Direct vs Indirect Financing：直接与间接融资

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MoneyandBanking

TheFinancialSector:anOverview

Alleconomicunitscanbeclassifiedintooneofthefollowinggroups:households,businessfirms,andgovernments.Eacheconomicunitmustoperatewithinabudgetconstraintimposedbyitstotalincomefortheperiod,andcanhaveoneofthreepossiblebudgetpositions:abalancedbudgetposition,asurplusposition,andadeficitposition.Themismatchbetweenincomeandspendingforindividualsandorganizationscreatesanopportunitytotrade.Thefinancialsystemprovideschannelstotransferfundsfromsavers(orlenders)toborrowers.Financialmarketsissueclaimsonindividualborrowersdirectlytosavers(directfinancing).Financialinstitutionsorintermediariesactasgo-betweensbyholdingaportfolioofassetsandissuingclaimsbasedonthatportfoliotosavers(indirectfinancing).Thismatchingprocessmakeshouseholdsandbusinessesbetteroffbyallowingthemtoplantheirpurchasesandsavingsaccordingtotheirneedsanddesires,whichimprovestheeconomy’sefficiencyandpeople’seconomicwelfare.

Thefinancialsystemprovidesthreekeyservicesforsaversandborrowers:risk-sharing,liquidity,andinformation.

First,sinceindividualspreferstablereturnsontheassetstheyhold.Investorstendtoholdacollectionofassets(portfolio)whichoverallprovidesarelativelystablereturns(diversification).Thefinancialsystemprovidesrisk-sharingbyallowingsaverstoholdmanyassets.

Second,anassetismoreliquidifitcanbeeasilyexchangedformoneytopurchaseotherassetsorexchangedforgoodsandservices.Financialmarketsandintermediariesprovidetradingsystemsformakingfinancialassetsmoreliquid.

Third,oneofthemostprominentfrictionsinthefinancialmarketsisasymmetricinformation.Financialmarketsinstitutionsandintermediariesproduceusefulinformationofpotentialborrowerstoinvestors.

1 Directvs.IndirectFinancing

1.1 DirectFinancing

YouengageindirectfinancingwhenyouborrowmoneyfromafriendandgivehimorheryourIOUorwhenyoupurchasestocksorbondsdirectlyfromthecorporateissuingthem.Thesedirectfinancialarrangementstakeplacethroughfinancialmarkets,marketsinwhichlenders(investors)lendtheirsavingsdirectlytoborrowers.Brokers,dealersandinvestmentbankersplayimportantrolesindirectfinancing.

Dealerscarryaninventoryofsecuritiesfromwhichtheystandreadyeithertobuyorsellparticularsecuritiesatstatedprices.Theinventoryofsecuritiesheldbyadealeriscalledaposition.Takingapositionisanessentialpartofadealer'soperation.Thedealerswhomakeamarketofasecurityquoteapriceatwhichtheyarewillingtobuy(thebidprice)andapriceatwhichtheyarewillingtosale(theaskprice).Theymakeprofitsonthespreadsbetweenthebidandaskprices.Brokersprovideapuresearchserviceinthattheyactmerelyasmatchmakers,bringinglendersandborrowerstogether.Brokersdifferfromdealersinthatbrokersdonottakepositions.Eitherabuyerorasellerofsecuritiesmaycontactabroker.Theirprofitsarederivedbychargingacommissionfeefortheirservices.

1.2 IndirectFinancing

Financialintermediariespurchasedirectclaimswithonesetofcharacteristics(e.g.termtomaturity,denomination)fromborrowersandtransformthemintodirectclaimswithadifferentsetofcharacteristics,whichtheyselltothelenders.Thetransformationprocessiscalledintermediation.Noticethatinthefinancialintermediationmarketthelender'sclaimisagainstthefinancialintermediariesratherthantheborrower.

Inproducingfinancialcommodities,intermediariesperformthefollowingassettransformationservices:(1)DenominationDivisibility;(2)MaturityFlexibility;(3)Diversification;(4)Liquidity.

