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 and annuity sales.

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.

In 2008 massive mortgage and real estate investment losses led to an upheaval in the securities industry, which included the takeover of Bear Stearns by JP Morgan Chase and the collapse of Lehman Brothers, the largest bankruptcy in U.S. history. Also in 2008 Morgan Stanley and Goldman Sachs got regulatory approval to convert to traditional bank holding companies (BHCs). Both now have financial holding company status, which expands the financial services activities that BHCs are permitted. 

REGULATION

The Dodd-Frank Wall Street Reform and Consumer Protection Act, the massive financial services regulatory overhaul enacted in July 2010 has key implications for the securities industry, including provisions that affect the regulation of capital market transactions, credit agencies, hedge funds and derivatives. Two years after its passage, legislators are continuing to work out the details of how and when several of the law’s provisions will be implemented.

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 integrity of the market by enacting new regulations and interpreting and enforcing existing laws. The Dodd-Frank Act enhanced the SEC’s enforcement authority in a number of areas, including antifraud actions and the servicing of subpoenas. The act exempts indexed annuities from SEC regulation, thus keeping them under the purview of state insurance departments.

The Financial Industry Regulatory Authority: The Financial Industry Regulatory Authority (FINRA), is the largest nongovernmental regulator of the securities industry. Its members include all securities firms doing business in the United States. Its role is to promote investor protection through such activities as registering and examining securities firms, enforcing federal securities laws, rule writing, and dispute resolution. The body was formed in 2007 through the consolidation of the enforcement and arbitration functions of the New York Stock Exchange with those of FINRA’s predecessor organization, the National Association of Securities Dealers (NASD).

 

NUMBER OF FINANCIAL INDUSTRY REGULATORY AUTHORITY (FINRA) REPORTING FIRMS, 2002-2011

Source: FINRA; Securities Industry and Financial Markets Association.

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NUMBER OF FINANCIAL INDUSTRY REGULATORY AUTHORITY (FINRA) REGISTERED REPRESENTATIVES, 2002-2011

(000)

Source: FINRA; Securities Industry and Financial Markets Association.

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MERGERS AND ACQUISITIONS

The largest 2011 securities deal was Charles Schwab Corporation’s purchase of optionsXpress Holdings, Inc. for $1 billion. Both buyer and target are broker/dealers. By contrast, 2010’s largest deal was insurance company AXA’s acquisition of a portfolio of private equity funds from Bank of America for $1.9 billion.

 

TOP TEN SECURITIES AND INVESTMENT FIRMS MERGERS AND ACQUISITIONS, 2011 (1)

($ millions)

Rank Buyer Industry Target Industry  Deal value (2)
1 Charles Schwab Corporation Broker/dealer optionsXpress Holdings, Inc. Broker/dealer $1,032.5
2 Virtu Financial LLC Broker/dealer Madison Tyler Holdings, LLC Broker/dealer 1,000.0
3 Jefferies Group, Inc. Broker/dealer Prudential Bache's Global Commodities Group Broker/dealer 430.0
4 Monex Group, Inc. Broker/dealer TradeStation Group, Inc. Broker/dealer 401.0
5 Nuveen Investments, Inc. Asset manager Gresham Investment Management LLC Asset manager 300.0
6 Ashmore Group Plc Asset manager Emerging Markets Management, L.L.C. Asset manager 244.5
7 Apollo Global
Management, LLC
Asset manager Stone Tower Capital/Stone Tower
Debt Advisors/Stone Tower Fund Management
Asset manager 241.0
8 Ladenburg Thalmann
Financial Services Inc.
Broker/dealer Securities America Financial Corporation Broker/dealer 220.0
9 Cowen Group, Inc. Broker/dealer LaBranche & Co Inc. Broker/dealer 188.7
10 Euromoney Institutional
Investor Plc
Media and
entertainment
Ned Davis Research Group Asset manager 112.0

(1) Target is a U.S. securities or investment firm. List does not include terminated deals.
(2) At announcement.

