Career Enhancement Project Industry Research Assignment - Dealers and Brokers by Group 2 Members: Simon 50261423 Kit 50322212 Philip 50311756 Jeffy 50253797 龍 50191570 Broker An individual who is paid a commission for executing customer orders. Person who acts as an intermediary between a buyer and seller, usually charging a commission. A broker who specializes in stocks, bonds, commodities, or options acts as agent and must be registered with the exchange where the securities are traded. Antithesis of dealer. Types of Broker Full-service brokers and discount brokers: Discount brokers charge far lower commissions than full service brokers. But there is a trade-off. If you use a discount broker, you will get little or no investment advice, so you must be willing to make your own buy and sell decisions. A full-service broker, on the other hand, will help you pick investments and devise a financial plan. However, it will charge a higher brokerage fee. Floor broker and upstairs broker: A floor broker executes orders on the floor of the exchange. An upstairs broker handles retail customers and their orders. Dealer An entity that stands ready and willing to buy a security for its own account (at its bid price) or sell from its own account (at its ask price). Used in the context of general equities. Individual or firm acting as a principal in a securities transaction. Principals are market makers in securities, and thus trade for their own account and risk. Antithesis of broker. Comparison between dealer and broker Dealer Broker Role Principal/Market Maker Agent/Intermediary Inventory hold Yes No Trading Own account and bear Clients’ account and no own risk risk Revenue Bid-ask spread Brokerage commission Specialist A specialist “makes a market” in the shares of one or more firms. This task may require the specialist to act as either a broker or dealer. The specialist’s role as a broker is simply to execute the orders of other brokers. Specialists may also buy or sell shares of stock for their own portfolios. When no other broker can be found to take the other side of a trade, specialists will do so even if it means they must buy for or sell from their own accounts. A specialist performs 5 essential functions: Manage the auction process. To maintain a fair and orderly market in a particular security, the specialist establishes the opening price for his security every day. Then, during the day, he quotes the current bid and offer prices to brokers. Execute orders for floor brokers. The specialist can execute an order immediately or hold the order and execute it when the stock reaches the specific price requested by the customer. As a dealer, the specialist will buy or sell stock from his own inventory to keep the market liquid or to prevent rapid price changes. Serve as catalysts. Specialists are the point of contact between brokers with buy and sell orders. The specialist acts as a catalyst, bringing buyers and sellers together enabling a transaction to take place that otherwise would not have occurred. Provide capital. If buy orders temporarily outpace sell orders, or conversely if sell orders outpace buy orders, the specialist is required to use his firm's own capital to minimize the imbalance. This is done by buying or selling against the trend of the market until a price is reached at which public supply and demand are once again in balance. Usually public order meets public order without specialist participation, however, specialists do participate in about 10 percent of all shares traded. Stabilize prices. To ensure that stock trading moves smoothly, with minimal price fluctuation, the specialist will step in against the market trend. Specialists buy and sell stock to cushion temporary imbalances and to avoid unreasonable price variations. Schwab General The Charles Schwab Corporation (NYSE:SCH), through Charles Schwab & Co., Inc. (member SIPC/NYSE), U.S. Trust Corporation, CyBerCorp, Inc. and its other operating subsidiaries, is the largest online broker in United State with 8 million active accounts and US$763 billion in client assets as of March 31, 2003, which 4.2 million accounts and US$296 billion in client assets are came from the online market. On the other hand, its market share is 27% which far away from the second largest online broker, E*trade and Waterhouse, which both of them have 12% market share. Business Area The main core business areas of Schwab are options, fixed income investment, mutual fund, and stocks. Clients can use the trading tools called StreetSmart ProTM to make the trade. Such tool provides the following information: Nasdaq Level II Quotes, unlimited