The securities industry is made up of establishments primarily engaged in the purchase, sale, and brokerage of securities. This industry also encompasses investment bankers, which originate, underwrite, and distribute issues of securities. Firms in this industry essentially serve as financial intermediaries, matching investors with entities that need money. They also provide a pricing mechanism for the investment market, and furnish a vehicle for the liquidation of investors' assets. Although many of these firms also provide investment consultation, companies engaged predominantly in advisement are classified in SIC 6282: Investment Advice.
523110 (Investment Banking and Securities Dealing)
523120 (Securities Brokerage)
523910 (Miscellaneous Intermediation)
523999 (Miscellaneous Financial Investment Activities)
In 1995 there were 981 companies with revenues of $176.26 billion and 429,900 employees. In that year U.S. corporate stock and bond sales rose to $709.3 billion from $705.7 billion in 1994, due to a robust calendar of common-stock offerings. Behind the strong financing activity was a blend of lower interest rates and higher stock prices, which together spurred more and more individual investors to buy common stock. One of the most vibrant areas of the common-stock underwriting market was the initial public offering, as 572 companies came to market for the first time in 1995. Total debt sales, including convertible offerings, slipped to nearly $611 billion in 1995 from $628.8 billion in 1994. But asset-backed offerings jumped 42 percent to $107.1 billion.
Major U.S. stock markets smashed an array of trading records in 1995. Average daily volume on the over-the counter NASDAQ (National Association of Securities Dealers' Automated Quotations System) stock market reached 400 million shares, up 36 percent from 1994. Average daily volume on the New York Stock Exchange (NYSE) totaled a record 346 million shares, up 19 percent.
In a dramatic recovery from record losses that bludgeoned dealers and brokers in 1990, the industry realized its highest revenues in history in 1995. While the future of the highly volatile securities market is nearly impossible to predict, economic and demographic trends—such as the aging of baby boomers—offered hope for continued healthy security markets throughout the 1990s.
Securities firms have three major functions in financial markets: they provide a mechanism that links people who have money with those seeking to raise money; they deliver a means of valuing and pricing investments; and they offer a vehicle that investors can use to liquidate their investments. Entities in the market that are served by securities firms include individuals, corporations, and governments.
Securities firms typically serve the first function, raising capital, through investment banking and brokerage activities. By acting as an intermediary between those with and those without capital, the firms channel funds between various sectors of the economy. The second function, pricing, is served when companies provide timely information to the marketplace about investments. The essential ability of securities firms to deliver this information quickly has made U.S. capital markets the world's most efficient. Liquidity, the third function, is served as brokers and dealers buy and sell securities for investors as efficiently as possible to avoid losses not related to market conditions.
Although not considered an integral function in the financial market, advisement and product development services offered by many full-service securities firms are significant factors in the dynamics of the industry. Companies continually strive to develop and refine financial instruments specifically tailored to customer needs. These instruments are designed to accomplish myriad investment goals including sheltering taxes, maximizing dividends, or increasing capital gains. Firms that engage in investment counseling provide extensive research for potential investors. These activities entail: obtaining information on the customer's investment strategy and goals; providing information on various investment vehicles; offering advice on specific market trends and forecasts; providing information regarding government initiatives such as tax laws; and recommending investments that match the customer's needs.
Types of Securities. Firms buy and sell an enormous variety of securities for their customers. These securities generally can be categorized as either equity or debt instruments. Equity instruments, most often stock, represent ownership interest in a firm and entitle the owner to a portion of the company's profits. Debt instruments, on the other hand, signify a promise on the part of the issuing entity to repay, at a specified time, a sum of money and an amount of interest for use of that money. Created as a means of raising capital, both debt and equity vehicles are often purchased and sold numerous times through various securities markets.
In addition to trading in traditional corporate stocks and bonds, securities firms were selling increasing amounts of alternative investment vehicles in the 1990s. These vehicles included municipal (state and local) bonds, junk bonds, options, mutual funds, asset and mortgagebacked securities, futures, and real estate investment trusts.
