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SECURITIES OPERATIONS. CHAPTER 24. INVESTMENT BANKING SERVICES . Four Basic Services Origination Registering securities with SEC Underwriting (Earning the spread) Full Best Efforts Advising Timing Pricing Terms Distribution Public or private placement

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Securities operations

SECURITIES OPERATIONS

CHAPTER 24

Dr David P Echevarria


Investment banking services
INVESTMENT BANKING SERVICES

  • Four Basic Services

    • Origination

      • Registering securities with SEC

    • Underwriting (Earning the spread)

      • Full

      • Best Efforts

    • Advising

      • Timing

      • Pricing

      • Terms

    • Distribution

      • Public or private placement

      • Function of managing underwriters

      • Function of the selling syndicate. (Earn the concession)

Dr David P Echevarria


Functions of security markets
FUNCTIONS OF SECURITY MARKETS

  • Price Discovery; arriving at fair prices

    • A security represents a promise of future payment(s)

    • Security values depend on expectations of future payment amounts

      • Timing and magnitude

      • Certainty (riskiness)

    • The "Market"; the Bid-Ask Spread

      • Fair offer price; lowest price of the well informed trader to sell

      • Fair bid price; highest price of the well informed trader to buy

      • In an ideal market, all trades occur at fair prices

Dr David P Echevarria


Functions of security markets1
FUNCTIONS OF SECURITY MARKETS

  • Provide Liquidity

    • Buying and selling quickly without loss

    • A function of volume or institutional arrangements

    • Transactions should not result in a price effect

  • Minimize Trading Costs:

    • Essence of security markets is trading

      • Traders agree on terms of transaction

      • Efficient execution of the transaction

      • Exchange of securities and moneys

    • Restricting access to market; authorized traders only

    • Rules of conduct for traders

    • Standardized transactions (i.e., round lots, blocks, odd lots)

    • Provide for conflict resolution. (American Arbitration Association, 1991)

Dr David P Echevarria


Security markets organization
SECURITY MARKETS ORGANIZATION

  • Organized Exchanges

    • NYSE, AMEX, Tokyo (TSE), London (LSE), etc

    • Restricted participation, trading rules strictly specified

    • Traders (members) hold seats. (Specialists, Floor traders, Odd Lot traders)

    • Sale of seats must be approved (Pre-qualifications must be met.)

    • Transactions tend to be centralized; advantageous for price discovery

  • Over-The-Counter (OTC)

    • NASDAQ, Government Securities, Money Markets, Foreign Exchange

    • Transactions tend to be decentralized; price discovery less efficient

    • Liquidity more expensive in terms of bid-ask spreads

Dr David P Echevarria


Security markets organization1
SECURITY MARKETS ORGANIZATION

  • Dealer Markets vs. Auction Markets

    • Dealer market;

      • Market is made by dealers who quote [trade] prices (LSE is one)

      • A double auction; simultaneous offers to buy and sell

    • Auction market; orders of traders are directly matched

      • A single auction; offer to buy or sell but not both

    • Some markets contain both; i.e., NYSE

      • Members may act as dealers (specialists) or

      • Brokers (floor traders)

Dr David P Echevarria


Government regulation of securities industry
GOVERNMENT REGULATION OF SECURITIES INDUSTRY

  • Regulatory Bodies

    • Securities Exchange Commission (SEC); administer laws

    • US Treasury; oversight of the Government securities market

    • Federal Reserve; set margin requirements

  • Federal Legislation

    • Securities Act of 1934: must register new securities (exceptions)

    • Securities Exchange Act of 1934; Establishes the SEC

    • Investment Advisors Act of 1940

    • Securities Investor Protection Corporation Act of 1970

    • Securities Acts Amendments of 1975

    • Commodities Exchange Act of 1936

    • Commodity Futures Trading Commission Act of 1974

    • Financial Services Modernization Act of 1999

Dr David P Echevarria


Globalization of the securities business
GLOBALIZATION OF THE SECURITIES BUSINESS

  • Some Statistics:

    • 1982, $249 Billion in international bonds, by 1991 $ 1,650 Billion

    • 1970, 7% of US Government Securities held by foreign investors, 2013, 42%

    • For China, 2013 ~ 7.6%, Japan 2103 ~ 6.7%

  • International Firms: "passing the book" to achieve round-the-clock trading

  • Lack of Uniform Regulations and Oversight an Impediment

    • Lack of confidence in foreign securities

    • Difficulties in buying/selling foreign securities

    • International Organization of Securities Commissions (IOSC) 1984

Dr David P Echevarria


Homework questions
HOMEWORK QUESTIONS

  • Security markets provide three important services to investors. What are they?

  • How do dealer markets differ from auction markets? Does one offer an advantage over the other to traders?

  • What three basic services do Investment Bankers provide to issuers of securities?

  • What does "passing the book" mean and what is its significance?

Dr David P Echevarria


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