The Black Scholes Model

By Will Kenton for Investopedia

What Is the Black Scholes Model?

The Black Scholes model, also known as the Black-Scholes-Merton (BSM) model, is a mathematical model for pricing an options contract. In particular, the model estimates the variation over time of financial instruments. It assumes these instruments (such as stocks or futures) will have a lognormal distribution of prices. Using this assumption and factoring in other important variables, the equation derives the price of a call option.

KEY TAKEAWAYS

• The Black-Scholes Merton (BSM) model is a differential equation used to solve for options prices.
• The model won the Nobel prize in economics.
• The standard BSM model is only used to price European options and does not take into account that U.S. options could be exercised before the expiration date.

The Basics of the Black Scholes Model

The model assumes the price of heavily traded assets follows a geometric Brownian motion with constant drift and volatility. When applied to a stock option, the model incorporates the constant price variation of the stock, the time value of money, the option's strike price, and the time to the option's expiry. Also called Black-Scholes-Merton, it was the first widely used model for option pricing. It's used to calculate the theoretical value of options using current stock prices, expected dividends, the option's strike price, expected interest rates, time to expiration and expected volatility. 

 The formula, developed by three economists—Fischer Black, Myron Scholes and Robert Merton—is perhaps the world's most well-known options pricing model. The initial equation was introduced in Black and Scholes' 1973 paper, "The Pricing of Options and Corporate Liabilities," published in the Journal of Political Economy. Black passed away two years before Scholes and Merton were awarded the 1997 Nobel Prize in economics for their work in finding a new method to determine the value of derivatives (the Nobel Prize is not given posthumously; however, the Nobel committee acknowledged Black's role in the Black-Scholes model).

The Black-Scholes model makes certain assumptions:

•  The option is European and can only be exercised at expiration.
• No dividends are paid out during the life of the option.
• Markets are efficient (i.e., market movements cannot be predicted).
• There are no transaction costs in buying the option.
• The risk-free rate and volatility of the underlying are known and constant.
• The returns on the underlying asset are normally distributed.

 While the original Black-Scholes model didn't consider the effects of dividends paid during the life of the option, the model is frequently adapted to account for dividends by determining the ex-dividend date value of the underlying stock.

The Black Scholes Formula

The mathematics involved in the formula are complicated and can be intimidating. Fortunately, you don't need to know or even understand the math to use Black-Scholes modeling in your own strategies. Options traders have access to a variety of online options calculators, and many of today's trading platforms boast robust options analysis tools, including indicators and spreadsheets that perform the calculations and output the options pricing values.

The Black Scholes call option formula is calculated by multiplying the stock price by the cumulative standard normal probability distribution function. Thereafter, the net present value (NPV) of the strike price multiplied by the cumulative standard normal distribution is subtracted from the resulting value of the previous calculation.

What Does the Black Scholes Model Tell You?

The Black Scholes model is one of the most important concepts in modern financial theory. It was developed in 1973 by Fischer Black, Robert Merton, and Myron Scholes and is still widely used today. It is regarded as one of the best ways of determining fair prices of options. The Black Scholes model requires five input variables: the strike price of an option, the current stock price, the time to expiration, the risk-free rate, and the volatility.

The model assumes stock prices follow a lognormal distribution because asset prices cannot be negative (they are bounded by zero). This is also known as a Gaussian distribution. Often, asset prices are observed to have significant right skewness and some degree of kurtosis (fat tails). This means high-risk downward moves often happen more often in the market than a normal distribution predicts.

The assumption of lognormal underlying asset prices should thus show that implied volatilities are similar for each strike price according to the Black-Scholes model. However, since the market crash of 1987, implied volatilities for at the money options have been lower than those further out of the money or far in the money. The reason for this phenomena is the market is pricing in a greater likelihood of a high volatility move to the downside in the markets.

This has led to the presence of the volatility skew. When the implied volatilities for options with the same expiration date are mapped out on a graph, a smile or skew shape can be seen. Thus, the Black-Scholes model is not efficient for calculating implied volatility.

Limitations of the Black Scholes Model

As stated previously, the Black Scholes model is only used to price European options and does not take into account that U.S. options could be exercised before the expiration date. Moreover, the model assumes dividends and risk-free rates are constant, but this may not be true in reality. The model also assumes volatility remains constant over the option's life, which is not the case because volatility fluctuates with the level of supply and demand.

