SIC 6211 Security Brokers, Dealers, and Flotation Companies
SIC 6211
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 2000, the industry realized record high profits of $31.57 billion but a sluggish economy, exacerbated by the terrorist attacks of September 11, 2001, that briefly disrupted New York market activity, led to a decline in the industry during 2001 and 2002. Pretax income fell off to $16.02 billion and $12.09 in 2001 and 2002, respectively. In 2003, the industry began to recover, posting pretax profits of $24.05 billion, a result of a revived economy and severe cost cutting within the industry. Between 2000 and 2003 industry expenses were reduced by about 37 percent, or $111 billion. In 2004, the securities industry employed over 780,000 and had pretax profits of an estimated $19.5 billion on gross revenues of $227.5 billion.
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.
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 mortgage-backed 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.
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 firm 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 Raymond James Associates.
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.
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...
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