SECURITIES 
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. As part of their asset management activities, some firms sell their own and others’ annuities.

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 may also be called 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, 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/wholesalers, they face the risk that the securities in their inventory will drop in price before they can resell them.
REGULATION

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 markets’ integrity by enacting new regulations and interpreting and enforcing existing laws.

A component of the Securities Act of 1933 is the requirement that publicly held companies disclose their financial information to provide transparency, ensuring that potential investors have access to key information needed for investment decisions. The Sarbanes-Oxley Act enacted in 2002 further increases the accountability of the boards of publicly held companies to their shareholders.

NASD: Originally known as the National Association of Securities Dealers, NASD is a self-regulatory body created by amendments to the Securities Exchange Act of 1934. The organization serves as the primary private-sector regulator of America's securities industry. Nearly all brokerage firms doing business in the United States are required by law to be members.
MERGERS AND ACQUISITIONS

The value of the top 10 mergers and acquisitions deals in the securities industry grew by $9 billion in 2005, after falling by $6 billion in 2004.
TOP TEN SECURITIES AND INVESTMENT FIRMS MERGERS AND ACQUISITIONS, 2005 (1)

($ millions)







1Legg Mason Inc.Asset managerCitigroup's asset management businessAsset manager$3,700.0
2Ameritrade Holding Corp.Broker/dealerTD Waterhouse Group Inc.Broker/dealer2,734.5
3Nasdaq Stock Market Inc.Broker/dealerInstinet Group Inc.Broker/dealer1,878.0
4E*TRADE Financial Corp.Broker/dealerBrownCo LLCBroker/dealer1,600.0
5Legg Mason Inc.Asset managerPermal Group Ltd.Asset manager930.0
6U.S. BancorpBankCorporate trust and institutional custody businessTrust company800.0
7E*TRADE Financial Corp.Broker/dealerHarrisdirect LLCOnline broker700.0
8ORIX Corp.Specialty lenderHoulihan Lokey Howard & Zukin Inc.Broker/dealer500.0
9Merrill Lynch & Co. Inc.Broker/dealerDSP Merrill LynchBroker/dealer500.0
10Thomas H. Lee Partners LPAsset managerCargill Investor Services Inc.Broker/dealer400.0
(1) At least one of the companies involved is a U.S.-domiciled company. List does not include terminated deals.
(2) At announcement.

Source: SNL Financial LC.

MERGERS AND ACQUISITIONS OF
U.S. SECURITIES FIRMS, 2001-2005 (1)




(1) Does not include terminated deals.

Source: SNL Financial LC.


  • Bank purchases of securities firms accounted for 34 percent of securities industry mergers and acquisitions from 2001 to 2005. (See also Chapter 4: Convergence.)

PROFITABILITY

SECURITIES INDUSTRY PRETAX RETURN ON EQUITY,
1996-2005 (1)


(Percent)



(1) New York Stock Exchange members doing public business, a proxy for the securities industry.

Source: Securities Industry Association.


  • According to the Securities Industry Association, the securities industry's return on equity was 10.0 percent in 2005.

  • Revenues of the U.S. securities industry rose 42.8 percent from 2004 to $228.8 billion in 2005, but they were 6.7 percent lower than the record high of $245.2 billion in 2000.

SECURITIES INDUSTRY PRETAX PROFITS, 1996-2005 (1)

($ billions)



(1) New York Stock Exchange members doing public business, a proxy for the securities industry.

Source: Securities Industry Association.


  • Pretax profits in 2005 totaled $9.4 billion, down 31.4 percent from $13.7 billion in 2004 and down $11.6 billion, or 55.2 percent, from the record $21 billion profits of 2000.

BROKER/DEALERS

The Securities Industry Association groups broker/dealers into four categories. The first, and largest catagory, major firms, consists of national full line companies, which are full service broker/dealers with an extensive national and international branch network system. This category also includes large investment banks and the largest U.S. broker/dealer subsidiaries of global financial holding companies. The major firms provide a broad array of financial services and products to households and institutions.

The second category is regional brokers. Operating on a somewhat smaller scale than the major firms, they offer a range of investment services based on their size and business specialty. Because of their regional expertise, these brokers participate in underwriting securities for businesses that are centered in their region.

New York City (NYC) area regionals, the third category, are mostly broker/dealer subsidiaries of U.S. and foreign banks and securities organizations, excluding those that fall into other listed categories, and are generally institutionally oriented. The fourth category is discounters, broker/dealers primarily engaged in the discount brokerage business.

