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SECURITIES OPERATIONS

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

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  1. SECURITIES OPERATIONS CHAPTER 24 Dr David P Echevarria

  2. 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

  3. 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

  4. 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

  5. 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

  6. 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

  7. 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

  8. 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

  9. 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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