Two vehicles that continued to receive increased emphasis in security markets in the 1990s were derivatives, such as futures and options. An option is a contract to purchase or sell shares of a particular stock. The contract specifies the security, the purchase or sale price, the life of the option, and the number of shares that the contract represents. A "put" option gives the owner the right to sell a security, while a "call" option allows the owner the choice of buying a security. In contrast to an option, a future is a commitment to receive or deliver a specified quantity and quality of a commodity by a specified future date. A future can be used to insure a transaction price at a date prior to the actual exchange.
Types of Firms. Many securities firms serve as both brokers and dealers in the market. A broker is an agent who buys and sells securities on behalf of a client for a commission or fee. A dealer is a principal that buys and sells on its own account with the intention of making a profit. Firms that serve as broker-dealers typically have a headquarters office supported by numerous branch offices. The branch offices sell and market the company's services, while the main office handles administrative activities, research, and product development. Depending on the type and extent of services offered beyond brokerage and dealing activities, securities firms fall into one of several categories.
For instance, national full-line firms provide a range of services for both retail and institutional customers. These companies usually have many offices nationwide. Examples of such firms include Merrill Lynch and Paine Webber. Investment banking firms, such as Goldman Sachs and First Boston, primarily provide institutional customers with services related to underwriting new securities issues, and mergers and acquisitions. They may also act as brokers and dealers. Regional firms offer full lines of securities products to customers within a particular geographic area. Large firms of this type are Robert W. Baird, Wheat First Securities, and Alex Brown.
In addition to full-service, investment banking, and regional firms, the marketplace also includes discount brokers. These companies allow retail customers to buy and sell securities for less than they would have to pay to a full-service broker. Because discount brokers usually do not offer investment advice, have sales staffs, or act as marketers for financial products, they are able to charge lower commissions. Popular firms in this category include Charles Schwab and Olde Discount.
Industry revenues remained highly concentrated among the top-tier firms, as they have been since the inception of the industry. In the early 1990s, the top 25 brokers garnered over 80 percent of all industry revenues. Furthermore, the top 10 brokers amassed nearly 70 percent of all industry revenues.
Primary Marketplaces. Industry participants buy, sell, and issue securities in three primary markets: exchange, over-the-counter (OTC), and money. Exchange markets provide organized trading facilities for stocks, bonds, and/or options. These facilities act as auction houses, where securities brokers and dealers essentially bid for securities. Organizations must meet requirements set forth by the exchange in order to have their securities listed, or made available for trade, on the exchange. The New York Stock Exchange (NYSE) is the best-known exchange, but others include the American Stock Exchange (AMEX), Midwest Stock Exchange, and the Chicago Board Options Exchange.
OTC markets, in contrast to organized exchange facilities, consist of a network of brokers and dealers that represents customers in the purchase or sale of securities. No central location exists for this type of market. Trading departments of securities firms negotiate price with customers or their agents over the telephone. OTC markets usually trade in securities of companies that are small in comparison to those on organized exchanges.
The money market trades mostly in short-term securities that have a maturity of one year or less. These instruments are characterized by high liquidity and typically trade in high denominations. Examples of securities traded in this market are U.S. treasury bills, certificates of deposit, and commercial paper. As with OTC markets, money markets do not have central trading places, and the market is composed primarily of banks and firms that borrow or invest large amounts of money for a short term.
The U.S. securities industry gradually evolved from a mix of financial services available as early as 1800. These services, and the subsequent development of a sophisticated industry, mimicked financial markets that developed in Europe in the eighteenth century. In fact, much of the early investment banking activity in the United States, which was responsible for issuing the first securities, was conducted through joint ventures between Europeans and Americans. Many of the famous families that helped to shape the American securities market are still well known, such as the Rothschilds, Warburgs, and Barings.
Throughout the nineteenth century the development of the American securities industry lagged several decades behind that of Europe. However, the Civil War and the construction of the U.S. railroads created a demand for financial services that spurred the growth of the investment banking and securities industry. In fact, government securities sold during the Civil War represented the first successful security offering made to the general public on a large scale. This opened the way for sales and distribution systems that would be used by securities firms throughout the twentieth century. Some of the larger investment banking houses that dominated the nineteenth-century securities industry in the United States included Kuhn Loeb, Morgan, Lehman Brothers, and Goldman Sachs.