Moreover, the model assumes that there are no transaction costs or taxes; that the risk-free interest rate is constant for all maturities; that short selling of securities with use of proceeds is permitted; and that there are no risk-less arbitrage opportunities. These assumptions can lead to prices that deviate from the real world where these factors are present.

               https://www.investopedia.com/terms/b/blackscholes.asp 

Magnets Manipulated at Atomic Scale

Researchers used ultrashort laser pulse excitation to optically stimulate specific atomic vibrations of the magnet’s crystal lattice

From the University of Lancaster

February 8, 2021 -- Fast and energy-efficient future data processing technologies are on the horizon after an international team of scientists successfully manipulated magnets at the atomic level.

Physicist Dr Rostislav Mikhaylovskiy from Lancaster University said: “With stalling efficiency trends of current technology, new scientific approaches are especially valuable. Our discovery of the atomically-driven ultrafast control of magnetism opens broad avenues for fast and energy-efficient future data processing technologies essential to keep up with our data hunger.”

Magnetic materials are heavily used in modern life with applications ranging from fridge magnets to Google and Amazon’s data centers used to store digital information.

These materials host trillions of mutually aligned elementary magnetic moments or “spins”, whose alignment is largely governed by the arrangement of the atoms in the crystal lattice.

The spin can be seen as an elementary “needle of a compass”, typically depicted as an arrow showing the direction from North to South poles. In magnets all spins are aligned along the same direction by the force called exchange interaction. The exchange interaction is one of the strongest quantum effects which is responsible for the very existence of magnetic materials.

The ever-growing demand for efficient magnetic data processing calls for novel means to manipulate the magnetic state and manipulating the exchange interaction would be the most efficient and ultimately fastest way to control magnetism.

To achieve this result, the researchers used the fastest and the strongest stimulus available: ultrashort laser pulse excitation. They used light to optically stimulate specific atomic vibrations of the magnet’s crystal lattice which extensively disturbed and distorted the structure of the material.

The results of this study are published in the prestigious journal Nature Materials by the international team from Lancaster, Delft, Nijmegen, Liege and Kiev.

PhD student Jorrit Hortensius from the Technical University of Delft said: “We optically shake the lattice of a magnet that is made up of alternating up and down small magnetic moments and therefore does not have a net magnetization, unlike the familiar fridge magnets.”

After shaking the crystal for a very short period of time, the researchers measured how the magnetic properties evolve directly in time. Following the shaking, the magnetic system of the anti-ferro-magnet changes, such that a net magnetization appears: for a fraction of time the material becomes similar to the everyday fridge magnets.

This all occurs within an unprecedentedly short time of less than a few picoseconds (millionth of a millionth of a second). This time is not only orders of magnitude shorter than the recording time in modern computer hard drives, but also exactly matches the fundamental limit for the magnetization switching.

Dr Rostislav Mikhaylovskiy from Lancaster University explains: “It has long been thought that the control of magnetism by atomic vibrations is restricted to acoustic excitations (sound waves) and cannot be faster than nanoseconds. We have reduced the magnetic switching time by 1000 times that is a major milestone in itself.”

Dr Dmytro Afanasiev from the Technical University of Delft adds: “We believe that our findings will stimulate further research into exploring and understanding the exact mechanisms governing the ultrafast lattice control of the magnetic state.”

https://www.lancaster.ac.uk/news/scientists-manipulate-magnets-at-the-atomic-scale

Explanation of Stock Warrants

In finance, a warrant is a security that entitles the holder to buy the underlying stock of the issuing company at a fixed price called exercise price until the expiry date.

Warrants and options are similar in that the two contractual financial instruments allow the holder special rights to buy securities. Both are discretionary and have expiration dates. The word warrant simply means to "endow with the right", which is only slightly different from the meaning of option.

Warrants are frequently attached to bonds or preferred stock as a sweetener, allowing the issuer to pay lower interest rates or dividends. They can be used to enhance the yield of the bond and make them more attractive to potential buyers. Warrants can also be used in private equity deals. Frequently, these warrants are detachable and can be sold independently of the bond or stock.

