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
• 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
– 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 1.28%

Receivable from other broker-dealers 1,530,227.0 38.44
Receivable from customers 163,159.2 4.10
Receivables from noncustomers 18,345.8 0.46
Long positions in securities/commodities 1,075,696.7 27.02
Securities and investments not marketed 11,753.1 0.30
Securities purchased w/resell agreement 967,008.0 24.29
Exchange membership 1,086.6 0.03
Other assets 162,346.1 4.08
Total assets $3,980,375.4 100.00
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 Balance Sheet Liabilities, 2004
Liabilities
Bank loans payable $ 75,548.8 1.90%
Payables to other broker-dealers 842,983.0 21.18
Payables to noncustomers 66,995.6 1.68
Payables to customers 407,432.6 10.23
Short positions in securities/commodities 510,513.0 12.82
Securities sold w/repurchase agreements 1,565,003.7 39.32
Other nonsubordinated liabilities 286,459.8 7.20
Subordinated liabilities 75,921.7 1.91
Total liabilities $3,830,858.1 96.24

Capital
Equity capital 149,517.3 3.76
Number of firms 6,549
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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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