SECURITIES OPERATIONS
CHAPTER 24
All Rights Reserved
Dr David P Echevarria
1
INVESTMENT BANKING
SERVICES
A.
Four Basic Services
1.
Origination
a.
2.
Underwriting (Earning the spread)
a.
b.
3.
Full
Best Efforts
Advising
a.
b.
c.
4.
Registering securities with SEC
Timing
Pricing
Terms
Distribution
a.
b.
c.
Public or private placement
Function of managing underwriters
Function of the selling syndicate. (Earn the concession)
All Rights Reserved
Dr David P Echevarria
2
FUNCTIONS OF SECURITY
MARKETS
A. Price Discovery; arriving at fair prices
1. A security represents a promise of future payment(s)
2. Security values depend on expectations of future
payment amounts
a.
b.
Timing and magnitude
Certainty (riskiness)
3. The "Market"; the Bid-Ask Spread
a.
b.
c.
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
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Dr David P Echevarria
3
FUNCTIONS OF SECURITY
MARKETS
B.
Provide Liquidity
1.
2.
3.
C.
Buying and selling quickly without loss
A function of volume or institutional arrangements
Transactions should not result in a price effect
Minimize Trading Costs:
1.
Essence of security markets is trading
a.
b.
c.
2.
3.
4.
5.
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)
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Dr David P Echevarria
4
SECURITY MARKETS
ORGANIZATION
A.
Organized Exchanges
1.
2.
3.
4.
5.
B.
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)
1.
2.
3.
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
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Dr David P Echevarria
5
SECURITY MARKETS
ORGANIZATION
C. Dealer Markets vs. Auction Markets
1. Dealer market;
a.
b.
Market is made by dealers who quote [trade] prices (LSE is one)
A double auction; simultaneous offers to buy and sell
2. Auction market; orders of traders are directly matched
a.
A single auction; offer to buy or sell but not both
3. Some markets contain both; i.e., NYSE
a.
b.
Members may act as dealers (specialists) or
Brokers (floor traders)
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Dr David P Echevarria
6
GOVERNMENT REGULATION
OF SECURITIES INDUSTRY
A.
Regulatory Bodies
1.
2.
3.
B.
Securities Exchange Commission (SEC); administer laws
US Treasury; oversight of the Government securities market
Federal Reserve; set margin requirements
Federal Legislation
1.
2.
3.
4.
5.
6.
7.
8.
Securities Act of 1933: must register new securities (exceptions)
Securities Exchange Act of 1934; Establishes the SEC
Commodities Exchange Act of 1936
Investment Advisors Act of 1940
Securities Investor Protection Corporation Act of 1970
Commodity Futures Trading Commission Act of 1974
Securities Acts Amendments of 1975
Financial Services Modernization Act of 1999
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Dr David P Echevarria
7
GLOBALIZATION OF THE SECURITIES BUSINESS
A. Some Statistics:
1. 1982, $249 Billion in
international bonds, by
1991 $ 1,650 Billion
2. 1970, 7% of US
Government Securities
held by foreign investors,
by 12/2013, 33%
3. For China, 2013 ~ 7.6%,
Japan 2103 ~ 6.7%
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Dr David P Echevarria
8
GLOBALIZATION OF THE
SECURITIES BUSINESS
A.
B.
International Firms: "passing the book"
to achieve round-the-clock trading
Lack of Uniform Regulations and
Oversight an Impediment
1.
2.
3.
Lack of confidence in foreign securities
Difficulties in buying/selling foreign securities
International Organization of Securities
Commissions (IOSC) 1984
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Dr David P Echevarria
9
HOMEWORK QUESTIONS
A.
B.
C.
D.
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?
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Dr David P Echevarria
10