2 TypesofFinancialIntermediaries

Financialintermediariescanbegroupedinthefollowingway:

(1)DepositoryInstitutions:commercialbanks,savingsandloanassociations,savingsbanks,andcreditunions.Theyderivethebulkoftheirloanablefundsfromdepositaccountssoldtothepublic.

(2)ContractualSavingsInstitutions:insurancecompaniesandpensionfunds.Theyattractfundsbyofferingfinancialcontractstoprotectthesaveragainstrisk.

(3)InvestmentIntermediaries:financecompanies,mutualfunds,venturecapitalist,andmoneymarketmutualfunds(MMMFs).Theysellsharestothepublicandinvesttheproceedsinstocks,bonds,andothersecurities.

InTaiwan,thecentralbankanddepositoryinstitutionsarecalledmonetaryinstitutions,becausetheyissuemonetaryindirectsecurities(depositcontracts,RPs,etc.),whilecontractualsavingsinstitutionsandinvestmentintermediariesissuenon-monetaryindirectsecurities(sharesandinsurancepolicies)tofinancetheirinvestments.

Amongthefinancialintermediaries,depositoryinstitutionsstilldominatetheindustry,especiallycommercialbanks.ForthecaseofU.S.in1996,commercialbanksaccountfor26%ofallassetsheldbyfinancialintermediaries.Thenextseverallargestinstitutionsarepensionfunds(16.8%),mutualfunds(13%)andlifeinsurancecompanies(12.4%).Mutualfundsandpensionfundsarethefastestgrowinginstitutions,withonly2.9%and6.3%respectivelyin1960s.Ontheotherhand,thesharesofcommercialbanksandsavingsinstitutions(6.2%in1996)havebeendecliningdrastically,from38.2%and18.8%in1960s.

2.1 InvestmentIntermediaries

Investmentinstitutions,whichraisefundstoinvestinloansandsecurities,includemutualfunds,financecompanies,andventurecapitalist.

(1)MutualFunds:Mutualfundsarefinancialintermediariesthatconvertsmallindividualclaimsintodiversifiedportfoliosofstocks,bonds,mortgages,andmoneymarketinstrumentsbypoolingtheresourcesofmanysmallsavers.Mutualfundsobtainsavers'moneybysellingsharesinportfoliosoffinancialassets.Thus,asaverdoesnothavetobuynumeroussecurities-eachwithitsowntransactioncosts-rather,hecanbuyintoallsharesinthefundwithonetransaction.Mutualfundsproviderisk-sharingbenefitsbyofferingadiversifiedportfolioofassetsandliquiditybenefitsbyguaranteeingtoquicklybuybackasaver'sshares.Thereareseveraltypesoffunds.ThemostcommontypeofinvestmentcompaniesisOpen-endmutualfundsissueredeemablesharesatapricetiedtotheunderlyingvalueoftheassets.Thepriceisknownasthenetassetvalue(NAV).Closed-endmutualfundsissueafixednumberofnon-redeemableshares,whichinvestorsmaytradeinOTCmarketslikecommonstock.Thecompositionofmutualfunds'assetshasundergonedrasticchangesovertheyears.Theshareofcommonstocksdeclinesubstantiallyovertheyears,whiletheshareofgovernmentandcorporatebondsincreaserapidly.

(2)MoneyMarketMutualFunds(MMMFs):MMMFsinvestinveryshort-termassets(within120days)whosepricesarenotsignificantlyaffectedbythechangesinmarketinterestrates.Also,theyprovideshareholderswithreadyaccesstotheirfunds,viawiretransfers,limitedcheckwriting,orunlimitedcreditcardcapabilities.

