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SECURITIES |
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OVERVIEW
The securities industry consists of securities brokers and dealers, investment banks and advisers, and stock exchanges. Together, these entities facilitate the flow of funds from investors to companies and institutions seeking to finance expansions or other projects. Firms that make up the securities sector may specialize in one segment of the business or engage in a wide range of activities that includes brokerage, asset management and advisory services, as well as investment banking. As part of their asset management activities, some firms sell their own and others’ annuities.
Investment banking involves the underwriting of new debt securities (bonds) and equity securities (stocks) issued by private or government entities to finance new projects. Investment banks buy the new issues and, acting essentially as wholesalers, sell them, primarily to institutional investors such as banks, mutual funds and pension funds. Investment banks are sometimes referred to as securities dealers or broker/dealers because many also participate in the financial market as retailers, selling to individual investors. The primary difference between a broker and dealer is that dealers buy and sell securities for their own account, whereas brokers act as intermediaries for investors who wish to purchase or sell securities. Dealers make money by selling at a slightly higher price than they paid. Like underwriters and wholesalers, they face the risk that the securities in their inventory will drop in price before they can resell them.
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REGULATION
Securities and Exchange Commission: The Securities and Exchange Commission (SEC), established by Congress in 1934, regulates the U.S. securities markets. Its mission is to protect investors and maintain the markets’ integrity by enacting new regulations and interpreting and enforcing existing laws.
A component of the Securities Act of 1933 is the requirement that publicly held companies disclose their financial information to provide transparency, ensuring that potential investors have access to key information needed for investment decisions. The Sarbanes-Oxley Act enacted in 2002 further increases the accountability of the boards of publicly held companies to their shareholders.
The Financial Industry Regulatory Authority: The Financial Industry Regulatory Authority (FINRA), is the largest non-governmental regulator of the securities industry. Its members include all securities firms doing business in the United States. All told it oversees nearly 5,000 brokerage firms, about 173,000 branch offices and more than 677,000 registered securities representatives. FINRA was created in July 2007 through the consolidation of NASD and the member regulation, enforcement and arbitration functions of the New York Stock Exchange. Its role is to promote investor protection and market integrity through effective regulation and compliance and technology-based services. NASD, originally known as the National Association of Securities Dealers, was a self-regulatory body created by amendments to the Securities Exchange Act of 1934.
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MERGERS AND ACQUISITIONS
The value of the top 10 mergers and acquisitions deals in the securities industry grew by $27 biilion in 2006, following a $9 billion increase in 2005.
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TOP TEN SECURITIES AND INVESTMENT FIRMS MERGERS AND ACQUISITIONS, 2006 (1)
($ millions)
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MERGERS AND ACQUISITIONS OF
U.S. SECURITIES FIRMS, 2001-2006 (1)
| - Bank purchases of securities firms accounted for 32 percent of securities industry mergers and acquisitions from 2001 to 2006. (See also Chapter 4: Convergence.)
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PROFITABILITY
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SECURITIES INDUSTRY PRETAX RETURN ON EQUITY,
1997-2006 (1)
(1) New York Stock Exchange members doing public business, a proxy for the securities industry.
Source: Securities Industry and Financial Markets Association.
| - The securities industry's return on equity was 19.8 percent in 2006.
- Revenues of the securities industry rose 44.2 percent from 2005 to $331.3 billion in 2006, breaking the previous record of $245.2 billion in revenues in 2000.
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SECURITIES INDUSTRY PRETAX PROFITS, 1997-2006 (1)
($ billions)
(1) New York Stock Exchange members doing public business, a proxy for the securities industry.
Source: Securities Industry and Financial Markets Association.
| - Pretax profits rose to $20.9 billion in 2006, double the $9.4 billion reported in 2005 and slightly below the record $21 billion profits of 2000.
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BROKER/DEALERS
The Securities Industry and Financial Markets Association (SIFMA) groups broker/dealers into four categories. The first and largest catagory, "major firms", consists of national full line companies, which are full service broker/dealers with an extensive national and international branch network system. This category also includes large investment banks and the largest U.S. broker/dealer subsidiaries of global financial holding companies. The major firms provide a broad array of financial services and products to households and institutions.
The second category is regional brokers. Operating on a somewhat smaller scale than the major firms, they offer a range of investment services based on their size and business specialty. Because of their regional expertise, these brokers participate in underwriting securities for businesses that are centered in their region.
