This document provides an overview of securities firms and investment banks. It discusses how investment banks help corporations raise capital through underwriting new stock and bond issues. It also describes how securities firms facilitate secondary market trading of existing securities. The document outlines the size and structure of the industry as well as subgroups of national full-service firms. It explains various functions of securities firms like investment banking, venture capital, market making, and mergers and acquisitions advising. Regulatory bodies for the industry are also summarized.

1. Financial Markets
Course Code 456414
by
Dr. Muath Asmar
An-Najah National University
Faculty of Graduate Studies

2. Chapter Sixteen
Securities Firms
and Investment
Banks
©2019 McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written
consent of McGraw-Hill Education.

3. © 2019 McGraw-Hill Education.
Securities Firms and Investment
Banks (IBs)
Investment banks (IBs) help corporations and governments
raise capital through debt and equity security issues in the
primary market.
• Underwriting is assisting in issuing new securities.
• IBs also advise on mergers and acquisitions (M&As) and corporate
restructuring.
Securities firms assist in the trading of securities in
secondary markets.
• Broker-dealers assist in the trading of existing securities.
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4. © 2019 McGraw-Hill Education.
Size, Structure and Composition
of Industry
The size of the industry is usually measured by the equity capital of
firms rather than total asset size.
• Equity capital in the industry in 2015 was $235 billion.
The number of firms in the industry changed due to economies of
scale and scope, losses with the economy, scandals at some firms, and
regulations that allowed both inter- and intra-industry mergers.
• 5,248 firms in 1980.
• 9,515 firms in 1987.
• 6,016 firms in 2006.
• 4,115 firms in 2016.
As with commercial banks, consolidation has largely occurred through
mergers and acquisitions. 16-4