MMMFswereintroducedintheearly1970sandstartedtogrowrapidlyinlate1970sandearly1980sduetotheexistenceofRegulationQ.TherapidgrowthofMMMFsdrewahugeflowoffundsoutofthedepositoryinstitutions.In1982,DepositoryInstitutionsActallowedbanksandsavingsinstitutionstoissuemoneymarketdepositaccounts(MMDAs)whichwereexemptfrominterestrateceilingsandreserverequirements.LatertheyeartherelaxationofRegulationQandthepassofSuperNOW(similartoMMDAsexceptthattheyhadunlimitedtransactionsprivilegesandweresubjecttoreserverequirements)accountsinearly1983terminatedtheirrapidgrowth.TheMMMFswereatadisadvantagebecausetheiraccountswerenotfederallyinsured;wereonlylimitedcheckable;andcouldnotofferunlimitedratesormatchthepromotionalrates,asMMDAsoffered.MMMFsdidnotstartedtoresumerapidgrowthuntilbankslowerthereturnsonMMDAsinlate1980s.

(3)FinanceCompanies:Financecompaniesmakeloanstoconsumersandsmallbusinesses.Theyobtainmajorityoftheirfundsbysellingcommercialpaperstoinvestors.Othersourcesoffundsincludebankloans,long-termdebtsorborrowingfromitsparentcompanyinthecasethatitisasubsidiaryofanothercompany.Theyarehighlyleveragedinstitutions.Usuallytheirnetworthisverysmallrelativetotheirtotalassets.Therearethreetypesoffinancecompanies:consumerfinancecompaniesspecializingininstallmentsmallconsumerloanstohouseholds,businessfinancecompaniesspecializinginloansandleasestobusinesses,andpurchasingbusinessaccountreceivables(factoring),andsalesfinancecompaniesthatfinancetheproductssoldbyretaildealers.Financecompaniesarediverseinstitutions.Theirbusinessstructureincludepartnerships;privatelyownedorpubliclyownedindependentcompanies;andwhollyownedsubsidiariesofmanufacturers,commercialbankholdingcompanies,lifeinsurancecompaniesandretailers.Financecompaniesarelessregulatedthancommercialbanksandsavingsbanksbecausemostofthemdonotissueinsureddepositstothepublicandtheyarenotcharteredandregulatedatthenationallevel.

Thefactthatmanyfinancecompaniesaresubsidiariesofotherinstitutionsisanevidenceoftherapidriseoffinancialconglomeratessince1970sintheU.S..Institutionsacquiredfinancialconglomeratesbecausetheyhopedtoincreasethelevelandstabilityoftheirprofitsandobtainfinancialsynergieswithotherlinesofbusiness.Theentryofvariousfirmsintothefinancialarenadifferswiththetypeoffirm.Some,particularlyretailersandautoandconsumergoodsmanufacturers,initiallyformedfinancecompaniestohelpfinancesalesoftheirconsumergoods.Others,suchasindustrialcompanies,formedfinancecompaniestohelpfinancetheiroperations,salesandtheirsuppliers.Manybrokeragefirmsbecamefinancialconglomeratesinordertoofferbanking-relatedproductstotheircustomersandbecomefull-servicefinancialinstitutions,whileavoidingconsiderableregulationsappliedtocommercialbanks

(4)VentureCapitalists:Anewfinancialintermediary,venturecapitalistfirms,emergedin1970s.Theseareinstitutionalinvestorsthatprovideequityfinancingtoyoungfirmsandplayanactiveroleinadvisingtheirmanagement.Thesefundshavebeenamajorsourceofequitycapitalfornewbusinesses,especiallyintechnology-basedindustries.

Aventurecapitalistfirmtendtoacquirealargechunkofequitiesfrominanewfirm,andsitonthefirm'sboardofdirectorstoobservemanagement'sactionsclosely.Whentheventurecapitalistfirmsuppliesthestart-upfunds,theequityinthefirmisnotmarketable.Thisistomakesurethatotherinvestmentinstitutionscannottakeafreerideontheventurecapitalistfirm'sverificationactivities.Apopularvehicleforinvestinginstart-upcompaniesispreferredstockthatcarriestherighttopurchaseortoconvertintocommonstock.

