Dealers and Brokers

By Group 2

Brokers

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.

Types of Brokers

Full-services brokers: It helps you pick investments and devise a financial plan.

However, it will charge a higher brokerage fee

Discount brokers: It charges far lower commissions than full service

brokers. But you will get little or no investment advice

Types of Brokers

Floor brokers: execute orders on the floor of the exchange

Upstairs brokers: handle retail customers and their orders

Dealers

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)

Comparison

Dealer Broker

Role Principal/Market Maker

Agent/Intermediary

Inventory hold Yes No

Trading Own account and bear own risk

Clients’ account and no risk

Revenue Bid-ask spread Brokerage commission

Specialists

Specialists make a market in the shares of one or more firms

Specialists can be either a broker or dealer

Functions of the specialists

4 main functions:

Manage the auction process - to maintain a fair and orderly market

Execute order for floor brokers - to keep the market liquid or to prevent rapid price changes

Serve as catalysts - to enable a transaction to take place Stabilize price - to ensure that stock trading moves

smoothly

Big players

Schwab (e-broker) Wachovia Securities (The fifth largest

full service retail broker dealer) Spear, Leeds & Kellogg (Specialist)

Schwab

NYSE ticket symbol: SCH The largest online broker in US Market share Schwab 27% E*trade 12% Waterhouse 12% Fidelity 9%

Schwab

4.2 million out of 8 million clients accounts and US$296 billion out of US$763 billion in

client assets are came from the online market

Schwab

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 these trades.

Schwab

Recent News: 25 October, 2000 first storefront branch in Hong Kong's Central

business district. 21 January, 2001 "Best Internet Brokerage" by Gomez

Wachovia Securities

The 5th largest full service retail broker-dealer in US

3.4 million of active retail client accounts retail clients assets of $265 billion

Wachovia Securities

Business area: discount and full-service brokerage asset management clearing services

Wachovia Securities

Exchange Membership: New York Stock Exchange American Stock Exchange Pacific Stock Exchange Chicago Stock Exchange Philadelphia Stock Exchange NASDAQ

Wachovia Securities

Financial health 8.27% tier-1 capital

(min 4%)

Source: Wachovia investor midyear update 16 Sep

2002

Wachovia Securities

Recent News: Create new firm with Prudential Financial Inc. Wachovia 62%, Prudential 38% Become third largest: $537b client base 3,500 offices in US

Spear, Leeds & Kellogg (SLK) One of the 7 specialist in NYSE Rank No.2 in number of common stocks Famous stocks handled:

IBM Boeing AOL Time Warner AIG NTT DoCoMo

Spear, Leeds & Kellogg (SLK) Acquired by Goldman Sachs in late 2000 GS paid more than $6 million, very high price

Other Business: Market makers in NASDAQ Order management system, REDIPlus Clearing business

Spear, Leeds & Kellogg (SLK)Scandal: In 1998, NASD fined SLK for $950,000 for del

ayed reports of trades In 2003 April, under scrutiny of NYSE Counterparts probed:

LaBranche Van Der Moolen Bear Wagner FleetBoston (fined $150,000)