WALL ST 101. Understanding Wall Street: 1600s to 1900s. How was Wall Street created? A Short History. Primary Market.

Understanding Wall Street: 1600s to 1900s

How was Wall Street created? A Short History

Primary Market Secondary Market

Agenda

WALL ST 101

¤  In the News

¤  SAC Plea Agreement

¤  Twitter IPO valuation

¤  History of Wall Street: 1600s to 1900s

¤  Primary Market

¤  Secondary Market

¤  Relevant Terms

In the News – NYTimes DealBook

WALL ST 101

¤  Plea Agreement Could End SAC’s Advisory Business

¤  Effects of insider trading scandal

¤  Putting a Price on Twitter

SAC Plea Agreement

WALL ST 101

¤  What is SAC Capital Advisors, LLC?

¤  Hedge fund with trading offices in Stamford, CT and NY, NY

¤  Multiple global satellite offices (London shutting down)

¤  What is insider trading?

¤  Trading of securities by individuals with access to non-public

information about the company

¤  Raj Rajaratnam (Galleon Group Founder)

¤  Michael R. Milken, “Junk Bond King” in 1980s

¤  Junk bonds have high risk of default but pay high yields

¤  Rated below investment grade(BBB or higher on S&P)

Steven A. Cohen

WALL ST 101

¤  1956 – Born in Great Neck, NY

¤  1978 – Wharton undergrad

¤  1978 – Started at Gruntal & Co.

¤  Junior Trader in Options Arbitrage

¤  1992 – Founded SAC Capital Partners

¤  Initial investment = $20-25 million

¤  Current AUM = $15 billion

¤  Avid poker player

SAC Plea Agreement

WALL ST 101

¤  Under agreement, SAC would become a family business

¤  Must end operations as an investment adviser

¤  Penalties of over $1billion, a record for insider trading

¤  $900 million in fines

¤  $284 million in forfeited profit

¤  SAC is returning ~$6 billion to investors who are fleeing

¤  AUM will drop to ~$9 billion, Cohen’s personal fortune

¤  Cohen owns one of world’s largest art collections

Putting a Price on Twitter

¤  Twitter’s most recent valuation

¤  Market Capitalization = Share Price * Number of Shares

¤  $12.43 billion = $20.62 * 603 million

¤  Facebook is a benchmark

¤  FB traded on multiple of ~20 its last 12 months of sales

¤  $10 billion

¤  Twitter’s faster year-to-year revenue growth in 2013 2nd quarter

¤  $15 billion

WALL ST 101

http://dealbook.nytimes.com/2013/10/18/ putting-a-price-on-twitter/

Bearish Expectations

WALL ST 101

¤  Avoid price drop similar to Facebook’s IPO

Bearish Expectations

WALL ST 101

¤  Avoid decline in revenue before IPO

¤  FB revenue growth decreased from 100% to 45%

http://www.businessinsider.com/ what-is-facebook-worth-2012-5

Bullish Expectations

WALL ST 101

¤  Facebook individual user value

Bullish Expectations

WALL ST 101

¤  Mobile devices

¤  Twitter receives 70% of revenue from ads on mobile devices

¤  FB had not proved this to be profitable before its IPO

¤  Advertising will increase with approaching holiday season

The Wolf of Wall Street

WALL ST 101

¤  November 15 is also the release of this epic movie

From Humble Beginnings

¤  Originally an insignificant dirt path in the early 1600s

¤  Street takes its name from a wall of brush and mud built

along side it after the Dutch founded New York as a Trading Post in 1609

¤  The wall later became a fence to keep out cows and

Indians.

¤  By 1626 Indians allowed in, and sell Manhattan for $24

and some beads

Relations with Commerce

¤  Wall Street connected that docks serving the Hudson

River trade and East River

¤  Merchants would buy and sell commodities such as furs

and tobacco, trade currencies, insured cargos and speculated land

¤  There was no formal investment in stocks and bonds, in

fact the first stock exchange is established in 1790 in Philadelphia.