3 FinancialMarkets

Wecanclassifythefinancialmarketsinthefollowingways:

3.1 DebtandEquityMarkets

Therearetwowaysthatafirmoranindividualcanobtainfundsinafinancialmarket.Themostcommonmethodistoissueadebtinstrument,suchasabondoramortgage,whichisacontractualagreementbytheborrowerwhopromisespaytheholderoftheinstrumentfixeddollaramountsatregularintervals(interestpayments)untilaspecifieddate(thematuritydate)whenafinalpaymentismade.Thesecondmethodofraisingfundsisbyissuingequitiessuchascommonstock,whichareclaimstosharethenetincome(incomeaftertaxesandrepaymentstodebtholders)andtheassetsofabusinessfirm.Thatis,equityholdersareresidualclaimants.Asaresidualclaimant,thepriorityofclaimofanequityholderisjuniortoadebtholder.Equitiesusuallymakeperiodicpayments(dividends)totheirshareholders,andhavenomaturitydate.

3.2 PrimaryandSecondaryMarkets

Theprimarymarket(issuemarket)isforthetradingofnewsecuritiesneverbeforeissued.Thereare2typesofprimarymarketsalesofdebtandequity:publicofferingandprivateplacement.Mostpubliclyofferedcorporatedebtandequityareunderwrittenbyasyndicateofinvestmentbankingfirms.Theunderwritingsyndicatebuysthenewsecuritiesfromthefirmforthesyndicate'sownaccountandresellthematahigherprice.Duetohighcostofregistrationrequiredforpublicoffering,privatelyplacedsecuritiesaresoldonthebasisofprivatenegotiationstolargefinancialinstitutions,suchasinsurancecompaniesandmutualfunds.So,theprimarymarketsmainlyprovidematchingservicesforsaversandborrowers.

Incontrast,thesecondarymarketdealsinsecuritiespreviouslyissued.Secondarymarketsareresalemarketsforexistingassets.Anexchangeofasecurityinasecondarymarketresultsonlyinachangeinownership.But,mostofthenewsabouteventsinfinancialmarketsconcernssecondarymarketsratherthanprimarymarkets.Thereasonwhysecondarymarketsaresoimportantisthatthesecondarymarketsproviderisk-sharing,increaseliquidityofsecurities,andproduceinformationservices.

Secondarymarketscanbeorganizedaccordingto(1)whatmaturityofassetsbeingtraded;(2)howtradingtakesplace;and(3)whensettlementtakesplace.

3.2 MoneyandCapitalMarkets

Themoneymarketisafinancialmarketwhereonlyshort-termdebtinstruments(maturitylessthanoneyear),e.g.treasurybills,negotiablecertificatesofdeposits(NCD),commercialpaper,bankers'acceptances,repurchaseagreements,federalfunds,andEurodollars,aretraded;whilethecapitalmarketisthemarketwherelonger-termdebtaretraded,e.g.stocks,mortgages,corporatebonds,governmentsecurities,governmentagencysecurities,stateandlocalgovernmentbonds,andcommercialbankloans.MoneymarketinstrumentsandmanycapitalmarketinstrumentsaretradedinOTCmarketsthroughsecuritiesmarketinstitutions.

3.2.1MoneyMarketInstruments

(1)U.S.Treasurybills(T-bills):Theseareissuedwith3,6,9,and12monthmaturities.T-billssellatadiscountandthegovernmentrepaysthefacevalueatmaturity.T-billsarehighlyliquidandvirtuallynoriskofdefault,andaretradedactivelyinthesecondarymarket.

(2)CommercialPapers:Commercialpaperprovidesaliquid,short-terminvestmentforsaversandasourceoffundsforcorporations.Usuallyonlywell-establishedcorporationsandfinancialinstitutionsareabletoraiseshort-termfundsthroughcommercialpapers.Theflightofthesecreditworthyborrowersfrombankloanstowardcommercialpapershasafundamentalinfluenceonthebankingindustry.

(3)NegotiableBankCertificatesofDeposits(NCDs):Acertificateofdeposit(CD)isafixed-maturityinstrumentsoldbyabanktodepositors.CDsareilliquidbecauseyoucannotsellthemtosomeoneelsebeforeredemption.In1961,Citibankcreatedthenegotiablecertificatesofdeposits,aCDwithalargedenomination(todaytypicallyover$1,000,000)andcouldbetradedatasecondarymarket.NCDsareanimportantsourceoffundsforbankstodayandareheldmainlybymutualfundsandnonfinancialcorporations.

