Overview - University of Nevada, Reno



Overview of Securities Firms and Investment Banks

Securities Firms and Investment Banks

Nature of business:

Underwrite securities.

Market making.

Advising (example: M&A, restructurings).

← Growth in mergers and acquisitions:

Less than $200 billion in 1990.

$1.83 trillion in 2000 (reflecting more then 10,000 deals)

Decline after (458 billion in 2002 and 1.3 trillion in 2006)

Size, Structure and Composition

Dramatic increase in number of firms from 1980 to 1987. Decline of 24% following the 1987 crash, to 2000s.

Many recent inter-industry mergers (i.e., insurance companies and investment banks).

Role of Financial Services Modernization Act, 1999

5 Types and relative sizes of firms

National full-line firms are largest.

National full-line firms specializing in corporate finance are second in size.

Remainder of industry:

Specialized investment subsidiaries of BHCs.

Discount brokers.

Regional securities firms (subdivided into large, medium and small).

Specialized electronic trading securities firms

6 Key Activities

Investing

Investment banking

Activities related to underwriting and distributing new issues of debt and equity.

Market making

Trading

Position trading, pure arbitrage, risk arbitrage, program trading

Cash management

Assisting with mergers and acquisitions

Back-office and service functions.

7 Balance Sheet

Key assets:

Long positions in securities and commodities.

Reverse repurchase agreements.

Key liabilities:

Repurchase agreements major source of funds.

Securities and commodities sold short.

Broker call loans from banks

Capital levels much lower than levels in banks

8 Regulation

Primary regulator: SEC

Reiterated by National Securities Markets Improvement Act (NSMIA) of 1996.

Prior to NSMIA, regulated by SEC and states.

Regulate trading activities such as shelf registration

Day-to-day trading practices regulated by the NYSE and NASD.

Investor protection & other monitoring

Securities Investors Protection Corporation (SIPC).

Protection level of $500,000

Federal Reserve also has role in overseeing securities firms and investment banks

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