《FINANCIAL SERVICES AND FINANCIAL INSTITUTIONS.doc》由会员分享，可在线阅读，更多相关《FINANCIAL SERVICES AND FINANCIAL INSTITUTIONS.doc（33页珍藏版）》请在三一办公上搜索。
1、FINANCIAL SERVICES AND FINANCIAL INSTITUTIONS:VALUE CREATION IN THEORY AND PRACTICEJ. Kimball DietrichCHAPTER 9Securities Trading, Dealing, and Origination IntroductionSecurities investment and trading are among the most publicized and exciting activities we observe in the financial services industr
2、y. In line with our earlier discussion of the financial system, securities are only a means of transferring savings to investors. How do securities differ in this role from the extensions of credit we discussed in the previous two chapters? What are the sources of value from those financial firms th
3、at trade securities on financial markets to providers and users of funds? Why are traders in securities willing to pay to transact sooner rather than later and what specialized firms have emerged to service this demand for immediacy? What skills and resources are required in order to bring securitie
4、s to the market?Answers to these and related questions are essential to understanding the dynamics governing the transition in this financial industry segment from traditional forms to new and emerging delivery and production systems.This chapter reviews the basic economics of the value added by sec
5、urities trading, market making, and securities origination. The emphasis is on economic analysis of these basic financial services to isolate sources of value in the value chain we have used in previous chapters. Securities markets grow in importance as economies grow in extent and sophistication in
6、 terms of technology and institutional complexity. Securities markets represent a development beyond raising funds in the form of credit as discussed in the previous chapter. Securities markets can be expected to grow ever more important around the world in the future. 9.1Overview of Securities Mark
7、ets and InstrumentsThis chapter explores value production in those financial services traditionally associated with brokers and investment bankers. In order to set the stage for the dynamic changes taking place in this sector of the financial services industry, the position of traditional and non-tr
8、aditional firms in the securities markets and the economic role of securities markets are reviewed in the following sections. The purpose here is to provide perspective on the creation of value in the major services provided by firms active in securities markets.Firms Active in Securities MarketsThe
9、 traditional concept of a securities firm is represented by a brokerage firm, like Merrill Lynch, or an investment banking firm, like Salomon Brothers. These and other firms involved in securities markets perform the established functions of buying and selling securities (brokerage) and advising cli
10、ents on how to originate new securities (investment banker) to raise money. Traditional firms can be providers of the full range of securities markets services or can be more specialized. Full line firms like Merrill Lynch offer retail brokerage services and corporate securities advice, while narrow
11、ly focussed firms like Jeffries Securities concentrate on trading for institutional clients.In recent years, non-financial firms tried providing securities market services: Sears Roebuck, the retail giant and owner of Allstate Insurance, acquired the full-line broker Dean Witter, and then spun it of
12、f in 1993. General Electric, maker of refrigerators and jet engines, bought the investment banking concern Kidder-Peabody, and sold it to PaineWebber in 1995. A development of even broader potential significance has been the entrance of non-securities related financial service firms, such as commerc
13、ial banks and thrift institutions, into securities businesses through expansion of their authorized powers. Other financial service firms have entered securities business through acquisitions, for example Travelers Insurance (then known as Primerica) bought Smith-Barney and Prudential Insurance acqu
14、ired Bache.There are four key factors influencing the future of the industry: (1) possible synergies realized by non-securities financial service firms from offering securities markets services; (2)synergies gained by non-financial firms from offering securities markets services; (3) technological c
15、hange; and (4) structural changes in the flow of savings into investment.Non-securities financial firms, principally commercial banks, have a number of synergistic connections to securities market services. Banks are portfolio lenders to non-financial firms and are involved in open-market, short-ter
16、m financing in the form of letters of credit backing commercial paper. As discussed in Chapter 8, banks increasingly arrange credit for their customers. Banks already trade and make markets in a variety of money market and government securities, a natural basis for expansion into the corporate secur
17、ities markets. Bank branch networks also offer ready marketing outlets for both retail and small corporate securities market services. It seems a natural extension of bank functions to arrange funding in the form of public securities issues. Finally, banks in Germany and Japan already have these aut
18、horities.Non-banks like large manufacturing corporations have already entered the financial services industry through their finance company subsidiaries. They offer the securities business one important advantage: a lower cost of funds. Their enormous size, equity capital, and top credit ratings mea
19、n that they can commit large amounts of capital to securities business. Their reputations can be of enormous value in competition for securities market services. Furthermore, non-banks are not hampered by the regulations limiting traditional securities and deposit-taking financial institutions.Techn
20、ology offers vastly cheaper ways of communicating all the types of information required by providers of securities market services. Information on prices and communication with market participants are all available at costs below levels observed even a short time ago. Processing information, applyin
21、g complex analytical tools, and plugging into related financial service functions, such as clearing networks and information providers, mean smaller firms and new entrants can quickly enter securities markets. These firms can compete on a relatively even footing with established firms for securities
22、 business.Finally, the institutional changes in the flow of funds dramatically alter the markets within which securities markets service firms operate. Globalization integrates world capital markets. American securities firms are active around the world but must compete in the United States with sec
23、urities firms from Europe and Japan, as well as Singapore and Hong Kong. Political and demographic trends foster emergence of locally important securities markets, like California and the Southeast in the United States, and China, the former Soviet Union, and Latin America abroad. Investment opportu
24、nities in these markets attract investors funds from around the world. The continuing accumulation of savings in institutional investors such as pension funds and money management firms means that the market for trading securities and target markets for new securities issues is more sophisticated th
