Services Offered by Securities Firms versus Investment Banks

1
Services Offered by Securities Firms versus
Investment Banks

• Investment Banks
• raise the debt and equity securities for
  corporations or governments including the
  origination, underwriting, and placement of
  securities in money and capital markets
• Securities Firms
• services involve assistance in the trading of
  securities in the secondary markets (brokerage
  services or market making)
• The largest companies in the industry perform
  multiple services (e.g., underwriting and
  brokerage) and are generally called investment
  banks
• advise corporations on mergers and acquisitions
  as well as advising on the restructuring of
  existing corporations

2
Size, Structure, and Composition of the Industry

• Three major types of firms
• national full-line investment banks that service
  retail and corporate customers (e.g., Merrill
  Lynch)
• national full-line firms that specialize more in
  corporate finance (e.g., Goldman Sachs)
• the remainder of the industry and includes four
  classes
• specialized investment bank subsidiaries of
  commercial banks
• specialized discount brokers
• regional securities firms
• specialized electronic trading securities firms

3
Securities Firm and Investment Bank Activity Areas

• Securities firms and investment banks engage in
  as many as seven key activity areas
• Investing
• Investment Banking
• Market Making
• Trading
• Cash Management
• Mergers and Acquisitions
• Other Service Functions

4
Investing

• Involves managing pools of assets such as mutual
  funds
• Compete with commercial banks, life insurance
  companies, and pension funds
• Manage funds either as agents for other investors
  or as principals
• Objective is to select asset portfolios to beat
  some return-risk performance benchmark such as
  the SP 500

5
Investment Banking

• Refers to activities related to underwriting and
  distributing new issues of debt and equity
  securities
• Industry is dominated by a small number of
  underwriting firms
• Securities underwriting can be undertaken through
  either public or private offerings
• Private placement - securities issue placed with
  one of a few large institutional investors
• Public placement - may be underwritten on a best
  efforts or firm commitment basis and offered to
  the public

6
Market Making

• Involves the creation of a secondary market in an
  asset by a securities firm or investment bank
• Either agency or principal transactions
• Agency transactions - two-way transactions on
  behalf of customers
• 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

7
Trading

• Closely related to market-making activities
• Six types of trading
• Position trading - purchases of large blocks on
  expectation of favorable price move
• Pure Arbitrage - buying an asset in one market
  and selling it immediately in another market at a
  higher price
• Risk Arbitrage - buying securities in
  anticipation of some information release
• Program Trading - simultaneous buying and selling
  using a computer program to initiate such trades
• Stock Brokerage - trading of securities on behalf
  of individuals
• Electronic Brokerage - offered by major brokers,
  direct access via internet to trading floor

8
Cash Management

• Securities firms and investment banks offer bank
  deposit-like cash management accounts (CMAs) to
  individual investors
• money market mutual fund sold by investment banks
  that offer check-writing privileges

9
Mergers and Acquisitions

• Frequently provide advice on, and assistance in,
  mergers and acquisitions
• assist in finding merger partners
• underwrite any new securities
• asses the value of target firms
• recommend terms of the merger agreement
• assist target firms in preventing a merger

10
Other Service Functions

• Custody and escrow services
• Clearance and settlement services
• Research and advisory services

11
Balance Sheet Assets
Assets Cash
27,780.4
1.26 Receivable from other broker-dealers
766,399.7 34.72 Receivable from
customers 135,723.3
6.15 Receivables from noncustomers
19,296.1 0.87 Long positions
in securities/commodities 514,949.9
23.33 Securities and investments not marketed
8,833.8 0.40 Securities purchased
w/resell agreement 647,360.8
29.33 Exchange membership
933.0 0.04 Other
assets
85,964.0 3.90 Total assets

2,111,191.2 100.00
12
Balance Sheet Liabilities
Liabilities Bank loans payable
47,363.2
2.15 Payables to other broker-dealers
361,774.7 16.39 Payables to
noncustomers
39,604.9 1.79 Payables to customers
239,797.3
10.86 Short positions in securities/commodities
263,219.8 11.93 Securities sold
w/repurchase agreements 933,214.3
42.28 Other nonsubordinated liabilities
170,715.5 7.73 Subordinated
liabilities
55,501.5 2.52 Total liabilities
2,111,191.2
95.65 Capital Equity capital
96,049.8
4.35 Number of firms
7,785
13
Regulation

• The primary regulator of the securities industry
  is the Securities and Exchange Commission (SEC)
  established in 1934
• SEC sets rules governing securities firms
  underwriting and trading activities
• The Securities Investor Protection Corporation
  (SIPC) protects investors against losses of up to
  500,000 on securities firm failures