In the case of warrants issued with preferred stocks, stockholders may need to detach and sell the warrant before they can receive dividend payments. Thus, it is sometimes beneficial to detach and sell a warrant as soon as possible so the investor can earn dividends.

Warrants are actively traded in some financial markets such as German Stock Exchange (Deutsche Börse) and Hong Kong.  In the Hong Kong Stock Exchange, warrants accounted for 11.7% of the turnover in the first quarter of 2009, just second to the callable bull/bear contract.

Structure and Features

Warrants have similar characteristics to that of other equity derivatives, such as options, for instance:

• Exercising: A warrant is exercised when the holder informs the issuer their intention to purchase the shares underlying the warrant.

The warrant parameters, such as exercise price, are fixed shortly after the issue of the bond. With warrants, it is important to consider the following main characteristics:

• Premium: A warrant's "premium" represents how much extra you have to pay for your shares when buying them through the warrant as compared to buying them in the regular way.
• Gearing (leverage): A warrant's "gearing" is the way to ascertain how much more exposure you have to the underlying shares using the warrant as compared to the exposure you would have if you buy shares through the market.
• Expiration Date: This is the date the warrant expires. If you plan on exercising the warrant, you must do so before the expiration date. The more time remaining until expiry, the more time for the underlying security to appreciate, which, in turn, will increase the price of the warrant (unless it depreciates). Therefore, the expiry date is the date on which the right to exercise ceases to exist.
• Restrictions on exercise: Like options, there are different exercise types associated with warrants such as American style (holder can exercise any time before expiration) or European style (holder can only exercise on expiration date).

Warrants are longer-dated options and are generally traded over-the-counter.

Secondary Market

Sometimes the issuer will try to establish a market for the warrant and to register it with a listed exchange. In this case, the price can be obtained from a stockbroker. But often, warrants are privately held or not registered, which makes their prices less obvious. On the NYSE, warrants can be easily tracked by adding a "w" after the company's ticker symbol to check the warrant's price. Unregistered warrant transactions can still be facilitated between accredited parties and in fact, several secondary markets have been formed to provide liquidity for these investments.

Comparison with Call Options

Warrants are very similar to call options. For instance, many warrants confer the same rights as equity options and warrants often can be traded in secondary markets like options. However, there also are several key differences between warrants and equity options:

• Warrants are issued by private parties, typically the corporation on which a warrant is based, rather than a public options exchange.
• Warrants issued by the company itself are dilutive. When the warrant issued by the company is exercised, the company issues new shares of stock, so the number of outstanding shares increases. When a call option is exercised, the owner of the call option receives an existing share from an assigned call writer (except in the case of employee stock options, where new shares are created and issued by the company upon exercise). Unlike common stock shares outstanding, warrants do not have voting rights.

• Unlisted Warrants are considered over the counter instruments and thus are usually only traded by financial institutions with the capacity to settle and clear these types of transactions.
• A warrant's lifetime is measured in years (as long as 15 years), while options are typically measured in months. Even LEAPS (long-term equity anticipation securities), the longest stock options available, tend to expire in two or three years. Upon expiration, the warrants are worthless unless the price of the common stock is greater than the exercise price.
• Warrants are not standardized like exchange-listed options. While investors can write stock options on the ASX (or CBOE), they are not permitted to do so with ASX-listed warrants, since only companies can issue warrants and, while each option contract is over 1000 underlying ordinary shares (100 on CBOE), the number of warrants that must be exercised by the holder to buy the underlying asset depends on the conversion ratio set out in the offer documentation for the warrant issue.
• As with options, warrants slowly lose extrinsic value due to time decay. The sensitivity to this is called theta.

Types of Warrants

The reasons you might invest in one type of warrant may be different from the reasons you might invest in another type of warrant. A wide range of warrants and warrant types are available:

• Equity warrants: Equity warrants can be call and put warrants. Callable warrants offer investors the right to buy shares of a company from that company at a specific price at a future date prior to expiration. Puttable warrants offer investors the right to sell shares of a company back to that company at a specific price at a future date prior to expiration.
• Covered warrants: A covered warrants is a warrant that has some underlying backing, for example the issuer will purchase the stock beforehand or will use other instruments to cover the option.
• Basket warrants: As with a regular equity index, warrants can be classified at, for example, an industry level. Thus, it mirrors the performance of the industry.
• Index warrants: Index warrants use an index as the underlying asset. Your risk is dispersed—using index call and index put warrants—just like with regular equity indexes. They are priced using index points. That is, you deal with cash, not directly with shares.
• Wedding warrants: are attached to the host debentures and can be exercised only if the host debentures are surrendered
• Detachable warrants: the warrant portion of the security can be detached from the debenture and traded separately.
• Naked warrants: are issued without an accompanying bond and, like traditional warrants, are traded on the stock exchange.
• Cash or Share Warrants in which the settlement may be in the form of either cash or physical delivery of the shares - depending on its status at expiry.