(4)RepurchaseAgreements(ReposorRPs):RPsarecollateralizedloansfromafirmtoabankwithaveryshortmaturity,typicallyovernightorlessthantwoweeks.Sincelaunchedin1969,Reposareanimportantsourceoffundstobanks.Banksmayfacelargeshort-termliquidityneeds,likefulfillmentofreserverequirement.Thus,aloancontractissignedthatalender(afirm)technicallypurchasessecurities(T-bills)fromabankthatagreestobuythembackthenextmorningatahigherprice.Thespreadreflectstheinterestpaymenttothelender.Sincetheyarecollateralized,theyarechargedwithalowerrateofinterest.

(5)FederalFunds:Banksarerequiredbylawtoholdcashasreservesagainstdeposits.TheyareallowedtoholdsomereservesintheformofdepositsattheFederalReserveBanks.Thesedepositsarecalledfederalfunds.Banksthathavemoredepositsthanrequiredcanlendtootherbanksthatareshortofreserves.Almostallloansinfederalfundsmarketareovernightloansforthepurposeofmeetingreserverequirements.Theinterestratechargedontheseovernightloansiscalledthefederalfundsrate.Thefederalfundsmarketreflectsthecreditneedsofcommercialbanks,sofederalfundsrateisanimportantindicatorofmonetarypolicies.

(6)Eurodollars:EurodollarsareU.S.dollar-denominatedtimedepositsthataredepositedinforeignbanksoutsidetheU.S.orinforeignbranchesofU.S.banks.Theyarelarge-denominateddepositswithmaturitiesrangingfrom1dayto5years.Theyareactivelytradedinsecondarymarkets,mostlyforasasubstituteforsimilartransactionsinthefederalfundsmarket.TheywereinitiallycreatedtoraisefundsabroadinordertocircumventU.S.regulationssuchasrateceilings.Afterderegulation,theimportanceofEurodollarshaddecline,ascommercialbanksshifttorelyonRPsforshort-termliquidity.

3.2.2CapitalMarketInstruments

(1)GovernmentBondsandLocalGovernmentBonds

(2)CorporateBonds

(3)Mortgages:Long-termloanstohouseholdsorbusinessestopurchasebuildingsorland,withtheunderlyingasset(house,land,orplant)servingascollateral.Amajordevelopmentintheresidentialmortgagemarketisasecondarymarketformortgagesinwhichmortgage-backedsecuritiesaretraded.

(4)CommercialBankLoans:Theirsecondarymarketsarenotaswelldevelopedasthoseforothercapitalmarketinstruments,andthustheyarelessliquid.

(5)BankDebentures:Adebtinstrumentissuedbyfinancialinstitutionstoborrowlong-termfundsfromcapitalmarket.Thereisnoreserverequirementforbankdebentures.Also,theamountofbankdebenturesisconsideredasthepartofbankcapitalbecauseitisastablesourceoffundsforfinancialinstitutions.

(6)DepositoryReceipt(存託憑證):InthecaseofTaiwanDepositoryReceipt(TDR),itmeansthatthedepositoryreceipts,representingacertainamountofforeignstocks,whicharekeptbyforeigncustodialbanks,areissuedbybanksorstockdealersinTaiwanandsoldtodomesticinvestorssothatdomesticinvestorssavethetroubletopurchaseforeignstocks.Depositoryreceiptsareusuallydenominatedintermsofthecurrencyoftheissuecountry.Thisreducestheriskofchangesinexchangerates.

(7)Stocks:nospecifiedmaturitydate.

3.2.2TradingPlaces:OrganizedExchangesandtheOver-the-Counter(OTC)Markets.