Only a small percentage of the companies in these four categories are included in the "total firms" column of the chart below. "Total firms" consists of all New York Stock exchange broker/dealers doing public business. It is used by the SIA as a proxy for the total industry as it accounts for approximately 60 percent of revenues, capital and assets of all brokers/dealers in the U.S.
SECURITIES INDUSTRY PRETAX RETURN ON EQUITY BY FIRM CATEGORY, 1996-2005

(Percent)







199627.1%40.2%17.3%42.6%29.1%
199727.832.812.837.427.9
199821.113.7-1.029.717.9
199930.321.24.746.325.6
200028.624.910.748.626.5
200116.49.54.12.512.2
200211.02.64.3-0.98.0
200323.013.00.814.519.1
200416.612.92.34.214.6
20058.514.41.60.410.0

(1) New York Stock Exchange member firms doing public business, a proxy for the securities industry.

Source: Securities Industry Association.

SECURITIES INDUSTRY INCOME STATEMENT, 2005 (1)

($ millions)





Commissions$25,612 Total compensation$59,953
Trading gain (loss)17,007     Registered representative compensation23,156
Investment account gain (loss)1,559     Clerical employee compensation34,308
Underwriting revenue17,261Total floor costs5,234
Margin interest11,272Communications expense4,344
Mutual fund sale revenue7,163Data processing costs2,725
Fees, asset management15,268Occupancy and equipment costs5,087
Research revenue132Promotional costs1,512
Commodities revenue1,053Interest expense121,061
Other revenue related to the securities business111,762Losses from error accounts and bad debts306
Other revenue21,730Regulatory fees and expenses1,193
Total revenue229,819Nonrecurring charges275
  Other expenses18,684
  Total expenses220,373
  Pretax net income9,446

(1) New York Stock Exchange members doing public business, a proxy for the securities industry.

Source: Securities Industry Association.

SECURITIES INDUSTRY EMPLOYMENT BY FUNCTION, 2002-2006

(000)







Securities, commodity contracts, investments (total industry)789.4757.7766.1786.1816.3
     Securities and commodity contracts, brokerages and exchanges528.3493.3492.7498.9509.7
          Securities brokerage321.1294.2292.2294.5298.9
     Other financial investment activities261.2264.3273.5287.1306.6
          Miscellaneous intermediation23.723.823.222.923.5
          Portfolio management97.998.9105.3112.9120.7
          Investment advice89.093.7100.0110.5121.8
          All other financial investment activities50.748.044.940.940.7

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

CONCENTRATION

As in the banking and insurance sectors, the largest companies are increasing their share of total revenue and capital, reversing a trend in the 1990s when second-tier companies were gaining at the expense of the top 10.
SECURITIES INDUSTRY CONCENTRATION BY TOTAL REVENUE, 1995, 2000 AND 2005 (1)

(Percent)



(1) New York Stock Exchange member firms doing public business, a proxy for the securities industry.

Source: Securities Industry Association.


SECURITIES INDUSTRY CONCENTRATION BY TOTAL CAPITAL, 1996-2005 (1)

(Percent)






199658.5%18.8%22.7%$70.7
199755.521.523.092.5
199857.121.821.1105.7
199956.622.720.7121.5
200053.823.123.2141.5
200156.322.321.4148.8
200259.622.418.0144.6
200362.120.817.2156.6
200463.920.016.1173.6
200563.620.915.5189.6

(1) New York Stock Exchange member firms doing public business, a proxy for the securities industry.

Source: Securities Industry Association.

TOP TEN U.S. SECURITIES FIRMS BY REVENUES, 2005

($ millions)




1Morgan Stanley$52,498
2Merrill Lynch47,783
3Goldman Sachs Group43,391
4Lehman Brothers Holdings32,420
5Bear Stearns11,552
6Charles Schwab5,151
7Franklin Resources4,310
8A.G. Edwards2,612
9ETrade Financial2,551
10Legg Mason2,490

Source: Fortune.

TOP TEN U.S. SECURITIES AND INVESTMENT COMPANIES BY ASSETS UNDER MANAGEMENT, 2005

($ millions, as of March 31, 2006)




1Legg Mason, Inc.$854,700
2AllianceBernstein L.P.625,158
3Morgan Stanley 625,000 (1)
4Goldman Sachs Group, Inc. 593,000 (1)
5Merrill Lynch & Co., Inc.589,000
6Franklin Resources, Inc.490,134
7BlackRock, Inc.464,070
8T. Rowe Price Group, Inc.293,700
9Federated Investors, Inc.210,517
10Affiliated Managers Group, Inc.202,261
(1) As of May 31, 2005.

Source: SNL Financial LC.