Growing Importance

WALL ST 101

¤  In 1789, first Congress met in Federal Hall on Wall Street,

same building as President Washington’s inauguration

¤  Purpose of the meeting is to authorize the issue of $80

million in government bonds to absorb the cost of war

¤  In two years, bank stocks are added when Hamilton

established the First National Bank. Shares are offered to the public

¤  Now securities could be traded but there was no

A Developing Marketplace

¤  Investors would indicate interest at any available issue by

word of mouth or advertising in newspapers

¤  Coffeehouses served as unofficial stock exchanges

¤  This list of securities grew as more bank and insurance

stock were issued. Clear need for an organized market

¤  First Bull Market occurs in 1792

¤  Merchants would keep securities on hand and sell over

the counter like any other good (OTC)

Increasing Organization

WALL ST 101

¤  Businessmen begin to schedule stock and bond auctions

as was normally done for commodities

¤  Soon 22 Wall Street became the site of a central auction

led by multiple merchants

¤  Customers of this “Stock Exchange Office” left securities

with auctioneers who received commission for sales

¤  The Customer’s agent, called a broker, would also

Meeting Under the Buttonwood Tree 1792

¤  Some businessmen would go to the auction to listen to prices and then sell the same securities at reduced rates. This after-hours market hurt some auctioneers ¤  On March 21, 1792 concerned Wall Street leaders met

at Corre’s Hotel to improve the auction market ¤  On May 17, 1792 the “Buttonwood Agreement” is

signed by 24 members in which they agree to ¤  Trade securities only among themselves

¤  Maintain fixed commission rates ¤  Avoid other auction

¤  This was the foundation of the New York Stock Exchange

Quick Development

¤  Originally the new broker’s union meets

at the tree facing 68 Wall Street, but that was outside

¤  Soon moved indoors to Tontine

Coffeehouse in 1793 at the northwest corner of Wall and William Streets

¤  Then moved to a larger space at 40 Wall

Street

Formal Organization

¤  On March 8, 1817 the members adopted a formal constitution officially creating the New York Stock and Exchange Board

¤  Every morning a list of stocks to be auctioned would be compiled and then read to members who would make bids while seated ¤  Only members can trade and the original cost of a seat is $25

(raised to $400 a bit down the road)

¤  To this day members of the NYSE are said “to own a seat”

¤  Board takes space in a building located at the present NYSE Site in 1863. The building presently occupied is completed in 1903

¤  In 1865 NYSE members are prohibited from trading at the Evening Exchange

Curbstone Brokers in the 19

_Century

¤  Brokers who were not able to afford a seat on the Board

often struggled to make a living and would often leave to return only when markets were good

¤  By 1850, gold had been discovered and mining and

railroad stocks were popular. These were considered “too speculative” by the board but were traded by non-members

¤  Often trade on the street. By 1870s the corner of William

and Beaver Streets are filled with these “curbstone brokers” and the market is called the Curb

The Curb

¤  In the early 1890s The Curb is moved to Broad street and the brokers use offices in the Mills Building

¤  Telephone clerks would shout to the brokers on the street below taking orders

¤  Unfortunately, it was loud so shouting didn’t work. In effect, an elaborate system of hand signals was

developed. Parts of it are still used today

¤  Clerks would lean out windows signaling furiously while colorfully dressed brokers would try to get attention ¤  It seemed crazy, but specific stocks were sold at

specific landmarks making it actually fairly organized

Hand Signals (NYMEX)

WALL ST 101

Curb Market Agency

¤  Organized by Emanuel S Mendels Jr. in 1908

which developed appropriate trading rules but had no enforcement powers

¤  In 1911 constitution is drawn up and the New York

Curb Market Association is founded

¤  Building on Trinity Place has trading post that

resembled the lamppost which they left behind

¤  In 1928 name is changed to New York Curb

Exchange and in 1953 its present name is adapted – The American Stock Exchange

WALL ST 101

Primary Market

¤  Beginning of investment process (investment banker)

¤  Main role is to guide a company into the public marketplace

¤  When firms have enjoyed several years of success they turn to the

market as a way to obtain funds for expansion

¤  The investment banker underwrites the issue by buying all shares for

resale at a pre-established price per share

¤  If the issue is large, a syndicate is used to reduce risk

¤  Before issues can be sold to the public, company must comply with SEC

regulation and release prospectus to ever buyer or potential buyer

¤  This is the only time that the price is fixed and when the firm stands to

make money

Secondary Market

WALL ST 101

¤  Market where issued securities are traded among investors

¤  Registered representatives (stockbrokers or account

executives) are brokers and dealers who actually execute a customer’s order on the trading floor of an exchange

¤  Work at brokerage firm and act on behalf of customers

¤  Receive “brokerage commission”

¤  Must conform to SEC regulations

¤  Almost all trades are electronic in present day

¤  Banks and prop trading firms use automated trading systems for

Relevant Terms

WALL ST 101

¤  Default

¤  Junk Bond

¤  Assets Under Management

¤  Market Capitalization

¤  Bullish Market

¤  Bearish Market

¤  Primary Market

Next Class

Want to Learn More?

¤  http://www.mergersandinquisitions.com

¤  http://www.wallstreetwannabe.com

¤  http://www.investopedia.com