Securities firms and investment banks Flashcards
Do investment banks act as asset transformers?
No, only as brokers
Are investment banks measured by asset or equity size? Why?
Equity, because they focus on securities trading rather than long-term investments
Define securities firms
- Retail services to investors
- Securities trading (brokerage + mkt making)
- Purchase, sale and brokerage of existing securities
Define Investment Banks
- Commercial side –> underwriting and placement of issues on the primary market
- corporate finance activities
- Advice in M&A
Has the number of firms in the securities firms + investment banking increased or decreased throughout the years?
Decreased due to M&A, economies of scope, economy and changes in regulations
Define commercial banks/ financial services holding companies
They are investment banks that also do the CB part. Offer advice, underwriting, brokerage, trading and asset management.
Work in a domestic and international environment.
- J.P Morgan, Bank of America
Define National full-service firms
They specialize on corporate finance or primary and secondary market activities.
- Goldman Sachs
- M&A, advisory and consultancy
Define large Investment banks
They maintain more limited branch networks concentrated in major cities, operating predominantly with institutional clients
- Lazard Ltd and Greenhil Co
What is the recent type of M&A among investment banks? And by what have they been encouraged?
Interindustry mergers encouraged by a regulatory change: the Financial Services Modernization Act.
What are the 8 services offered by securities firms and IB? (no explanation)
-Investment banking
-venture capital
Market trading
-Trading
-Investing
-Cash management
-M&A
-Other services
Define the service “investment banking”
- IPOs and seasonal offers
- Private and public placements
- Best efforts underwriting and firm commitment
What is best efforts underwriting and what role does the IB take?
IB act as an agent, that is, usually puts together a bank syndicate to help them sell the securities issue. It doesn’t buy any, gets a fee.
What is firm commitment and what role does the IB take?
IB act as principals. That is it buys the issue and sell it to investors at a higher price. They are exposed to underwriting risk = not being able to sell at a higher P
Define the service “Venture capital (VC)”
Professionally managed pool of money used to finance new and high risk firms. They are NON-passive investors, that is, they are involved in the management
What are thee different types of VC investing
- LIMITED PARTNER = act as general partners in the firm, organize it, then liquidate investment
- FINANCIAL VENTURE = subsidiaries of CB’s investments
- CORPORATE VENTURE = investment in high-tech firms
- ANGEL VENTURE CAPITALISTS = wealthy INDIVIDUALS who make equity investments
What are VCs looking when investing?
- High returns =high risk
- Easy exit
Define the service “Market making”
Create a secondary market for an issue of securities, operating as an agent/broker on behalf of the client or as a dealer, on their own behalf. They have the OBLIGATION to buy/sell from their own pocket to create a liquid market and to offer the best prices, thus they TAKE ON RISKS.
What is the difference between VC and Private equity investments?
- Funds origin = PE sell securities to raise funds
- Type of investment = PE acquire established existing firms, rather than start-ups
Define the service “ trading” and its different types
- Taking an active net position on an instrument.
Types:
1. POSITION TRADING –> Maintain the position for long-term
2. PURE ARBITRAGE –> Buying an asset and immediately selling it on the market, benefiting from price discrepancies
3. RISK ARBITRAGE –> Buying securities in anticipating some information release. It is risky because the event might not occur
4. PROGRAM TRADING –> Simultaneously buying and selling of at least 15 different stocks valued at >=$1 million
5. STOCK BROKERAGE –> trading on behalf of customers
6. ELECTRONIC BROKERAGE –> offering customers direct access to the trading floor, via internet
Define the service “Investing”
Managing a pool of assets either as an agent or as a a principal for themselves and for stockholders
Define the service “cash management”
Money market mutual funds sold by investment banks that offer check writing privileges
Define the service “M&A”
- Finding merger partners
- Underwrite new securities to be issued by the merged firms
- Assess the value of the target firms
- Recommend the terms
- Assist target firms in preventing a merger
Define “other services” by IBs
- Custody and escrow
- Clearance and settlement
- Research and advisory
- Inroads to traditional banking (soft dollars) to finance internal research
What were the post crisis consequences faced by IBs?
Regulation was passed on risk-taking and capital requirements –> balance sheet reduction, downsizing selected businesses, trading products and investments
-Corporate strategy shifted to client services and away from making large bets through principal investments
Are assets on IBs balance sheet of long-, medium- or short-term?
Short and medium
What are the biggest assets for IBs?
Cash and cash equivalent from brokerage/trading fees
Do IBs have a high financial leverage?
Yes, they use securities to finance their assets
Do IBs have minimum reserves?
No
What are the main risks that IBs suffer from?
interest risk, sovereign and foreign exchange risk
What are some liabilities of IBs?
- Payables to customers and brokers
- Securities and commodities sold short for future delivery
- Securities under repurchase agreement