Source: SNL Financial LC.

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MERGERS AND ACQUISITIONS OF U.S. SECURITIES FIRMS AND INVESTMENT FIRMS, 2007-2011 (1)

  2007 2008 2009 2010 2011
Number of deals 190 182 183 173 146
Purchased by banks and thrifts 49 43 42 20 23

(1) Includes whole and asset deals where the target is a U.S.-domiciled securities and investment firm. List does not include terminated deals.

Source: SNL Financial LC.

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  • Bank purchases of securities firms accounted for 20 percent of securities industry mergers and acquisitions from 2007 to 2011. (See also Chapter 4: Convergence.)

PROFITABILITY

   

 

SECURITIES INDUSTRY PRETAX RETURN ON EQUITY, 2002-2011 (1)

(Percent)

(1) New York Stock Exchange reporting firms doing public business in the United States.

Source: NYSE Euronext; Securities Industry and Financial Markets Association.

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  • The security industry’s return on equity was 4.9 percent in 2011, down from 16.2 percent in 2010.
  • The 2008 return on equity (-38.5 percent) was the lowest in the 37 years that the Securities Industry and Financial Markets Association has kept records.

SECURITIES INDUSTRY PRETAX PROFIT/LOSS, 2002-2011 (1)

($ billions)

(1) New York Stock Exchange reporting firms doing public business in the United States.

Source: NYSE Euronext; Securities Industry and Financial Markets Association.

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  • In 2011 the securities industry pretax profit fell to $7.7 billion from $25.1 billion in 2010. Pretax profits of $58.6 billion in 2009 was a record high; the pretax loss of -$42.6 billion in 2008 was a record low.

 

 

FINANCIAL DATA OF NYSE-REPORTING FIRMS, 2011 (1)

($ millions)

Revenue  
Commissions $25,673
Trading gain (loss) 1,540
Investment account gain (loss) 107
Underwriting 18,295
Margin interest 4,910
Mutual fund sales 5,530
Asset management fees 25,682
Research 67
Commodities 2,551
Other revenue related to the securities business 48,093
Other revenue 14,836
Total revenue $147,283
   
Expenses  
Total compensation $68,024
     Registered representative compensation 28,705
     Clerical employee compensation 37,767
Total floor costs 8,891
Communications expense 5,165
Data processing (EDP) costs 2,370
Occupancy and equipment costs 5,497
Promotional costs 1,203
Interest expense 18,689
Losses from error accounts and bad debts 276
Regulatory fees and expenses 1,432
Nonrecurring charges 153
Other expenses 27,835
Total expenses $139,536
Pretax net income (loss) $7,747

(1) New York Stock Exchange reporting firms doing public business in the United States.

Source: NYSE Euronext; Securities Industry and Financial Markets Association.

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ASSETS AND LIABILITIES OF SECURITIES BROKER/DEALERS, 2007-2011

($ billions)