5. © 2019 McGraw-Hill Education.
Subgroups of National Full-
Service Firms
#1 - Commercial bank or financial services holding companies.
• Largest of the full-service investment banks.
• Extensive domestic and international operations.
• Offer advice, underwriting, brokerage, trading, and asset
management services.
#2 - National full-service firms specializing in corporate finance
or primary market activities.
• Highly active in trading securities, or secondary market activities.
#3 - Large investment banks maintain more limited branch
networks concentrated in major cities.
• Operate with predominantly institutional client bases.
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6. © 2019 McGraw-Hill Education.
Investment Banking
Investment banking.
• First time debt and equity issues occur through initial public
offerings (IPOs).
• New issues from a firm whose debt or equity is already traded are
called seasoned security offerings.
• A private placement is a securities issue that is placed with one or a
few large institutional investors.
• Public offerings are offered to the public at large.
• IBs act only as an agent in best efforts underwriting.
• IBs act as principals in firm commitments.
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7. © 2019 McGraw-Hill Education.
Venture Capital
Venture capital (VC) is a professionally managed pool of
money used to finance new (that is, start-up) and often
high-risk firms.
• VC usually purchases an equity stake in the start-up.
• VC firms are not generally passive investors, but instead
provide valuable expertise to the firm’s managers.
• Institutional venture capital firms find and fund the most
promising new firms.
• Venture capital limited partnerships.
• Financial venture capital firms.
• Corporate venture capital firms.
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Venture Capital vs. Private Equity
Private equity investments.
• Private equity (PE) differs from VC in funds sources and in
types of investments.
• PE firms raise funds by selling securities rather than commingling
private funds.
• PE firms often acquire established existing firms rather than
purchase start-ups.
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9. © 2019 McGraw-Hill Education.
Market Making
Market making involves the creation of secondary markets
for an issue of securities.
• Agency transactions are two-way transactions made on
behalf of customers.
• With principal transactions, market makers seek to profit for
their own accounts.
In 2016, J.P. Morgan Chase managed over $53 trillion in
derivative securities (28% of all derivative securities held by
FIs).
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Trading
Trading involves taking an active net position in an
underlying instrument or asset.
• Position trading involves relatively long-term views of market
trends.
• Pure arbitrage involves attempts to profit from price discrepancies.
• Risk arbitrage involves attempts to profit by forecasting
information releases.
• Program trading is the simultaneous buying and selling of at least
15 different stocks valued at $1 million or more.
• Stock brokerage involves trading on behalf of customers.
• Electronic brokerage offers customers direct access, via the
internet, to the trading floor.
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Investing and Cash Management
Investing involves managing pools of assets such as closed-
and open-end mutual funds.
• As agents.
• As principals.
Cash management involves offering deposit-like accounts,
such as money market mutual funds (MMMFs), that offer
check writing privileges.
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Mergers and Acquisitions
Investment banks frequently provide advice on, and assistance
in, mergers and acquisitions.
• Assist in finding merger partners.
• Underwrite any new securities to be issued by the merged firms.
• Assess the value of target firms.
• Recommend terms of the merger agreement.
• Assist target firms in preventing a merger.
M&A activity.
• $1.15 trillion for the first nine months of 2016.
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Other Service Functions
Other Service Functions.
• Custody and escrow services.
• Clearance and settlement services.
• Research and advisory services.
IBs are making increasing inroads into traditional bank
service areas, such as small-business lending and the
trading of loans.
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14. © 2019 McGraw-Hill Education.
Industry Performance 1
Industry trends depend heavily on the state of the
stock market and the economy.
• Commission income fell after the 1987 stock market crash.
• Improvements in the U.S. economy in the mid-2000s led to
increases in commission income, but income fell with the
stock market in 2006 to 2008 because of rising oil prices and
the subprime mortgage collapse.
• Commission income again rose to between 15 and 20 percent
of total revenues as the economy and the stock market
recovered in the early- and mid-2010s.
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Industry Performance 2
By the mid-2010s, while the industry had put most problems
from the financial crisis behind it, the industry was affected by
post-crisis consequences, with increased regulation on risk
taking and capital requirements.
• This has led to balance sheet reductions, as well as downsizing or
disposition of select businesses, trading products, and investments.
• Corporate strategies increasingly focus on client services and away
from making large bets through principal investments.
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16. © 2019 McGraw-Hill Education.
Assets and Liabilities of Broker-
Dealers as of 2015 1
Table 16–7 Assets and Liabilities of Broker-Dealers as of 2015 (in billions of dollars)
Blank Blank Percentage
of Total Assets
Assets Blank Blank
Cash $ 115.1 2.66%
Receivables from other broker-dealers 1,400.1 32.38
Receivables from customers 257.2 5.95
Receivables from noncustomers 105.8 2.45
Long positions in securities and commodities 974.8 22.54
Securities and investments not readily marketable 32.6 0.75
Securities purchased under agreements to resell 1,145.3 26.48
Exchange membership 0.2 0.00
Other assets 293.5 6.79
Total assets $4,324.6 100.00%
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Assets and Liabilities of Broker-
Dealers as of 2015 2
Blank Blank Percentage
of Total Assets
Liabilities Blank Blank
Bank loans payable $ 78.8 1.82%
Payables to other broker-dealers 677.6 15.67
Payables to noncustomers 47.6 1.10
Payables to customers 835.8 19.33
Short positions in securities and commodities 374.5 8.66
Securities sold under repurchase agreements 1,539.1 35.59
Other nonsubordinated liabilities 418.0 9.66
Subordinated liabilities 118.1 2.73
Total liabilities $4,089.50 94.56%
Capital Blank Blank
Equity $ 235.1 5.44%
Total capital (equity capital and subordinate debt) 353.2 8.17%
Number of firms 4,115
Source: Focus Report, Office of Economics Analysis, U.S. Securities and Exchange Commission,
2016, Washington, DC. www.sec.gov
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18. © 2019 McGraw-Hill Education.
Regulation 1
The Securities and Exchange Commission (SEC) is the
primary regulator of the securities industry.
The National Securities Markets Improvement Act
(NSMIA) of 1996 reaffirmed federal (over state) authority.
• Even so, state attorneys generally intervene through
securities-related investigations that have led to many highly
publicized criminal cases.
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NSMIA of 1996
The National Securities Markets Improvement Act
(NSMIA) of 1996.
• Reaffirmed the significance of the SEC as the primary
regulatory of securities firms.
• States are not allowed to require federally registered
securities firms to be registered in a state as well.
• States are prohibited from requiring registrations of securities
firms’ transactions and from imposing substantive
requirements on private placements.
• Effectively gives the SEC primary regulatory jurisdiction over
securities firms.
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Regulation 2
While the SEC sets the overall regulatory standards for the
industry, the Financial Industry Regulatory Authority (FINRA) is
involved in the day-to-day regulation of trading practices.
• FINRA is an independent, not-for-profit organization as opposed to
the SEC, which is a government run regulator.
• FINRA writes and enforces rules governing the activities of
securities firms, examines firms for compliance with those rules,
works to foster market transparency, and supports investor
education.
Wall Street Reform and Consumer Protection Act of 2010.
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Regulation Concluded
U.S. Congress also oversees the industry.
• U.S. Senate Permanent Subcommittee on Investigations was
created with the broad mandate to determine whether any
changes are required in U.S. law to better protect the public.
• Spring of 2010.
• Subcommittee hearing focused on the contributing role of
investment banks in the financial crisis.
• Subcommittee brought up evidence and internal Goldman
documents that showed Goldman knew the housing market was
on the brink of collapse but continued to sell mortgage-backed
securities to investors.
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SIPC
Securities Investor Protection Corporation (SIPC).
• Not an agency or establishment of the U.S. government and
has no authority to regulate its member broker-dealers.
• SIPC was created under the Securities Investor Protection Act
of 1970 as a non-profit membership corporation.
• SIPC oversees the liquidation of member broker-dealers that
close when the broker-dealer is bankrupt or in financial
trouble and customer assets are missing.
• SIPC’s focus is on restoring customer cash and securities left in
the hands of bankrupt of otherwise financially troubled
brokerage firms.
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23. © 2019 McGraw-Hill Education.
Global Issues
Securities firms and investment banks are by far the most global
of any group of financial institutions.
As a result of the financial crisis of the late 2000s, large
investment banks around the world became concerned with
capital, liquidity, and leverage, but did not want to lose ground
in the global competition for clients.
• Result was that global investment banks looked for strategic
alliances that would allow them to compete in foreign markets or
they exited foreign markets altogether.
Increase in cross-border strategic alliances.
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24. © 2019 McGraw-Hill Education.
Foreign Transactions in U.S.
Securities Markets
Figure 16–4 Foreign Transactions in U.S. Securities Markets
Sources: Treasury Bulletin, U.S. Treasury, various issues. www.ustreas.gov
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25. © 2019 McGraw-Hill Education.
U.S. Transactions in Foreign
Securities Markets
Figure 16–5 U.S. Transactions in Foreign Securities Markets
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Sources: Treasury Bulletin, U.S. Treasury, various issues. www.ustreas.gov
Access the long description slide.