The securities industry rapidly expanded after World War I, as the prosperity of the 1920s caused an almost insatiable appetite for securities. Despite massive growth in the popularity of municipal and utility issues, for the first time in 1929 the volume of even more popular stock issues surpassed the amount of bonds issued. Throughout the 1920s investment bankers raced to meet the demand for new securities. Even an influx of foreign securities was insufficient to satisfy consumers.
The immense success of the securities industry, however, foreshadowed its rapid decline and the subsequent transformation of its structure. The industry that had evolved by 1930 was loosely regulated and was dominated, many people at that time believed, by an exclusive network of power brokers. In addition, banks were allowed to participate in both commercial and investment banking activities, which created a conflict of interest for many firms.
The Industry Crash and Reformation. The stock market crash of 1929 confirmed the suspicions of many that the securities industry was in need of reform. A variety of New Deal legislative orders quickly transformed the industry into one of the most regulated sectors of the American economy. In 1934 Congress established the Securities and Exchange Commission (SEC) to protect investors against fraud and mismanagement by securities firms and other investment entities. The Securities Exchange Commission (SEC) performs legislative, judicial, and executive functions. The most inclusive and farreaching piece of legislation enacted by the SEC in the 1930s was the Glass-Steagall Act. Other laws included the Revenue Act, the Securities Act, and the Securities Exchange Act. These laws required stricter standards of disclosure and erected a barrier between investment and commercial banking. They were also used to strengthen the banking industry and to reduce speculative risks that threatened the health of the U.S. economy.
The result of the industry transfiguration was a relatively stable securities market throughout most of the remainder of the twentieth century. After 1930 the industry gradually grew and prospered under SEC regulation until the late 1960s, when demand for new business boomed. The amount of new common stock issued increased from about $10 billion in 1965 to a peak of over $40 billion by 1968. New issues of bonds reflected a similar pattern. Although the dynamics of the industry had changed significantly after 1930, the industry remained dominated by several of the larger brokerage houses until the late 1970s, when the increased volume allowed smaller companies to begin to establish a presence in the market.
One of the greatest developments in the securities industry occurred in 1975, when commissions that securities firms charged were deregulated, and negotiated rates were allowed. Since this time, market volume has increased dramatically, and new service offerings have increased. For example, the volume of common stock issued skyrocketed from about $40 billion per year in 1975 to over $75 billion by 1985. During the same period, the amount of new bond issues leapt from $40 billion to over $110 billion per year.
The 1980s. Deregulation of commission rates, a strong market demand for new issues of securities in a vibrant economy, and the increase in the volume and number of new financial instruments all contributed to the growth of the securities industry in the mid-1980s. Between 1982 and 1986 combined industry commissions on securities rose from $6 billion to over $12.6 billion, and total industry revenues jumped from $23.2 billion to $50 billion. Industry employment soared from about 170,000 in 1980 to a peak of 262,000 in 1987. In addition, merger and acquisition activity by American companies, which securities firms handled, proliferated throughout most of the decade, peaking at over $250 billion of completed deals in 1988. Leveraged buyouts and junk bond issues, both of which were high margin activities for securities firms, also added to industry growth and profitability.
Just as the boom of the 1920s foreshadowed the fall of securities markets in the 1930s, the mid 1980s were a prelude to industry setbacks in the late 1980s and early 1990s. The stock market crash on Black Monday, in October of 1987, significantly diminished activity and profits for securities firms during the next few years. As equity and debt trading declined, and mergers and acquisitions decreased between 1987 and 1990, pre-tax income for the entire industry plummeted from $8.3 billion in 1986 to $3.2 billion in 1987 and only $800 million by 1990. As industry employment fell to less than 210,000 in 1990, Wall Street posted its worst year on record.