(1)OrganizedExchanges:Theorganizedexchangesaretangiblephysicalentitieswherebuyersandsellersofsecurities(ortheiragentsorbrokers)meetinonecentrallocationtocontracttrades.Forexample,inNYSEandAMEX,asinglespecialist-whoisassignedtoasecuritybytherespectivestockexchange-isresponsibleformatchingbuyersandsellersinanorderlyfashionandactingasadealerwhennecessarytomaintaincontinuousauctiontrading.Specialists“makemarkets”inthosestockslistedonmostofthemajorstockexchangesintheU.S..TheyalsomakemarketsforthoseoptionslistedontheNewYork,AmericanandPhiladelphiaoptionsexchanges.Thesesmarketmakersgatheratthetradingpostandcompetetobuyatthebestbidorsellatthebestaskprice.

Stockexchangeshavespecificquantitativeandqualitativelistingandmaintenancestandardswhicharestringentlymonitoredandenforced.Companieslistedonanexchangehavereportingobligationstotheexchangeandadirectbusinessrelationshipexistsbetweentheexchangeanditslistedcompanies.

Majorstock-index,interestrates,andcurrencyfuturescontractsinUSaretradedonfutureexchangesthatuse“open-outcry,continuous-auctionmarkets,”inwhichmultiplemarketmakersandbrokersmeetinatradingpitandcontinuouslynegotiatetradesatthebestprice.Typically,itisverynoisyashundredsofmarketmakersandbrokersshout,pushandshovetocompeteforbusiness.Sincetheintensityofopen-outcrymarketsisexhaustingandmajorfinancialfuturescontractsaretradedaroundtheworld,automatedtradingsystemsaredesignedtocapturetradingsinotherpartoftheworld.ThemajorChicagofuturesexchanges(CMEandCOBT)developedthe“Globex”tradingsystemwithReuters,availablesincemid-1992,toconductfuturestradingvirtuallyona24-hourbasis.ThecomputermatchingoforderswithGlobexexchangenetworkseemssocheapandsimplethatonewonderswhyithasnotbeenusedsooner.Advocatesofopen-outcrymarketssaythatitdoesnotallowonetojudgetheintensityorsourceofsupplyanddemand.Thus,thetraderscannothaveagood“feel”whythemarketismoving.Theotherreasonmaybethattradersfearthattheywilllosebusinesstocomputers.ThatiswhyGlobexonlyoperatesathourswhenfuturetradingpitsareclosed.

Anotheradvantageofcomputerizedmatchingisthatitpreservesanonymityofthetraderswithoutrevealingtheiridentity.Manystockexchangesarecomputerizingatleastaportionoftheirtrading.Forexample,theNYSEusesa“SuperDot”thatautomaticallyroutesmarketorderstoaspecialist'spostforrapidexecution.FortheTaiwanSecuritiesExchange(TSE),atthebeginningrotationaltradingwasdonewithopenoutcry.Later,rotationaltradingwasreplacedbysimultaneoustradingofallissues.InAugust1985,theopenoutcrysystemwassubstitutedbyacomputer-aidedsystem(CATS).Thissystemhasevolvedintoafullyautomatedsecuritiestrading(FAST)systemin1993.Ingeneral,thecomputerizedmatchingexchangeshavegainedpopularityrapidly.

(2)Over-the-CounterTrading:Debts,foreigncurrencies,forwardcontracts,swapsandsomestocksaretradedindealermarketsinwhichdealerswhohaveaninventoryofsecuritiesstandingreadytobuyandsellsecurities.Unliketheorganizedexchanges,wherethereisasinglebestbidandaskpriceforastandardizedproductatonepointoftime,theseassetsaretradedbymanydealers,eachofwhommayhaveadifferentbidandaskpriceandeachofwhomisusuallylocatedinadifferentplace,linkedbytelephoneorcomputernetworks.Inadealermarket,multiplemarketmakers-securitiesfirmsthatusetheirowncapitaltobuyandmaintainaninventoryinaspecificcompany'sstock-competeforcustomerordersusingtheirowncapitaltobuyandsellspecificsecurities.Thedealerswhomakeamarketinaparticularstockcontinuouslyquoteapriceatwhichtheyarewillingtobuythestock(thebidprice)andapriceatwhichtheyarewillingtosellshares(theaskprice).Thespreadbetweenbidandaskpricesrepresentsthedealer'smarkup,orprofit.Thesemarketsarereferredtoastheover-the-counter(OTC)markets.IntheU.S.,dealerswhomakeuptheOTCmarketsaremembersofaself-regulatingbodyknownastheNationalAssociationofSecuritiesDealers(NASD),whichlicensesbrokersanddealers,andmonitorstradingpractice.

