I | Introduction to the Securities Industry | |
1 | Introduction | 3 |
| Design of the Study | 4 |
| The New Economics of Organization | 5 |
| Strategic Choice | 5 |
| A Brief Look at Structural Change Between 1960 and 1980 | 6 |
| Regulation | 7 |
| An Overview of the Book | 8 |
2 | Accelerating Change, 1980-1992 | 9 |
| Changing Economic Conditions | 12 |
| Junk Bonds | 13 |
| Financial Futures and Options | 14 |
| New Approaches to Managing Risk | 15 |
| Program Trading | 16 |
| Derivative Securities | 17 |
| The Impact of Program Trading and Derivatives on Broker-Dealers' Trading Activities | 18 |
| Corporate Restructuring with Innovative Financing | 20 |
| Bridge Loans | 21 |
| Merchant-Banking Activities | 21 |
| The Private Placement Market | 22 |
| Conclusion | 23 |
3 | An Overview of the Securities Industry | 24 |
| Types of Broker-Dealers | 24 |
| Long-Term Industry Trends | 25 |
| Organization and Services of Securities Firms | 33 |
| Discount Brokers | 37 |
| Securities Firms' Jobs | 37 |
| Securities Firms' Capital | 39 |
| Firm Classifications | 39 |
| Overall Industry Model | 41 |
II | The Legislative and Regulatory Framework | |
4 | The Legislative Framework | 45 |
| The Original Legislation | 45 |
| The Glass-Steagall Act | 46 |
| Legislation in the 1960s | 48 |
| The Securities Investor Protection Act of 1970 | 48 |
| The Securities Act Amendments of 1975 | 49 |
| Integrating the Disclosure Requirements of the 1933 and 1934 Acts | 50 |
| Antitrust Issues | 51 |
| Economic Analyses of the Regulatory Framework of the Securities Markets | 52 |
5 | The Safety and Soundness of Broker-Dealers: The Net Capital Rule | 55 |
| The History of the Net Capital Rule | 55 |
| The Logic of the Net Capital Rule | 56 |
| Alternative Net Capital Rules | 57 |
| The Customer Protection Rule | 58 |
| Capital Trends | 61 |
| Net Capital During the 1987 Market Crash | 62 |
| Customer Protection Proceedings: The Experience | 64 |
| Benefits of Self-Regulation | 65 |
| Conclusion | 65 |
6 | Principal-Agent Problems in the Securities Industry | 67 |
| Fiduciary Obligations of Securities Firms | 67 |
| Conflicts as a Result of Growth and Diversification | 68 |
| Conflicts in the Brokerage Business | 68 |
| Conflicts in the Dealer Business | 72 |
| Conflicts with Institutional Customers | 73 |
| Conflicts in Investment Banking | 74 |
| The General Economic View of Agency Problems | 75 |
| Overall Conflict Control | 76 |
| Economic Models of Specific Agency Problems in the Securities Industry | 78 |
| Conclusion | 79 |
III | Elements of Securities Industry Structure | |
7 | Characteristics of Demand | 83 |
| Individuals | 83 |
| Institutions | 85 |
| Demand Characteristics | 89 |
| Demand in the Core Lines of Business | 89 |
| Conclusion | 93 |
8 | Costs and Entry Barriers in the Securities Industry | 95 |
| Fixed Costs, Sunk Costs, and Entry Barriers | 95 |
| Barriers to Entry into the Securities Industry | 97 |
| Strategically Created Barriers to Entry | 99 |
| Measures of Fixed Costs | 101 |
| Cost Estimates Using Brokerage Commission Data | 102 |
| Conclusion | 104 |
9 | Mergers, Concentration, and Multiproduct Economies of Scale and Scope | 106 |
| Merger History | 106 |
| Concentration in the Securities Industry | 108 |
| Economies of Scale and Scope in the Securities Industry | 111 |
| Conclusion | 123 |
IV | Conduct | |
10 | Securities Brokerage Pricing | 127 |
| Pricing for Individuals | 127 |
| Pricing for Institutions | 131 |
| An Economic Rationale for Soft Dollars | 137 |
