12. Other Service Functions <ul><li>Custody and escrow services </li></ul><ul><li>Clearance and settlement services </li></ul><ul><li>Research and advisory services </li></ul>
  13. 13. Regulation <ul><li>The primary regulator of the securities industry is the Securities and Exchange Commission (SEC) established in 1934 </li></ul><ul><li>SEC sets rules governing securities firms’ underwriting and trading activities </li></ul><ul><li>Shelf registration - allows firms that plan to offer multiple issues of stock over a two-year period to submit one registration statement summarizing the firm’s financing plans for the period </li></ul><ul><li>The Securities Investor Protection Corporation (SIPC) protects investors against losses of up to $500,000 on securities firm failures </li></ul>

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