Traditional

Traditional warrants are issued in conjunction with a bond (known as a warrant-linked bond) and represent the right to acquire shares in the entity issuing the bond. In other words, the writer of a traditional warrant is also the issuer of the underlying instrument. Warrants are issued in this way as a "sweetener" to make the bond issue more attractive and to reduce the interest rate that must be offered in order to sell the bond issue.

Example

• Price paid for bond with warrants {\displaystyle P_{0}}
• Coupon payments C
• Maturity T
• Required rate of return r
• Face value of bond F

Covered or naked

Covered warrants, also known as naked warrants, are issued without an accompanying bond and, like traditional warrants, are traded on the stock exchange. They are typically issued by banks and securities firms and are settled for cash, e.g. do not involve the company who issues the shares that underlie the warrant. In most markets around the world, covered warrants are more popular than the traditional warrants described above. Financially they are also similar to call options, but are typically bought by retail investors, rather than investment funds or banks, who prefer the more keenly priced options which tend to trade on a different market. Covered warrants normally trade alongside equities, which makes them easier for retail investors to buy and sell them.

Third-party warrants

A third-party warrant is a derivative issued by the holders of the underlying instrument. Suppose a company issues warrants which give the holder the right to convert each warrant into one share at $500. This warrant is company-issued. Suppose, a mutual fund that holds shares of the company sells warrants against those shares, also exercisable at $500 per share. These are called third-party warrants. The primary advantage is that the instrument helps in the price discovery process. In the above case, the mutual fund selling a one-year warrant exercisable at $500 sends a signal to other investors that the stock may trade at $500-levels in one year. If volumes in such warrants are high, the price discovery process will be that much better; for it would mean that many investors believe that the stock will trade at that level in one year. Third-party warrants are essentially long-term call options. The seller of the warrants does a covered call-write. That is, the seller will hold the stock and sell warrants against them. If the stock does not cross $500, the buyer will not exercise the warrant. The seller will, therefore, keep the warrant premium.

                               Warrant (finance) - Wikipedia

Obesity Drug Lowers Body Weight

About one third (35 percent) of people who took a new drug for treating obesity lost more than one-fifth of their total body weight, according to a major global study.

From: University College London

February 11, 2021 -- The findings from the large-scale international trial, published today in the New England Journal for Medicine, are being hailed as a "gamechanger" for improving the health of people with obesity and could play a major part in helping the UK to reduce the impact of diseases, such as COVID-19.

The drug, semaglutide, works by hijacking the body's own appetite regulating system in the brain leading to reduced hunger and calorie intake.

Rachel Batterham, Professor of Obesity, Diabetes and Endocrinology who leads the Centre for Obesity Research at UCL and the UCLH Centre for Weight Management, is one of the principal authors on the paper which involved almost 2,000 people in 16 countries.

Professor Batterham (UCL Medicine) said: "The findings of this study represent a major breakthrough for improving the health of people with obesity. Three quarters (75%) of people who received semaglutide 2.4mg lost more than 10% of their body weight and more than one-third lost more than 20%. No other drug has come close to producing this level of weight loss -- this really is a gamechanger. For the first time, people can achieve through drugs what was only possible through weight-loss surgery."

Professor Batterham added: "The impact of obesity on health has been brought into sharp focus by COVID-19 where obesity markedly increases the risk of dying from the virus, as well as increasing the risk of many life-limiting serious diseases including heart disease, type 2 diabetes, liver disease and certain types of cancers. This drug could have major implications for UK health policy for years to come."

The average participant in the trial lost 15.3kg (nearly 3 stone); this was accompanied by reductions in risk factors for heart disease and diabetes, such as waist circumference, blood fats, blood sugar and blood pressure and reported improvements in their overall quality of life.