11 | Market Making, Proprietary Trading, and Derivatives | 140 |
| United States Government Securities | 140 |
| The Corporate Bond Market | 142 |
| The Municipal Bond Market | 143 |
| The OTC Market in Stocks | 145 |
| Proprietary Trading | 149 |
| Interest Rate and Currency Swaps | 150 |
| Derivatives | 151 |
| Market Making and Contestability | 152 |
| Conclusion | 153 |
12 | Investment Banking | 154 |
| The Underwriting Function | 154 |
| Elasticity of Demand for Underwriting Services | 155 |
| Entry and Contestability in Investment Banking | 156 |
| Lack of Diversification by Large Investment Bankers into Retail Brokerage | 159 |
| Concentration Trends in Underwriting | 159 |
| Stability of Leading Positions | 160 |
| Prices | 160 |
| Impact of Rule 415 on Underwriting | 162 |
| Key Investment-Banking Lines in the 1980s | 164 |
| Strategic Mapping in Investment Banking | 167 |
| Strategy Versus Contestability in Investment Banking | 169 |
| Conclusion | 170 |
13 | Competition Through Innovation | 172 |
| The Links Between Market Structure and Innovation | 172 |
| Model Development | 173 |
| Market Structure Considerations in the Securities Industry | 179 |
| Empirical Research on Innovation in the Securities Industry | 179 |
| Conclusion | 181 |
14 | Diversification by Securities Firms | 183 |
| Motives for Diversification | 183 |
| The Securities Industry Environment | 186 |
| Modes of Entry | 189 |
| Facilitating Conditions | 190 |
| The Decision Framework | 191 |
| Diversification and Relative Position in the Industry | 191 |
| Diversification Choices at Problem Firms | 193 |
| Diversification into the Securities Industry by Large Financial Institutions | 194 |
| The Potential for Creating Strategic Barriers to Entering New Lines of Business | 196 |
V | Performance and Public Policy | |
15 | Merrill Lynch, Morgan Stanley, and Salomon Brothers Adapt | 203 |
| Merrill Lynch | 204 |
| Morgan Stanley | 206 |
| Salomon Brothers | 208 |
| Conclusion | 212 |
16 | Competition in the International Securities Markets | 214 |
| Developments in World Securities Markets | 214 |
| Stock Market Capitalization | 215 |
| United States Firms in London | 217 |
| Competition with the Japanese Securities Industry | 218 |
| Conclusion | 223 |
17 | Performance of the Securities Industry | 225 |
| What We Have Learned from Structure and Conduct Analysis | 225 |
| Lack of Evidence of Widespread Collusion in the Industry | 226 |
| Overall Profitability in the Securities Industry | 227 |
| DuPont Analysis of Profits of Publicly Held Firms | 229 |
| Employment by Firm Category in the 1980s | 231 |
| Risk in the Industry | 232 |
| Liquidation Risk | 236 |
| Compensation in the Securities Industry | 236 |
| The Technology of Trading and Fragmented Markets | 237 |
| Comparing the Cost of Capital for U.S. and Japanese Securities Firms | 238 |
| Sources of Extraordinary Profit for Broker-Dealers | 239 |
| Focusing on Revenues Rather than Profits | 239 |
| Overall Performance of the Securities Industry | 240 |
18 | Policy Implications and Recommendations | 242 |
| International Competition | 242 |
| The Value of U.S. Securities Firms as International Competitors: The Case of Salomon Brothers | 243 |
| Property Rights for New Products and Services | 244 |
| SEC-CFTC Jurisdictional Disputes | 245 |
| Banks' Entry into the Securities Industry | 246 |
| Broker-Dealers' Capital and SIPC Insurance | 249 |
| More Economic Input into SEC Policymaking | 250 |
| References | 253 |
| Author Index | 265 |
| Subject Index | 269 |