8 why are financial market professionals organized in

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8. Why are financial market professionals organized in large, multifunction securities firms? Why is the internal organization of these securities firms different from that of banks? What is the resulting problem? Economies of Scale and Scope = REPUTATION o v important in investment banking. this part of business has always been concentrated. o reputation important too in brokerage (esp. money management) in raising funds to finance a firm’s positions. Indivisibility of fixed costs o Innovation has increased importance of costs enormously MOST IMP. SCALE= diversification o Securities deliberately take on risks in underwriting, merchant banking and trading activities- they are still pioneers in risk management but diversification is still a big help. Globalization o Securities firms try to expand local activities to activities that are relatively easy to expand in large international firms to have an advantage over local competitors in other countries. Multifunction firms because of economies of scope and diversification Taking advantage of economies of scope (static and dynamic) you must have information or expertise in one market of business that can be applied to another Companies are also more likely to pick underwriter that can make market in their securities after they have been issued. Customers for one type of service are potential customers for others Why are they different from that of a bank-? o For security firms- depend on skill and talent of personnel (skill of traders is important for faster trading). Because of this- securities firms are usually organized as a collection of separate departments that act independently. Firms provide each department with capital. Individuals in departments are rewarded from performance- to ensure cooperation individuals have a stake in the profits of department and firm
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o Disadvantage- especially vulnerable to employee risk, if interests of induvial and firm align it will work well. o Firms usually organized as partnerships- recently trending towards incorporation (adv. Of corporation= selling shares to outside people) o Disadvantage- unlimited liability and inability to cash out or diversify focus attention. Also, external investors create conflicts of interest between these outsiders and insiders that can be harmful to efficiency of enterprise. 12. a. What is the economic function of the secondary bank? Price discovery (determining a fair price for the securities it trades) and the provision of liquidity (enable transactions to be made at this price quickly and easily). more imp for longer term securities. b. Do good secondary markets enhance the ability of the economy to mobilize savings and allocate capital? no – market does not help funds go to better places. money is just moving around savings are mobilized, efficient allocation all happens in primary market.
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