As if economic woes were not enough, the industry was also rocked by scandals in the late 1980s. Arrests and indictments of executives from some of the largest brokerage houses in the United States shook up Wall Street. Charges by the SEC ranged from insider trading, or trading while in possession of non-public information, to concealing stock ownership. Charges against Dennis Levine, of Drexel Burnham Lambert Inc., and Ivan Boesky in 1986 led to subsequent investigations of a number of prominent Wall Street figures. Boesky received three years in prison and a $100 million civil penalty. Levine was sentenced to serve four years in prison and was fined $362,000.
Increased Competition. At the same time that the securities industry was experiencing its volatile rise and fall during the 1980s, it was also undergoing structural changes. The initiation of negotiated competitive commissions in 1975 gradually reduced the percentage of company revenues created by commissions. In fact, commission income as a percentage of total industry revenues plummeted from over 40 percent in 1976 to 16 percent by 1990.
Other regulatory changes also jostled the market. Some of these laws were prompted by scandals that tarnished the industry's image during the 1980s, while others were a result of a changing marketplace. For instance, the Glass-Steagall Act was essentially dismantled, as regulators tried to make the U.S. banking industry more competitive in global markets. Additionally, the Tax Equity and Fiscal Responsibility Act (TEFRA) and Rule 415 also affected the industry. TEFRA, which increased reporting requirements for securities companies, compelled firms to invest in costly information technology. Rule 415 allowed multiple security offerings to be covered by one underwriting, thereby increasing fee competition in the industry.
Besides regulatory changes, three major factors increased the competitiveness of the industry. First of all, the pool of investment dollars grew because of large increases in the size of pension funds, a trend that was expected to accelerate through the end of the twentieth century. Secondly, interest-rate volatility was partly responsible for growth in the trading of fixed-income investment products, which increased opportunities for commissions in the industry. Finally, rapid growth in the federal deficit resulted in a large increase in the available pool of U.S. government investment instruments, causing increased trading in bonds.
One effect of these changes was the entrance of new players in securities markets. Banks, insurance companies, and investment advisors, among others, all began competing for a piece of the securities market pie in the late 1980s, placing downward pressure on securities firms' profits. Furthermore, discount brokers, many of which charged as much as 90 percent less than full-service firms, cornered 20 percent of the individual investor market during the 1980s.
Securities firms reacted to increased competition and reduced commission income in two ways. First, they emphasized the services side of their business, relying less on income from buying and selling securities and more on money management and advisory services. Secondly, the number of firms in the industry declined, as companies merged to benefit from economies of scale. Besides mergers between securities firms, several large firms also merged with insurance companies and other institutions that complemented their role in the market. For example, Kemper Insurance Company merged with five regional broker-dealers. The number of securities firms fell from a peak of 9,515 in 1987 to 7,610 in 1992.
Despite significant setbacks for securities firms triggered by the 1987 stock market crash and aggravated by increased competition, the industry staged an amazing recovery by 1991 and 1992. Following one of its worst years on record in 1990, industry pre-tax income rose to historical highs of $8.6 billion in 1991 and over $10 billion in 1992. Low interest rates and high stock prices sparked much of the activity. Lower rates increased the amount of new debt offerings and encouraged corporations, municipalities, and homeowners to refinance their existing debt. Because stock prices were high in relation to company earnings, corporations tended to issue more new equities.
However, the bond market crashed in 1994 as a result of an unexpected rise in interest rates. Furthermore, brokerage companies experienced slowdowns in under-writing and trading. Firms became stuck with unwieldy cost structures that outstripped revenues. Thus, Wall Street firms curtailed expansion plans and eliminated more marginal businesses.
In 1995 pre-tax profits of NYSE-member securities firms soared. Virtually all revenue components posted increases led by trading gains. Commissions and asset management fees also hit new highs. In 1995 securities firms took in $6.58 billion in disclosed underwriting fees, making 1995 Wall Street's third best year ever. Triggering the surge in fees was robust activity in stock sales, the most lucrative underwriting sector. Stock sales yielded $4.02 billion in fees alone, or nearly two-thirds of all underwriting fees.