New York City (NYC) area regionals, the third category, are mostly broker/dealer subsidiaries of U.S. and foreign banks and securities organizations, excluding those that fall into other listed categories, and are generally institutionally oriented. The fourth category is discounters, broker/dealers primarily engaged in the discount brokerage business.
Only a small percentage of the companies in these four categories are included in the "total firms" column of the chart below. "Total firms" consists of all New York Stock exchange broker/dealers doing public business. It is used by SIFMA as a proxy for the total industry as it accounts for approximately 60 to 80 percent of revenues, capital and assets of all brokers/dealers in the U.S.
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SECURITIES INDUSTRY PRETAX RETURN ON EQUITY BY FIRM CATEGORY, 1997-2006
(Percent)
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SECURITIES INDUSTRY INCOME STATEMENT, 2006 (1)
($ millions)
Revenue |
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| Commissions | $26,665.0 |
| Trading gain (loss) | 34,522.5 |
| Investment account gain (loss) | 3,306.6 |
| Underwriting revenue | 20,884.4 |
| Margin interest | 20,777.4 |
| Mutual fund sale revenue | 7,843.5 |
| Fees, asset management | 18,195.1 |
| Research revenue | 206.2 |
| Commodities revenue | 54.8 |
| Other revenue related to the securities business | 175,354.4 |
| Other revenue | 23,525.6 |
| Total revenue | $331,335.7 |
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| Expenses | |
| Total compensation | $71,104.2 |
| Registered representative compensation | 26,873.6 |
| Clerical employee compensation | 41,664.3 |
| Total floor costs | 6,444.4 |
| Communications expense | 4,918.5 |
| Data processing costs | 2,926.4 |
| Occupancy and equipment costs | 5,211.4 |
| Promotional costs | 1,541.3 |
| Interest expense | 198,804.2 |
| Losses from error accounts and bad debts | 276.8 |
| Regulatory fees and expenses | 1,266.2 |
| Nonrecurring charges | 118.0 |
| Other expenses | 17,831.1 |
| Total expenses | $310,442.2 |
| Pretax net income | $20,893.6 |
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(1) New York Stock Exchange members doing public business, a proxy for the securities industry.
Source: Securities Industry and Financial Markets Association. |
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ASSETS AND LIABILITIES OF SECURITIES BROKER/DEALERS, 2003-2007
($ billions)
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2003 |
2004 |
2005 |
2006 |
2007 |
| Total financial assets | $1,613.0 | $1,844.9 | $2,127.1 | $2,741.7 | $3,092.0 |
| Checkable deposits and currency | 47.2 | 62.9 | 56.5 | 80.5 | 105.0 |
| Credit market instruments | 424.1 | 394.9 | 477.2 | 583.4 | 803.1 |
| Open market paper | 49.4 | 48.0 | 60.2 | 64.3 | 87.1 |
| U.S. government securities | 121.5 | 62.7 | 36.4 | 71.0 | 230.2 |
| Treasury | 37.8 | -44.6 | -64.6 | -67.0 | -50.0 |
| Agency- and GSE (1)-backed securities | 83.7 | 107.3 | 101.0 | 138.0 | 280.2 |
| Municipal securities | 24.9 | 32.0 | 42.9 | 50.9 | 50.1 |
| Corporate and foreign bonds | 228.3 | 252.2 | 337.7 | 397.2 | 435.6 |
| Corporate equities | 100.5 | 129.1 | 158.3 | 186.4 | 224.8 |
| Security credit | 182.5 | 264.0 | 232.4 | 292.1 | 325.5 |
| Miscellaneous assets | 858.8 | 994.0 | 1,202.6 | 1,599.4 | 1,633.7 |
| Total liabilities | 1,589.9 | 1,823.1 | 2,092.5 | 2,688.6 | 3,039.7 |
| Security repos (2) (net) | 490.4 | 526.9 | 733.6 | 1,071.8 | 1,147.3 |
| Corporate bonds | 47.0 | 62.2 | 62.4 | 68.8 | 64.8 |
| Trade payables | 28.2 | 36.0 | 43.1 | 48.3 | 45.8 |
| Security credit | 676.3 | 774.2 | 806.0 | 957.8 | 1,200.9 |
| Customer credit balances | 475.4 | 578.3 | 575.3 | 655.7 | 866.4 |
| From banks | 200.9 | 195.8 | 230.7 | 302.2 | 334.5 |
| Taxes payable | 1.8 | 2.2 | 2.1 | 2.8 | 2.2 |
| Miscellaneous liabilities | 346.3 | 421.7 | 445.5 | 539.1 | 578.7 |
| Foreign direct investment in U.S. | 87.3 | 94.9 | 89.9 | 80.5 | 83.0 |
| Due to affiliates | 602.3 | 638.8 | 787.2 | 850.9 | 902.6 |
| Other | -343.3 | -312.1 | -431.6 | -392.3 | -406.8 |
(1) Government-sponsored enterprise.
