Question

Chapter 24

Managing in Financial Markets

As a consultant for a securities firm, you are assessing the operations of a securities firm.

a. The securities firm relies heavily on full-service brokerage commissions. Do you think that heavy reliance on these brokerage commissions is risky? Explain.

b. If this firm attempts to enter the underwriting business, would it be an easy transition?

c. In recent years, the stock market volume increased substantially, and this securities firm performed very well. In the future, however, many institutional and individual investors may invest in indexes rather than in individual stocks. How would this affect the securities firm?

Answer 1

Ans a) Heavy reliance on brokerage commissions will impact the profitability of the securities firm because if there is any change in market sentiments and market start performing bad then there might be the cances that securities firm will not generate enough reveune which pose the risk to its business. Not only that in case liquidity issue in market where people are not transacting share s but holding for long time then also it will impact the brokerage commissions of the securities firm.

If people investing in indexes then it will hamper the profitability and revenue of the brokerage firm. So the heavy reliance on the brokerage commissions raise significant risk to securities firms.

Ans b) If this firm attempts to enter into the underwriting business, then it won't be easy transition though it will be logical transaction. It has to form underwriting syndicate by asking other securites firm to underwrite a portion of the stock. In this way securities firm can enter into the underwriting business. Since it has access to already availabel institutional investors it may be possible for it to place the order.

Ans c) Securities firm revenue will be impcated if institutional investors and individual investors invest in indexes rather than individual stocks. Firm will able to generate less brokerage comission and it will impact the bottom line of securities firm.