Another positive factor in 1995 was the volume of mergers and acquisitions activity. In 1995 all records for mergers and acquisitions activity in the United States and abroad were broken. An unprecedented $458 billion in deals was announced by U.S. companies, up 32 percent from the old record of $347 billion reached in 1994. Globally, a record $866 billion in transactions was reached, up 51 percent from the $572 billion announced in 1994. However, investment bankers took a back seat in a number of the transactions. Some of the biggest deals were hammered out by chief executives. Even though deal volume was 35 percent above 1988, the best year of the 1980s, many of 1995's deals were crafted without all the complicated financial arrangements, such as junk bonds and bridge loans, that can generate large fees.
In late 1996, the Federal Reserve Board loosened the cap on banks' underwritings from 10 percent to 25 percent of the revenue in their securities' affiliates. Furthermore, during 1996, industry firms continued to diversify their revenue bases. A generally favorable environment for financial assets continued to provide a backdrop for impressive profits postings in the industry. Mutual fund inflows and trading volumes increased.
During 1997 there was an increasing pace of consolidation among Wall Street firms. For example, in January 1997 Morgan Stanley announced a $10.2 billion merger with Dean, Witter, Discover & Co.
The late 1990s saw the advent of online trading, a trend that revolutionized and changed the industry. According to an article in The Economist (8 May 1999), one of every six shares traded during 1999 was traded through the Internet, or 500,000 shares per day. In 1994 there were no online brokerage accounts; by 1999, 5 million of these accounts were active. Online brokerage firms were typically discount brokerages, with an average commission of $15.00 per trade, much less than the full-service brokerage fee of $100 to $300 per trade. Traditional brokerages such as Merrill Lynch appeared not to be concerned with the rising competition—arguing that the discount online brokerage model was not sustainable in a business sense. Online brokers in 1999 continued to shape their niche in the industry by offering additional services and products such as insurance or online research on companies. The CEO of Prudential Securities, a traditional firm without online trading, suggested that the value for consumers in sticking with a traditional firm lay with the advice that the firm could provide, rather than the actual execution of the trade, which online providers excel at, and offer at a cheap price.
Performance among online brokerages varied as these companies evolved in the late 1990s. A Kiplinger's article (November 1999) surveyed the performances of online brokerages and found a disparity in the quality of service provided. Among the disadvantages of online brokerages were long phone waits (one investor lost $5,000 because he couldn't get through to the firm), computer crashes, or difficulty logging onto the brokerage site. Advantages included low brokerage fees from some companies (good for frequent traders) and information available on a brokerage site. Using several criteria for ranking online brokerages (including commissions, responsiveness, margin rates, availability of initial public offerings [IPOs], broker knowledge, and Web site), Kiplinger's ranked Accutrade and Ameritrade highly. Web Street Securities received the lowest overall rating. Forbes 1999 Annual Report (11 January 1999) noted that Charles Schwab, a traditional brokerage firm, had done well both in establishing dominance in the mutual fund market and in online brokerage services.
The largest security broker-dealer in the United States in 1991 was Merrill Lynch and Company, Inc. of New York. The firm is the world's largest equities under-writer, providing financing, investment, and insurance services to clients worldwide. Merrill Lynch is one of the few financial services companies to have achieved strength in both the retail and institutional markets at home and abroad. Despite the unprecedented bull market in the United States, the company has made significant acquisitions overseas, such as Smith New Court PLC, a global securities firm based in Great Britain. In 1996, Merrill Lynch had total worldwide revenues of more than $25 billion.
Morgan Stanley, a premier institutional brokerage firm, employed more than 12,000 individuals in 1996. In that year the firm was ranked number one in global announced mergers and acquisitions transactions and number three in worldwide common stock underwriting, according to Securities Data Co. Morgan Stanley's network of offices spans 22 countries, and the firm's Morgan Stanley Capital International indices serve as benchmarks for international investors. In 1996, the firm generated net revenue of $5.8 billion.
Merrill Lynch remained the largest U.S. securities firm in 1998, with 49,800 employees. Fidelity Distributors retained the greatest market share (as of February 1999) for a mutual fund at 12.84 percent. The Fidelity Magellan Fund had the greatest market share of mutual funds (during the first quarter of 1999) at $85.86 billion dollars.
