j. k. dietrich - fbe 525 - fall, 2006 value creation in securities services week 5 - september 28,...

J. K. Dietrich - FBE 525 - Fall, 2006

Value Creation in Securities Services

Week 5 - September 28, 2006


Securities Services

Brokerage Market making/dealing Origination Economics of each service Value added Synergies


Brokers

Brokers find buyers for sellers and sellers for buyers– Create markets to concentrate trading activity and

reduce search costs– Fixed costs of markets imply economies of scale

with respect to transaction volume Organized exchanges, over-the-counter

markets, electronic communication networks (ECNs)


Types of Brokers

Wholesale or institutional brokers Retail brokers Floor brokers and day traders Wire-houses Clearing houses Full-line brokers


Securities Trading Developments Organization of organized exchanges

– Ownership of exchanges (Europe, NASDAQ, NYSE)

– Outcry vs. order matching (floor, computers)

– Consolidation of exchanges (Nasdaq and AMEX, Europe, NYSE and Archipelago)

Market making and technology– Computer order books vs. information flow

– Competition, Nasdaq spreads case and pennies

Changes in market access– Corporate access to markets (shelf, names)

– Retail market trading (DOT, ECNs)


Over-the-Counter Markets

Fixed incomes– Dealer networks– The TRACE system for corporates– Municipal debt– Contrasts with U.S. Treasury debt

Derivatives Other equity claims


Retail Market for Trading

Self-directed retirement accounts Performance of fund managers Internet trading

– Day trading– Information and advice on internet versus

traditional broker network (cases of Merrill-Lynch and DLJ)

Importance of customer accounts (Schwab)


Issues in Brokerage Pricing

Commissions versus price of trade execution– Measurement of costs by consultants

Payment for order flow Soft-dollar commissions Combination of advisory and trading

services at wholesale level


Market-Makers or Dealers

Required to post and bid and ask (buy and sell) price

Carry inventories, bear inventory costs– Carrying costs– Market risk– Information costs

Information traders versus liquidity traders


Value Creation by DealersPrices PAsk

PBid

SSi

Di

D

Volume0 X


Securities Origination

Advise securities issuer on– Market conditions and likely prices, yields– Design of securities– Regulatory and marketing requirements– Distribution of securities

Investment bankers– Bulge bracket firms– Boutiques, regional firms, financial firm affiliates,

commercial banks


Securities Origination

SecuritiesOriginator

InvestorIssuer

Advising, UnderwritingDistribution

Best EffortsDistribution

Distribution


Principal-Agent Problems

Broker and customer Market maker and traders Securities issuer and investment banker

– Due diligence– Effort and costs– Investor and underwriter

Combined financial services and origination – Banks and investment banks – Brokers and asset managers


For Next Classes

Prepare cases International Securities Exchange and W. R. Hambrecht + Co.: OpenIPO cases for discussion on Saturday, September 30

Read Chapter 10 for October 5 and prepare State Street case

Be prepared to discuss group project (choice of firms, data problems, etc.) after class on September 30

j. k. dietrich - fbe 525 - fall, 2006 value creation in securities services week 5 - september 28,...

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