1. J. K. Dietrich - FBE 525 - Fall, 2006 Value Creation in Securities Services Week 5 - September 28, 2006

2. J. K. Dietrich - FBE 525 - Fall, 2006 Securities Services u Brokerage u Market making/dealing u Origination u Economics of each service u Value added u Synergies

3. J. K. Dietrich - FBE 525 - Fall, 2006 Brokers u Brokers find buyers for sellers and sellers for buyers –Create markets to concentrate trading activity and reduce search costs –Fixed costs of markets imply economies of scale with respect to transaction volume u Organized exchanges, over-the-counter markets, electronic communication networks (ECNs)

4. J. K. Dietrich - FBE 525 - Fall, 2006 Types of Brokers u Wholesale or institutional brokers u Retail brokers u Floor brokers and day traders u Wire-houses u Clearing houses u Full-line brokers

5. J. K. Dietrich - FBE 525 - Fall, 2006 Securities Trading Developments u Organization of organized exchanges –Ownership of exchanges (Europe, NASDAQ, NYSE) –Outcry vs. order matching (floor, computers) –Consolidation of exchanges (Nasdaq and AMEX, Europe, NYSE and Archipelago) u Market making and technology –Computer order books vs. information flow –Competition, Nasdaq spreads case and pennies u Changes in market access –Corporate access to markets (shelf, names) –Retail market trading (DOT, ECNs)

6. J. K. Dietrich - FBE 525 - Fall, 2006 Over-the-Counter Markets u Fixed incomes –Dealer networks –The TRACE system for corporates –Municipal debt –Contrasts with U.S. Treasury debt u Derivatives u Other equity claims

7. J. K. Dietrich - FBE 525 - Fall, 2006 Retail Market for Trading u Self-directed retirement accounts u Performance of fund managers u Internet trading –Day trading –Information and advice on internet versus traditional broker network (cases of Merrill- Lynch and DLJ) u Importance of customer accounts (Schwab)

8. J. K. Dietrich - FBE 525 - Fall, 2006 Issues in Brokerage Pricing u Commissions versus price of trade execution –Measurement of costs by consultants u Payment for order flow u Soft-dollar commissions u Combination of advisory and trading services at wholesale level

9. J. K. Dietrich - FBE 525 - Fall, 2006 Market-Makers or Dealers u Required to post and bid and ask (buy and sell) price u Carry inventories, bear inventory costs –Carrying costs –Market risk –Information costs u Information traders versus liquidity traders

10. J. K. Dietrich - FBE 525 - Fall, 2006 Value Creation by Dealers Prices P Ask P Bid S SiSi DiDi D Volume0 X

11. J. K. Dietrich - FBE 525 - Fall, 2006 Securities Origination u Advise securities issuer on –Market conditions and likely prices, yields –Design of securities –Regulatory and marketing requirements –Distribution of securities u Investment bankers –Bulge bracket firms –Boutiques, regional firms, financial firm affiliates, commercial banks

12. J. K. Dietrich - FBE 525 - Fall, 2006 Securities Origination Securities Originator InvestorIssuer Advising, Underwriting Distribution Best Efforts Distribution

13. J. K. Dietrich - FBE 525 - Fall, 2006 Principal-Agent Problems u Broker and customer u Market maker and traders u Securities issuer and investment banker –Due diligence –Effort and costs –Investor and underwriter u Combined financial services and origination –Banks and investment banks –Brokers and asset managers

14. J. K. Dietrich - FBE 525 - Fall, 2006 For Next Classes u Prepare cases International Securities Exchange and W. R. Hambrecht + Co.: OpenIPO cases for discussion on Saturday, September 30 u Read Chapter 10 for October 5 and prepare State Street case u Be prepared to discuss group project (choice of firms, data problems, etc.) after class on September 30