Since 1980 the securities industry has, on average, grown faster than other industries. However, employment in the industry has been highly volatile compared to other segments of the economy. Tasks performed by workers in many occupations in the security brokerage industry have been transformed, as global markets have expanded, and computerized trading has increased. The industry has increased employment in highly technical professional occupations such as computer scientists and statistical financial analysts and has streamlined managerial and internal analysis jobs. The increase in the professional share of the industry's employment has largely offset a decrease in the managerial share.
With more commercial banks gaining their Federal Reserve approval to open securities affiliates, the demand for experienced research, sales, and trading people is greater than the supply. Money-center banks, such as Chemical Bank and Chase Manhattan, have hired dozens of experienced professionals in these areas.
Employment in the field typically requires knowledge of finance and investments, although many brokers in the past have started their careers with little of either. Jobs usually are available in one of five basic functional areas: sales and marketing, where securities or financial products are sold directly to customers; investment banking; research; trading, which often entails buying and selling on an exchange floor; and finance and administration. Although salaries in more traditional business functions are similar to other industries, salaries in commission-based positions in brokerage or sales can vary greatly depending on the market and the success of the worker.
One of the most glamorous and high-paying areas, and the most difficult to break into, is investment banking. Although employment in the field declined after the mid 1980s, the industry remains cyclical, and economic growth could open more opportunities in this field. Successful investment bankers typically work long hours, have a master's degree in business administration, and work in one of a few large metropolitan areas, particularly New York.
The greatest job growth in the securities market during the 1990s is expected to be in financial services and operations. Money management, financial consulting, and other fee-based services are expected to grow. Likewise, operations positions in the industry should increase faster than average throughout the 1990s. Operations departments are basically responsible for maintaining customer accounts, updating records, and handling cash and securities receipts and deliveries. As companies struggle to keep costs down, and securities markets increasingly become electronic, firms will continue to invest in advanced information processing and delivery systems.
During the consolidation, merging, and downsizing of Wall Street brokerages in the 1990s, many brokers became independent. Between 1992 and 1997, independent brokers across the United States increased by 23 percent, though that amount tapered slightly in 1998, when large, traditional brokerage firms attempted to woo independent brokers back to their firms. By the late 1990s, 96,000 independent brokers offered services nationwide. Independents cited an ability to offer flexibility to customers, since these brokers were not limited to offering products from a parent company.
Regional securities brokers also took advantage of Wall Street downsizing to beef up their own staff. While firms like Merrill Lynch and Company planned to cut its staff by 5 percent (or 3,400 people) in 1998, smaller regional firms like Piper Jaffray of Minneapolis, Minnesota, used funds of $730 million to hire additional staff.
Brokerages in the late 1990s attempted to better reach untapped potential customers by hiring women and minority brokers. According to the Securities Industry Association, nearly 800,000 potential customers represent untapped women or minority markets in the country. But CEO Joseph Grano of Paine Webber Inc. ( American Banker, 2 June 1998) admitted that the industry had a long way to go in hiring minorities, claiming that the industry had a difficult time attracting them and retaining them. Other executives cited industry consolidation and resistance to change as barriers in hiring more women or minority brokers.
Securities firms in the United States, as well as in other countries, often deal in foreign markets to access untapped capital, among other reasons. By issuing a security in a foreign market, a company can increase the success of its offering simply by increasing the size of the potential market. A second important impetus for buying and selling overseas securities is to achieve greater returns and asset diversification. Although the United States maintains the largest and most efficient securities industry and markets in the world, foreign securities industries were becoming increasingly competitive, and overseas markets more attractive, in the early 1990s.
The international securities market began to realize explosive growth in 1983. U.S. purchases and sales of foreign stocks skyrocketed from $15.7 billion in 1982 to $320.3 billion in 1992. Purchases and sales of bonds during the same period bounded as well, from $61 billion to $824 billion. At the same time, foreign purchases and sales of U.S. stocks and bonds increased at an even greater pace. Combined sales and purchases of U.S. stocks and bonds spiraled from $296 billion in 1982 to $5.1 trillion by 1992, a 17-fold increase.