watch lists, detailed options chains, real-time news headlines from Dow Jones® and COMTEX News Networks, the day’s leading gainers, decliners, and volume movers for the Nasdaq or NYSE, etc. Recent News In 25 October, 2000, Charles Schwab, Hong Kong, Ltd. announced the opening of its first storefront branch in Hong Kong's Central business district. The branch is equipped with the latest in on-line trading and communication technology to provide full investment services to clients in Hong Kong. In 21 January, 2001 Charles Schwab & Co., Inc., has been named the winner of five prestigious accolades in 2000. The awards, announced in December 2000 and January 2001, are "Company of the Year" by Forbes; "Best Internet Brokerage" by Gomez; "The Top 25 Managers" by Business Week; "Best Company to Work for (5th)" by Fortune and "Companies Best for Female Executives (2nd)" by Working Women. In 22 January, 2003, Charles Schwab, announced the official launch of StreetSmart ProTM, a comprehensive and customizable trading platform, as a strategic move to further expand its active trader business in Hong Kong and Asia. Despite the challenging environment last year, Charles Schwab Hong Kong’s active trader customers remained robust with their investments, with the average annual number of trades per year increasing by 22 per cent from 2001 to 2002. Average investable assets for this group of customers also grew by 14 per cent from last year regardless of market downturn Wachovia Securities General Wachovia Securities is the fifth largest full service retail broker dealer, based on client base, in the United States. Excluding the banking business, it has 3.4 million of active retail client accounts, and is managing retail clients’ assets of $265 billion. As a non-bank affiliate of Wachovia Corporation, it is not separately listed in any stock exchange. Business Area Its business area includes discount and full-service brokerage, asset management and clearing services. It owns memberships of New York Stock Exchange, American Stock Exchange, NASDAQ, Philadelphia Stock Exchange, Chicago Stock Exchange and Pacific Stock Exchange. Financial position Wachovia Securities has a very healthy financial position, as its parent companies Wachovia Corp proudly presents its 8.27% tier-1 capital, which is high above the 4% minimum required in Basel-2 accord. The parent company’s debt rating is also at good level, as its senior debt rated Aa3 by Moody's Investors Service, A by Standard & Poor's and A+ by Fitch. Recent News On February 19, 2003, Wachovia Corp announced that it would join the retail brokerage forces with Prudential Financial Inc by setting up a new brokerage firm, in which Wachovia Corp will have a 62% interest while Prudential will have 38%. This will create the third largest retail brokerage firm in the country, based on combined client assets of $537 billion. The firm will have more than 3,500 brokerage locations throughout the USA. Spear, Leeds & Kellogg General Spear, Leeds & Kellogg (SLK) is one of the 7 specialists operating in the prominent New York Stock Exchange. In terms of the number of common stocks the specialist handle, SLK is ranked second. And 103 of common stocks handled by SLK are composed in the S&P 500. The listed companies that have their common stocks handled by SLK, to name a few, are AIG, AOL Time Warner, IBM, Boeing and NTT DoCoMo. It is also the specialist in 10 Exchange Traded Fund. Takeover In late 2000, Goldman Sachs Group paid more than $6 million in stock to acquire SLK, which is considered a very high price, and this made headlines in financial columns. Other Business SLK also has businesses in other area, like being market makers in NASDAQ, providing order management system, called REDIPlus, for institutions, hedge funds and broker-dealers, and clearing business. Scandal Specialists are restricted by stock exchanges from making a profit from the knowledge of incoming orders available in their display book. Occasionally, however, there are scandals that the specialists break the rules. 1998, the NASD fined SLK for $950,000 after finding that it had intentionally delayed reports of some trades “to secure a competitive advantage, protect its interests and maximize its profits or minimize its losses”, according to NASD records. In 2003 April, FleetBoston Financial Corporation, was fined $150,000 for mishandling customers orders. This triggered another wave of scrutiny, which also included SLK, and other specialists like LaBranche, which is the biggest specialist firm on the floor, Van Der Moolen and Bear Wagner, partly owned by Bear Stearns. So far only FleetBoston was fined.