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

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1 Understanding Wall Street: 1600s to 1900s How was Wall Street created? A Short History Primary Market Secondary Market

2 Agenda In the News SAC Plea Agreement Twitter IPO valuation History of Wall Street: 1600s to 1900s Primary Market Secondary Market Relevant Terms Next Class

3 In the News NYTimes DealBook Plea Agreement Could End SAC s Advisory Business Effects of insider trading scandal Putting a Price on Twitter Valuations with different assumptions

4 SAC Plea Agreement 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)

Trading of securities by individuals with access to non-public information about the company Raj Rajaratnam (Galleon Group Founder) Michael R.

5 Steven A. Cohen 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 Legendary Wall Street portfolio manager

6 SAC Plea Agreement 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 He could yield $60 million at Sotheby s auction for 3 paintings

profit SAC is returning ~$6 billion to investors who are fleeing AUM will drop to ~$9 billion, Cohen s personal

7 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 nd quarter $15 billion putting-a-price-on-twitter/

62 * 603 million Facebook is a benchmark FB traded on multiple of ~20 its last 12 months of sales

8 Bearish Expectations Avoid price drop similar to Facebook s IPO Bankers might price more conservatively

9 Bearish Expectations Avoid decline in revenue before IPO FB revenue growth decreased from 100% to 45% what-is-facebook-worth

10 Bullish Expectations Facebook individual user value Twitter market cap

11 Bullish Expectations 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 Tentative IPO date November 15

to be profitable before its IPO Advertising will increase

12 The Wolf of Wall Street November 15 is also the release of this epic movie Wealthy stockbroker è criminal è motivational speaker

13 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

Dutch founded New York as a Trading Post in 1609 The wall later became a fence to

14 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.

tobacco, trade currencies, insured cargos and speculated land There was no formal

16 Growing Importance 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 organized market

bonds to absorb the cost of war In two years, bank stocks are added when Hamilton established the First

17 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)

grew as more bank and insurance stock were issued.

18 Increasing Organization 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 receive a small commission

merchants Customers of this Stock Exchange Office left securities with auctioneers who received

19 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

This after-hours market hurt some auctioneers On March 21, 1792 concerned Wall Street leaders met at Corre s Hotel to improve the

20 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

indoors to Tontine Coffeehouse in 1793 at the northwest corner of

21 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 The building presently occupied is completed in 1903 In 1865 NYSE members are prohibited from trading at the Evening Exchange

22 Curbstone Brokers in the 19 th 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 nonmembers 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

23 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

24 WALL ST 101 Hand Signals (NYMEX) BUY SELL PUT OPTION CALL OPTION

25 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

26 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

27 Secondary Market 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 execution, position management, and quantitative research

28 Relevant Terms Default Junk Bond Assets Under Management Market Capitalization Bullish Market Bearish Market Primary Market Secondary Market

29 Next Class

30 Want to Learn More?

When firms need to raise capital, they may issue securities to the public by investment bankers.

CHAPTER 3. HOW SECURITIES ARE TRADED When firms need to raise capital, they may issue securities to the public by investment bankers. Primary market is a market for new securities. Secondary market is