Although new technology was the greatest reason for the emergence of the global securities market, as discussed later, regulatory reform on all continents was also an important factor. This has resulted as governments have discovered that globalized financial markets encourage flows of capital to regions offering the best returns. They also recognized that open markets have allowed investors to achieve greater portfolio diversification, thus creating more stable markets.
The United States has been a leader in the opening of markets for foreign investment. During the 1980s, the SEC revised many of its rules to assure that capital raising in the United States by foreign issuers was not unnecessarily hampered. In 1990, the SEC adopted Rule 144a, which made it easier for large institutions to trade certain securities among themselves, thereby encouraging foreign issuers to invest in U.S. markets despite U.S. disclosure requirements. In 1991, the SEC acted again by allowing certain Canadian firms to issue securities prepared in accordance with Canadian requirements, rather than under U.S. laws. Furthermore, in the 1990s, foreign companies increasingly issued American Depository Receipts (ADRs) in the United States in order to obtain additional sources of equity capital.
Similar breakdowns in barriers of overseas markets in the 1980s and early 1990s were encouraging U.S. securities firms to venture abroad as well, often despite less efficient overseas markets. For instance, surplus countries — such as Japan — have opened their markets as a result of pressure from other nations seeking a greater balance of world capital flows. In fact, Japan and England both led other Asian and European nations to deregulate their markets when both countries abolished many of their controls in 1979. Further reorganization of financial markets by the European Community promises more efficient markets in the future.
The ramifications of global markets for the U.S. securities industry include the potential for a broadened role in world financial markets, more investment alternatives and financial products, greater access to capital, and a greater volume of transactions. As markets continue to become more efficient, and foreign securities industries become more advanced, however, the global market will also mean greater competition for U.S. firms.
Advances in technology continued to have a marked impact on the securities industry in the 1990s. Technology was rapidly changing the entire structure of the industry in several ways. Companies were relying increasingly on computer automation to reduce costs and to meet federal reporting requirements. In addition, markets and exchanges in the United States were becoming more "electronic" each year, allowing various trading functions to be conducted by computer. Finally, computer technology was quickly creating a global securities market in which investors and capital seekers around the world could collaborate.
Successful securities firms in the 1990s were those that had made, or were making, the technological leap from transaction processors to information processors. Firms were coordinating sales, trading, and financial advisory services through advanced information system networks. This was allowing companies to reduce transaction costs, make better investment decisions, and deliver new products more quickly, thereby increasing customer service and lowering overhead costs. Advanced information systems were also becoming vital as a result of increased SEC reporting requirements.
Besides making companies within the industry more productive, information technology was also altering the way that securities were bought and sold in the marketplace. For instance, programmed trading allows brokers and dealers to complete transactions by computer, rather than from the floor of an exchange. Although critics of this system argue that it creates excessive market volatility, increased regulation of the system following the 1987 market crash has alleviated resistance.
Automated trading techniques will increasingly influence the market, as they continue to deliver greater cost benefits. For instance, in 1988 the average cost of executing an order on the floor of the NYSE for a firm was $12.87 using one of its own brokers, and $24.32 for an independent broker. Using Designated Order Turnaround (DOT), the automated system, the cost fell in the range of $4.84 to $8.67 per transaction, depending on the number of daily transactions a company made on the system.
In addition to changes it has prompted in the way firms and markets operate, information technology has had the most notable impact upon global securities markets. Advancements in telecommunications and satellite systems allow investors and capital seekers to monitor and participate in world markets on a minute-by-minute basis. By the mid- to late 1980s, however, issuing procedures had been simplified and accelerated to the point that borrowers could offer issues in several national markets simultaneously. Indeed, all market participants now have access to information allowing them to swiftly orchestrate complex financing techniques that simultaneously integrate multiple national markets.
While great strides have been made in uniting international markets with new technologies, there was still enormous room for improvement going into the mid-1990s. Industry leaders in participating nations were still in the process of developing a central or global depository/clearance system, which would essentially settle trades of securities made by members of separate nations. A system of this type, similar to the one that exists for trades made in the United States, would make markets more efficient. Furthermore, many nations were still overcoming their reluctance to allow computerized access to their financial markets.
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