(2) Security repurchase agreements: short-term agreements to sell and repurchase government securities at a specified date and at a set price.
Source: Board of Governors of the Federal Reserve System, June 5, 2008. |
| - Total assets of securities broker/dealers increased 12.8 percent from $2.7 trillion in 2006 to $3.1 trillion in 2007.
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SECURITIES INDUSTRY EMPLOYMENT BY FUNCTION, 2003-2007
(000)
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2003 |
2004 |
2005 |
2006 |
2007 |
| Securities, commodity contracts, investments (total industry) | 757.7 | 766.1 | 786.1 | 818.3 | 847.9 |
| Securities and commodity contracts, brokerages and exchanges | 493.3 | 492.7 | 498.9 | 510.6 | 519.1 |
| Securities brokerage | 294.2 | 292.2 | 294.5 | 300.1 | 304.6 |
| Other financial investment activities | 264.3 | 273.5 | 287.1 | 307.8 | 328.8 |
| Miscellaneous intermediation | 23.8 | 23.2 | 22.9 | 23.7 | 23.7 |
| Portfolio management | 98.9 | 105.3 | 112.9 | 121.0 | 127.9 |
| Investment advice | 93.7 | 100.0 | 110.5 | 121.3 | 131.1 |
| All other financial investment activities | 48.0 | 44.9 | 40.9 | 41.8 | 46.1 |
| Source: U.S. Department of Labor, Bureau of Labor Statistics. |
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CONCENTRATION
As in the banking and insurance sectors, the largest companies are increasing their share of total revenue and capital.
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SECURITIES INDUSTRY CONCENTRATION BY TOTAL REVENUE, 1996, 2001 AND 2006 (1)
(1) New York Stock Exchange member firms doing public business, a proxy for the securities industry.
Source: Securities Industry and Financial Markets Association.
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SECURITIES INDUSTRY CONCENTRATION BY TOTAL CAPITAL, 1997-2006 (1)
(Percent)
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TOP TEN U.S. SECURITIES FIRMS BY REVENUES, 2007
($ millions)
Rank |
Company |
Revenues |
| 1 | Goldman Sachs Group | $87,968 |
| 2 | Morgan Stanley | 87,879 |
| 3 | Merrill Lynch | 64,217 |
| 4 | Lehman Brothers Holdings | 59,003 |
| 5 | Bear Stearns | 16,151 |
| 6 | Franklin Resources | 6,206 |
| 7 | Charles Schwab | 6,063 |
| 8 | BlackRock | 4,845 |
| 9 | International Assets Holding | 4,460 |
| 10 | Legg Mason | 4,344 |
| Source: Fortune. |
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TOP TEN U.S. SECURITIES AND INVESTMENT COMPANIES BY ASSETS, 2006 (1)
($ millions)
Rank |
Company |
Assets |
| 1 | Morgan Stanley | $1,120,645.0 |
| 2 | Merrill Lynch & Co., Inc. | 841,299.0 |
| 3 | Goldman Sachs Group, Inc. | 838,201.0 |
| 4 | Lehman Brothers Holdings Inc. | 503,545.0 |
| 5 | Credit Suisse (USA), Inc. | 438,848.0 |
| 6 | Bear Stearns Companies Inc. | 350,432.6 |
| 7 | Deutsche Bank Securities Inc. | 317,870.7 |
| 8 | Banc of America Securities LLC | 251,441.6 |
| 9 | Barclays Capital Inc. | 236,022.7 |
| 10 | BNP Paribas Securities Corp. | 135,115.3 |
| (1) Ranked by total assets.
Source: SNL Financial LC. |
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