25、an the past.To appreciate developments in securities related financial services, industry observers must understand the role of securities markets and the economic functions performed by financial service firms active in them. After a review of the basic attractiveness of tradable financial instrume
26、nts and the economic determinants of the demand for each of these services, the underlying economics of the business is examined to identify sources of value in the securities business.Demand and Supply for SecuritiesSecurities are standardized financial claims that can be readily transferred betwee
27、n parties and therefore traded on securities markets. Typical individuals acquire or dispose of securities in the retail markets for securities services. Large firms and investors operate in the market for institutional securities market services. There are many reasons why individual and institutio
28、nal investors prefer securities to portfolio investments. Securities have desirable attributes relative to portfolio investments. They are liquid, meaning they can be exchanged for cash easily because there are markets where the securities are traded (not always at a prices pleasing sellers). Securi
29、ties markets produce technical information (as defined in Chapter 6) including prices for the same or similar investments, unlike portfolio investments which are often difficult to price. Trading volume reflects the depth of the market for securities and investors ability to convert investments into
30、 cash at predictable transaction prices. Publicly traded securities of large corporations in many countries are accompanied by a wealth of information in the form of disclosures. The investment community provides ongoing analysis of securities when they are issued or as they subsequently trade. Fina
31、lly, securities market services are offered by established firms and institutions with reputations. Rules and regulations govern securities issuance and trading which can be a source of confidence or basis for litigation for investors investing in securities.Issuing securities in order to raise fund
32、s has advantages for users of funds. Issuers may prefer to raise funds through issuance of securities rather than credit or direct placements described in the previous chapter because the liquidity of securities means that costs of funds are cheaper. Technical information reflected in the prices of
33、similar or identical securities provided by securities markets clearly establishes the costs of funds for issuers. Prices and returns associated with alternative or substitute investments traded in securities markets provide issuing firms feedback on opportunity costs of making investments or return
34、ing funds to investors.Some of the principal-agent problems between investors and users of funds discussed in the previous chapter may be less severe if firms are willing to disclose information required of firms with publicly traded issues. Firms issuing publicly traded securities can take advantag
35、e of competition in securities markets to reduce issue costs relative to costs implicit in negotiated deals with portfolio investors. In the case of some large firms, like Exxon, open market auctions of securities issues may eliminate the need for financial intermediaries and their fees altogether.
36、These considerations also lead firms to prefer securities issues to private deals.Demand for Securities Trading ServicesBuyers and sellers of securities, trading either new issues or seasoned issues, are motivated by two basic reasons. The first reason trade securities for cash or cash for securitie
37、s is because of normal variation in consumption or business needs for cash. Traders making portfolio adjustments requiring offsetting changes in cash and securities in response to factors unrelated to events in the securities markets are called liquidity traders. An individual selling stock to finan
38、ce a childs education or an insurance company buying bonds to finance future payment of claims are both liquidity traders motivated by their specific portfolio considerations.A second type of trader knows something that the rest of the participants in the market do not know. This information may be
39、that a lawsuit has been filed or that a takeover attempt is imminent. Traders placing buy or sell orders based on private knowledge are called information traders. Information traders expect to profit because they buy securities at prices which are low relative to their true values or sell them at p
40、rices which are high relative to what they will sell for when the information the trader possesses becomes available to the market.Function of Securities Firms and Security TypesA broker finds a buyer for a seller. Because most traders are not continuously buying and selling securities, they turn to
41、 professional brokerage firms to complete their trades. Often, a buyer or seller wants to trade sooner than would be required by waiting for a counterpart seller or buyer to show up in the market. Financial institutions which facilitate quick trades by buying or selling securities on their own accou
42、nts are called market makers or dealers in securities. When offering new securities to investors, firms raising funds require guidance as how to design and price newly issued securities in order to make them attractive to investors. This guidance is one of the functions performed by financial servic
43、e firms assisting borrowing entities with securities origination.Brokers and dealers of securities buy and sell a wide range of financial instruments to flexibility for investors or issuers in their portfolio or balance sheet composition. The variety of securities makes it possible to fine-tune inve
44、stments or fund raising to particular investor or borrower needs. Most of us are familiar with securities in the form of common stocks and various types of bonds. Stocks and bonds represent ownership or debt claims against the earnings and underlying income producing assets of firms. These tradition
45、al securities are a significant part of trading volume in todays markets.Stocks and bonds are important but relatively simple securities. To achieve an optimal combination of risks and returns against a variety of future economic scenarios, issuers and investors often look for more innovative securi
46、ties designs. If these securities achieve a better risk and return combination in terms of investors and issuers preferences than existing securities, they will be more marketable. Classic examples are convertible bonds, preferred stock, and warrants. Newer examples are collateralized mortgage oblig
47、ations and index options. There is an unlimited number of possible risks investors or borrowers may be concerned about. For example, a financial instrument which pays higher returns with higher inflation would offer protection against inflation risks. A security which pays off more if automobile dem
48、and drops might be useful to some particular investors. Conceptually there are an infinite number of possible future outcomes which could be of concern to individual investors and borrowers.Creating financial instruments which pay future cash flows under economic conditions offfering new protection
49、to market participants is a move toward completing the market. A complete securities market offers securities which pay returns under every conceivable circumstance, for example which pays $1 if Mongolia attacks India next year and zero otherwise. It is not possible to define much less trade the infinite number of securities which would be necessary to complete financial
