Broker-dealers
Broker-dealers do not change the legal and functional form of the securities they own and owe. They buy stocks, currencies, mortgage bonds, leases, etc. and they sell the same securities. As dealers they own them temporarily before they sell them, exposing themselves to temporary market risks. As brokers they simply match buyers and sellers.
Broker-dealers participate in both primary sale and secondary resale transactions. They transfer securities from the original issuers to buyers as well as from existing owners to new owners. The first is known as investment banking or corporate finance, the latter as dealing or trading. The purest forms of broker-dealers exist in the U.S. and Japan where laws have historically separated them from other forms of banking. Most securities firms in those two countries are pure broker-dealers (investment banking, institutional trading, and retail brokerage) with an addition of asset-transforming businesses of asset management and lending. In most of continental Europe, financial institutions are conglomerates commonly referred to as universal banks as they combine both functions. In recent years, with the repeal of the Glass–Steagal Act in the U.S. and the wave of consolidations taking place on both sides of the Atlantic, U.S. firms have the possibility to converge more closely to the European model. Broker-dealers tend to be much less regulated than asset transformers and the focus of laws tends to be on small investor protection (securities disclosure, fiduciary responsibilities of advisers, etc.).
Asset transformers and broker-dealers compete for each other’s business. Securities firms engage in secured and unsecured lending and offer check-writing in their brokerage accounts. They also compete with mutual funds by creating bundled or indexed securities designed to offer the same benefits of diversification. In the U.S., the trading on the American Stock Exchange is dominated by ETFs (exchange-traded funds), HOLDRs (Holding Company Despositary Receipts), Cubes, etc., all of which are designed to compete with index funds, instead of ordinary shares. Commercial banks securitize their credit card and mortgage loans to trade them out of their balance sheets. The overall trend has been toward disintermediation (i.e., securitization of previously transformed assets into more standardized tradeable packages). As burdensome
Regulations fall and costs of securitization plummet, retail customers are increasingly given access to markets previously reserved for institutions.
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10-04-2008, 12:07 AM
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