26. © 2019 McGraw-Hill Education.
Value of International Security
Offerings
Table 16–8 Value of International Security Offerings (in billions of dollars)
Type of Offering 1995 1999 2004 2007 2008 2009 2011 2014 2015
Total international offerings Blank Blank Blank Blank Blank Blank Blank Blank Blank
Straight debt $410.3 $1,104.1 $2,000.7 $3,282.3 $3,013.0 $3,411.6 $2,551.7 $3,270.1 $2,685.6
Convertible debt 9.8 31.5 50.1 90.0 53.8 55.5 36.3 55.1 38.4
Common equity 22.2 95.5 145.3 387.7 272.1 395.9 235.8 353.4 395.7
Preferred equity 1.0 7.5 2.7 21.7 10.9 14.2 16.2 16.0 17.7
Total offerings $443.3 $1,238.5 $2,198.8 $3,781.7 $3,349.7 $3,877.2 $2,840.0 $3,694.7 $3,137.4
International offerings by
U.S. issuers
Blank Blank Blank Blank Blank Blank Blank Blank Blank
Straight debt $64.3 $270.5 $200.9 $363.7 $236.8 $255.5 $272.2 $597.3 $651.2
Convertible debt 1.9 1.0 0.0 1.2 0.0 0.2 0.9 3.9 1.9
Common equity 6.7 9.3 0.2 4.7 20.0 1.6 0.9 1.6 1.0
Preferred equity 0.1 0.9 6.0 2.4 2.3 1.1 6.8 0.1 3.4
Total offerings $72.9 $281.6 $201.1 $371.9 $259.1 $258.5 $280.8 $602.8 $657.5
Source: 2016 Fact Book, Securities Industry and Financial Markets
Association. www.sifma.org
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Foreign Transactions in U.S. Securities
Markets Long Description
Corporate stock transactions increased fairly
steadily from about 0 to about 12,000 billion with
one spike in 2007. The corporate bond transactions
rose slowly from 1991 to 2012 from about 0 billion
to about 500 billion, but increased dramatically
after 2012 to about 12,000 billion.
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U.S. Transactions in Foreign Securities
Markets Long Description
Both the corporate stock transactions and
corporate bond transactions rose steadily from
about 200 billion to about 5 trillion in 2016.
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