The trial's UK Chief Investigator, Professor John Wilding (University of Liverpool) said: "This is a significant advance in the treatment of obesity. Semaglutide is already approved and used clinically at a lower dose for treatment of diabetes, so as doctors we are already familiar with its use. For me this is particularly exciting as I was involved in very early studies of GLP1 (when I worked at the Hammersmith Hospital in the 1990s we were the first to show in laboratory studies that GLP1 affected appetite), so it is good to see this translated into an effective treatment for people with obesity."

With evidence from this trial, semaglutide has been submitted for regulatory approval as a treatment for obesity to the National Institute of Clinical Excellence (NICE), the European Medicines Agency (EMA) and the US Food and Drug Administration (FDA).

About the trial

The Phase III 'STEP'* randomised controlled trial involved 1,961 adults who were either overweight or had obesity (average weight 105kg/16.5 stone; body mass index 38kg/m2), and took place at 129 sites in 16 countries across Asia, Europe, North America, and South America.

Participants took a 2.4mg dose of semaglutide (or matching placebo) weekly via subcutaneously (under the skin) injection; similar to the way people with diabetes inject insulin. Overall, 94.3% of participants completed the 68-week study, which started in autumn 2018.

Those taking part also received individual face-to-face or phone counselling sessions from registered dietitians every four weeks to help them adhere to the reduced-calorie diet and increased physical activity, providing guidance, behavioural strategies and motivation. Additionally, participants received incentives such as kettle bells or food scales to mark progress and milestones.

In those taking semaglutide, the average weight loss was 15.3kg (nearly three stone), with a reduction in BMI of -5.54. The placebo group observed an average weight loss of 2.6kg (0.4 stone) with a reduction in BMI of -0.92.

Those who had taken semaglutide also saw reductions in risk factors for heart disease and diabetes, such as waist circumference, blood fats, blood sugar and blood pressure and reported improvements in their overall quality of life.

About the drug

Semaglutide is clinically approved to be used for patients with type 2 diabetes, though is typically prescribed in much lower doses of 1mg.

The drug possesses a compound structurally similar to (and mimics) the human glucagon-like peptide-1 (GLP-1) hormone, which is released into the blood from the gut after meals.

GLP-1 induces weight loss by reducing hunger, increasing feelings of fullness and thereby helping people eat less and reduce their calorie intake.

While the STEP study has been through Phase I and II trials, assessing the 2.4mg doses for safety, in the Phase III trial some participants reported side effects from the drug including mild-to-moderate nausea and diarrhoea that were transient and generally resolved without permanent discontinuation from the study.

The international trial was funded by the pharmaceutical company Novo Nordisk.

          * Semaglutide Treatment Effect in People with Obesity (STEP)

      https://www.sciencedaily.com/releases/2021/02/210211091352.htm

Gene Alteration May Define Human Brains

Novel study used brain organoids genetically modified to mimic now-extinct Neanderthals

Source: University of California, San Diego

February 11, 2021 -- Researchers discovered a single gene alteration that may help explain cognitive differences between modern humans and our predecessor, and used that information to develop Neanderthal-like brain organoids in the lab.

As a professor of pediatrics and cellular and molecular medicine at University of California San Diego School of Medicine, Alysson R. Muotri, PhD, has long studied how the brain develops and what goes wrong in neurological disorders. For almost as long, he has also been curious about the evolution of the human brain -- what changed that makes us so different from preceding Neanderthals and Denisovans, our closest evolutionary relatives, now extinct?

Evolutionary studies rely heavily on two tools -- genetics and fossil analysis -- to explore how a species changes over time. But neither approach can reveal much about brain development and function because brains do not fossilize, Muotri said. There is no physical record to study.

So Muotri decided to try stem cells, a tool not often applied in evolutionary reconstructions. Stem cells, the self-renewing precursors of other cell types, can be used to build brain organoids -- "mini brains" in a laboratory dish. Muotri and colleagues have pioneered the use of stem cells to compare humans to other primates, such as chimpanzees and bonobos, but until now a comparison with extinct species was not thought possible.

