Struggle and Survival on Wall Street: The Economics of Competition among Securities Firms

by John O. Matthews

Overview

U.S. securities firms are the most competitive in the world and are now facing challenges posed by the internationalization of securities markets. Struggle and Survival on Wall Street provides a comprehensive economic analysis of competition among securities firms. John Matthews analyzes the interaction of the industry's structure, conduct and performance. To meet the competition and the needs of their customers, he argues, firms develop new financial products, some of which become new lines of business. The most important decisions firms make concern the methods of entry into these lines of business. Those firms that successfully innovate and adapt their organizations are in the best position to deal with both domestic and international competition. The regulatory framework of the industry is vital to its growth and Matthews makes policy recommendations which urge regulators, particularly the Securities and Exchange Commission, to provide for a framework in which organizational change can take place.

Product Details

ISBN-13:	9780195364149
Publisher:	Oxford University Press
Publication date:	03/03/1994
Sold by:	Barnes & Noble
Format:	eBook
Lexile:	1470L (what's this?)
File size:	4 MB

About the Author

John Matthews is an Associate Professor of Economics at Villanova University.

Table of Contents

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

Editorial Reviews

"Rich in institutional detail, yet analytical in focus, this book provides a comprehensive look at the securities industry in the 1980s. Anyone interested in the changing structure of the industry, in product innovation, in regulatory issues, in market making and in a host of other topics will find this an interesting and rewarding book."—Hans R. Stoll, Vanderbilt University

"Struggle and Survival on Wall Street: The Economics of Competition Among Securities Firms is required reading for those wanting to understand the economic motivations and workings of securities firms and the securities markets that they serve. Matthews' analysis of industry structure changes and institutional arrangements makes for particularly interesting reading."—Gene L. Finn, Vice-President and Chief Economist, National Association of Securities Dealers, Inc.

"An imaginative, up to date application of the lessons of modern industrial organization and competitive analysis to the rapidly evolving, highly competitive U.S. securities industry."—Ingo Walter, New York University

"John Matthews' Struggle and Survival on Wall Street is an insightful analysis of broker-dealer competition as it developed in the '80s and continues even today. His focus on the innovation and adaptation of broker-dealers operating in a highly regulated environment, while satisfying customer demand and providing niche market opportunities, is well taken. Professor Matthews' significant policy recommendation that regulators provide an appropriately flexible framework for accommodating innovation is particularly on point."—Nicholas A. Giordano, President and Chief Executive Officer, Philadelphia Stock Exchange

"A thoroughly researched book on an important and fascinating industry...Struggle and Survival on Wall Street provides a comprehensive study of securities firms. It should be of great interest to economists, as well as to practitioners who work in or with the securities industry."—Journal of Economic Literature

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