THE ECONOMICS OF MONEY,BANKING, AND FINANCIAL MARKETS 333

CHAPTER 12 Nonbank Financial Institutions 301 the company However, with the bursting of the tech bubble in 2000, many of them lost much of their wealth when the value of their shares came tumbling down to earth When the corporation decides which kind of financial instrument it will issue, it offers them to underwriters investment bankers that guarantee the corporation a price on the securities and then sell them to the public If the issue is small, only one investment-banking firm underwrites it (usually the original investment banking firm hired to provide advice on the issue) If the issue is large, several investment-banking firms form a syndicate to underwrite the issue jointly, thus limiting the risk that any one investment bank must take The underwriters sell the securities to the general public by contacting potential buyers, such as banks and insurance companies, directly and by placing advertisements in newspapers like the National Post and the Globe and Mail The activities of investment bankers and the operation of primary markets are heavily regulated by the provinces and the federal government The Ontario Securities Commission (OSC), for example, is responsible for administering the Ontario Securities Act, Canada s first provincial securities act passed in 1945 Other provinces and territories have generally tended to follow Ontario s lead and passed Securities Acts regulating investment banking and the trading of securities Canada doesn t have a Securities Act, but portions of the Criminal Code of Canada specifically apply to securities trading Securities Brokers and Dealers Securities brokers and dealers conduct trading in secondary markets Brokers are pure intermediaries who act as agents for investors in the purchase or sale of securities Their function is to match buyers with sellers, a function for which they are paid brokerage commissions In contrast to brokers, dealers link buyers and sellers by standing ready to buy and sell securities at given prices Therefore, dealers hold inventories of securities and make their living by selling these securities for a slightly higher price than they paid for them that is, on the spread between the asked price and the bid price This can be a high-risk business because dealers hold securities that can rise or fall in price; in recent years, several firms specializing in bonds have collapsed Brokers, by contrast, are not as exposed to risk because they not own the securities involved in their business dealings Brokerage firms engage in all three securities market activities, acting as brokers, dealers, and investment bankers That is, the same investment banks that handle the sale of securities in the primary markets also are involved in the retail business of trading for clients on the stock exchanges However, the provinces and the federal government regulate the investment banking operation of the firms and also restrict brokers and dealers from misrepresenting securities and from trading on insider information, nonpublic information known only to the management of a corporation Organized Exchanges As discussed in Chapter 2, secondary markets can be organized either as over-thecounter markets, in which trades are conducted using dealers, or as organized exchanges, in which trades are conducted in one central location The largest of the organized stock exchanges in Canada is the Toronto Stock Exchange It was established on October 25, 1861 as a nonprofit organization, and now boasts the fourth most active stock exchange in North America, after the New York Stock Exchange (NYSE), the American Stock Exchange (AMEX), and NASDAQ