  2007 2008 2009 2010 2011
Total financial assets $3,092.0 $2,217.2 $2,084.2 $2,075.1 $1,953.5
Checkable deposits and currency 105.0 120.1 90.7 96.9 114.8
Credit market instruments 803.1 717.4 525.3 557.5 567.2
     Open market paper 87.1 65.7 41.5 36.2 42.1
     U.S. government securities 230.2 433.2 233.9 244.3 335.5
          Treasury -60.0 190.6 123.0 94.5 187.8
          Agency- and GSE (1)-backed securities 290.2 242.6 110.9 149.8 147.7
     Municipal securities 50.1 38.7 35.4 40.0 31.5
     Corporate and foreign bonds 382.8 123.8 154.4 189.5 103.7
     Other loans and advances 52.8 55.9 60.1 47.4 54.3
Corporate equities 224.8 109.2 124.2 117.2 100.9
Security credit 325.5 164.8 203.0 278.2 238.5
Miscellaneous assets 1,633.7 1,105.7 1,141.0 1,025.3 932.0
Total liabilities $3,019.4 $2,158.1 $1,987.8 $1,990.2 $1,889.3
Security repos (2) (net) 1,147.3 586.9 470.9 404.7 213.3
Credit market instruments 64.8 142.6 92.9 129.7 91.8
     Corporate bonds 64.8 97.1 92.9 129.7 91.8
     Depository institution loans (3) 0.0 45.5 0.0 0.0 0.0
Trade payables 45.8 21.2 70.1 18.1 14.2
Security credit 1,200.9 963.6 888.2 936.6 1,073.6
     Customer credit balances 866.4 742.7 668.6 694.3 752.3
     From U.S.-chartered depository institutions 145.9 158.6 158.0 152.3 189.6
     From foreign banking offices in U.S. 188.6 62.3 61.6 90.1 131.7
Taxes payable 2.2 2.5 5.7 3.6 2.1
Miscellaneous liabilities 558.4 441.4 460.1 497.5 494.2
     Foreign direct investment in U.S. 62.6 72.1 74.5 103.0 113.6
     Investment by funding corporations 567.5 672.1 1,119.3 1,076.6 1,119.5
     Other -71.7 -302.8 -733.7 -682.0 -738.9

(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.
(3) Loans extended through the Federal Reserve's Primary Dealer Credit Facility and the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility.

Source: Board of Governors of the Federal Reserve System, June 7, 2012.

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SECURITIES INDUSTRY EMPLOYMENT BY FUNCTION, 2008-2012

(000)

  2008 2009 2010 2011 2012
Securities, commodity contracts and
investments
864.2 811.3 800.5 810.7 814.4
     Securities and commodity contracts,
     brokerages and exchanges  
516.2 475.7 467.5 465.5 458.1
          Securities brokerage   301.5 283.9 280.1 279.2 273.9
     Other financial investment activities   348 335.6 333 345.2 356.3
          Miscellaneous intermediation   26.1 25.4 24.0 24.1 23.5
          Portfolio management   141.3 135.1 133.0 137.0 141.2
          Investment advice   133.5 131.6 134.0 142.2 150.5
          All other financial investment
          activities
 
47.2 43.4 41.9 41.9 41.0

Source: U.S. Department of Labor, Bureau of Labor Statistics.

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TOTAL CAPITAL OF NYSE-REPORTING FIRMS, 2002-2011

($ billions)

Source: NYSE Euronext; Securities Industry and Financial Markets Association.

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EQUITY CAPITAL OF NYSE-REPORTING FIRMS, 2002-2011

($ billions)

Source: NYSE Euronext; Securities Industry and Financial Markets Association.

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TOP U.S. SECURITIES FIRMS BY REVENUES, 2011 (1)

($ millions)

Rank Company Revenues Profits
1 BlackRock $9,081 $2,337
2 Franklin Resources 7,140 1,924
3 Charles Schwab 4,884 864

(1) Based on all securities firms in the Fortune 500.

Source: Fortune.

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TOP TEN U.S. SECURITIES AND INVESTMENT COMPANIES BY ASSETS, 2011 (1)

($ millions, end of year)

Rank Company Assets
1 Goldman Sachs Group, Inc. (2) $923,225
2 Morgan Stanley 749,898
3 Merrill Lynch & Co., Inc. 555,788
4 Credit Suisse (USA), Inc. 374,431
5 BlackRock, Inc. 179,896
6 Charles Schwab Corporation 108,553
7 Brookfield Asset Management Inc. 91,030
8 E*TRADE Financial Corporation 47,940
9 Oaktree Capital Group, LLC 44,294
10 CME Group Inc. 40,759

(1) Includes U.S. and Canadian asset managers, investment companies and brokers/dealers.
(2) Financial holding company. Classified as a securities firm by SNL Financial on the basis of its business model.

Source: SNL Financial LC.

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