ThekeyelementofinanOTCmarketisthatvariousdealersquotebidsandasksforsecuritiesorcontracts,andthatagreementstotraderaremadeoverthephone.InmanyOTCmarkets,dealerquotesarecarriedoncomputersandpostedonscreensothatthesequotescanbeseenbyalltradersinthemarket.Forsomecases,tradescanbeenteredandexecutedautomatically,whileinsomecases,tradersmustcontactdirectlybyphonesorothermeanstoexecutethetrades.IntheU.S.,theNationalAssociationofSecuritiesDealersAutomatedQuotationSystem(NASDAQ)isacomputerizedcommunicationssystemthatisavailableforpostingquotesonthemostactivelytradedstockswithseverallevelsofactivitiesavailable.NASDAQalsoorganizeda“smallorderexecutionsystem”(SOES)thatallowexecutionofsmallorders(upto1000shares)automaticallybyusingcomputerizedbuyandsellorders.Currently,themajorityofstocksaretradedoverthecounterandtradingvolumeisgreateronNASDAQstocksthanonNYSE.However,morethanhalfofthedollarvolumeofstocktradingtakesplaceontheexchanges.InTaiwan,smallordersofOTCmarkettradingsareexecutedbycomputerizedmatchingthroughbrokers,andlargeorderscanbenegotiatedthroughdealers.

TheNASDAQStockMarketisdistinctlyseparatefromtheU.S.OTCmarketandtheOTCBulletinBoard(OTCBB)quotationsystem,althoughtheyallareregulatedbytheNationalAssociationofSecuritiesDealers(NASD).AnOTCequitysecuritygenerallyisanyequitythatisnotlistedortradedonanationalsecuritiesexchange(NYSEandAMEX)orNASDAQ.Dealerscommunicatebywireandtelephonestonegotiatethedeals.TheOTCmarketconsistsofunlistedsecurities.Issuersofthesesecuritiesoftenhavenoreportingobligationstoanyfederalregulatoryauthority.TheOTCBBisunliketheNASDAQStockMarketinthatit:(i)doesnotimposelistingstandardsorrequirements;(ii)doesnotprovideautomatedtradeexecutions;(iii)doesnotmaintainrelationshipswithquotedissuers;and(iv)doesnothavethesameobligationsformarketmakers.

3.3 SpotandFuturesMarkets

Aspotmarketisonewheresecuritiesaretradedforimmediatedelivery(usuallywithinoneortwobusinessdays).Afuturemarket,ontheotherhand,isdesignedtotradecontractscallingforthefuturedeliveryoffinancialinstruments.Householdsandbusinessesusefinancialfutures,forwardcontracts,options,swaps,andvarioustypesofderivativestoreducetheirexposuretotheriskofpricefluctuationsinspotmarkets(orsometimeseventobetonfuturepricefluctuations).

4 OtherFinancialInstitutionsinSecuritiesMarkets

Otherfinancialinstitutionsinthesecuritiesmarketsincludeinvestmentbanks,brokeragefirmsandorganizedexchanges.Thesesecuritiesmarketsinstitutionsarenotfinancialintermediariesbecausetheydonotacquirefundsfromsaverstoinvestinborrowers;theymakeiteasierforinvestorstolocatesuitableborrowersandtoreduceborrowers'costsinraisingfunds.Wehavediscussedorganizedexchanges,nowwediscussthefirsttwoinstitutions.Thefocushereisontherisk-sharing,liquidityandinformationproductionoftheseinstitutions,andtheirroleinmatchingsaversandborrowers.

4.1 InvestmentBanks

Theterminvestmentbankissomewhatmisleading,becausewhattheydohavelittletodowiththetraditionalactivitiesofcommercialbanking(takingdepositsan