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Chapter Sixteen
Securities Firms and
Investment Banks
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Services Offered by Securities Firms
versus Investment Banks
• Investment Banks
– originating, underwriting, and placing securities in
money and capital markets
• Securities Firms
– 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
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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 in corporate
finance (e.g., Goldman Sachs)
– the remainder of the industry
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•
•
•
•
specialized investment bank subsidiaries of commercial banks
specialized discount brokers
regional securities firms
specialized electronic trading securities firms
venture capital firms
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Securities Firm and Investment Bank
Activity Areas
• Securities firms and investment banks engage
in as many as seven key activity areas
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Investing
Investment Banking
Market Making
Trading
Cash Management
Mergers and Acquisitions
Other Service Functions
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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 S&P 500
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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
– Public placement
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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
– Principal transactions
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Trading
• Closely related to market-making
activities
• Six types of trading
– Position trading
– Pure Arbitrage
– Risk Arbitrage
– Program Trading
– Stock Brokerage Electronic Brokerage
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Cash Management
• cash management accounts (CMAs)
– money market mutual fund sold by
investment banks that offer check-writing
privileges
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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
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Other Service Functions
• Custody and escrow services
• Clearance and settlement services
• Research and advisory services
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Balance Sheet Assets, 2004
Assets
Cash
$ 50,744.0
Receivable from other broker-dealers
1,530,227.0
Receivable from customers
163,159.2
Receivables from noncustomers
18,345.8
Long positions in securities/commodities 1,075,696.7
Securities and investments not marketed
11,753.1
Securities purchased w/resell agreement
967,008.0
Exchange membership
1,086.6
Other assets
162,346.1
Total assets
$3,980,375.4
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1.28%
38.44
4.10
0.46
27.02
0.30
24.29
0.03
4.08
100.00
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Balance Sheet Liabilities, 2004
Liabilities
Bank loans payable
$ 75,548.8
Payables to other broker-dealers
842,983.0
Payables to noncustomers
66,995.6
Payables to customers
407,432.6
Short positions in securities/commodities 510,513.0
Securities sold w/repurchase agreements 1,565,003.7
Other nonsubordinated liabilities
286,459.8
Subordinated liabilities
75,921.7
Total liabilities
$3,830,858.1
1.90%
21.18
1.68
10.23
12.82
39.32
7.20
1.91
96.24
Capital
Equity capital
Number of firms
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149,517.3
6,549
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3.76
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Regulation
• The primary regulator of the securities
industry is the Securities and Exchange
Commission (SEC)
• SEC sets rules governing securities firms’
underwriting and trading activities
• Shelf registration
• The Securities Investor Protection
Corporation (SIPC)
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