In a study published February 11, 2021 in Science, Muotri's team catalogued the differences between the genomes of diverse modern human populations and the Neanderthals and Denisovans, who lived during the Pleistocene Epoch, approximately 2.6 million to 11,700 years ago. Mimicking an alteration they found in one gene, the researchers used stem cells to engineer "Neanderthal-ized" brain organoids.

"It's fascinating to see that a single base-pair alteration in human DNA can change how the brain is wired," said Muotri, senior author of the study and director of the UC San Diego Stem Cell Program and a member of the Sanford Consortium for Regenerative Medicine. "We don't know exactly how and when in our evolutionary history that change occurred. But it seems to be significant, and could help explain some of our modern capabilities in social behavior, language, adaptation, creativity and use of technology."

The team initially found 61 genes that differed between modern humans and our extinct relatives. One of these altered genes -- NOVA1 -- caught Muotri's attention because it's a master gene regulator, influencing many other genes during early brain development. The researchers used CRISPR gene editing to engineer modern human stem cells with the Neanderthal-like mutation in NOVA1. Then they coaxed the stem cells into forming brain cells and ultimately Neanderthal-ized brain organoids.

Brain organoids are little clusters of brain cells formed by stem cells, but they aren't exactly brains (for one, they lack connections to other organ systems, such as blood vessels). Yet organoids are useful models for studying genetics, disease development and responses to infections and therapeutic drugs. Muotri's team has even optimized the brain organoid-building process to achieve organized electrical oscillatory waves similar to those produced by the human brain.

The Neanderthal-ized brain organoids looked very different than modern human brain organoids, even to the naked eye. They had a distinctly different shape. Peering deeper, the team found that modern and Neanderthal-ized brain organoids also differ in the way their cells proliferate and how their synapses -- the connections between neurons -- form. Even the proteins involved in synapses differed. And electrical impulses displayed higher activity at earlier stages, but didn't synchronize in networks in Neanderthal-ized brain organoids.

According to Muotri, the neural network changes in Neanderthal-ized brain organoids parallel the way newborn non-human primates acquire new abilities more rapidly than human newborns.

"This study focused on only one gene that differed between modern humans and our extinct relatives. Next we want to take a look at the other 60 genes, and what happens when each, or a combination of two or more, are altered," Muotri said.

"We're looking forward to this new combination of stem cell biology, neuroscience and paleogenomics. The ability to apply the comparative approach of modern humans to other extinct hominins, such as Neanderthals and Denisovans, using brain organoids carrying ancestral genetic variants is an entirely new field of study."

To continue this work, Muotri has teamed up with Katerina Semendeferi, professor of anthropology at UC San Diego and study co-author, to co-direct the new UC San Diego Archealization Center, or ArchC.

"We will merge and integrate this amazing stem cell work with anatomic comparisons from several species and neurological conditions to create downstream hypotheses about brain function of our extinct relatives," Semendeferi said. "This neuro-archealization approach will complement efforts to understand the mind of our ancestors and close relatives, like the Neanderthals."

Co-authors of the study include: Cleber A. Trujillo, Isaac A. Chaim, Emily C. Wheeler, Assael A. Madrigal, Justin Buchanan, Sebastian Preissl, Allen Wang, Priscilla D. Negraes, and Ryan Szeto, UC San Diego; Edward S. Rice, Nathan K. Schaefer, Ashley Byrne, Maximillian Marin, Christopher Vollmers, Angela N. Brooks, Richard E. Green, UC Santa Cruz; Roberto H. Herai, Pontifícia Universidade Católica do Paraná; Alik Huseynov, Imperial College London; Mariana S.A. Ferraz, Fernando da S. Borges, Alexandre H. Kihara, Universidade Federal do ABC; Jonathan D. Lautz, Stephen E.P. Smith, Seattle Children's Research Institute and University of Washington; Beth Shapiro, UC Santa Cruz and Howard Hughes Medical Institute; and Gene W. Yeo, UC San Diego, Agency for Science, Technology and Research (Singapore) and National University of Singapore.

       https://www.sciencedaily.com/releases/2021/02/210211144418.htm

The Financial Industry Regulatory Authority (FINRA)

 The Financial Industry Regulatory Authority (FINRA) is a private American corporation that acts as a self-regulatory organization (SRO) which regulates member brokerage firms and exchange markets.  FINRA is the successor to the National Association of Securities Dealers, Inc. (NASD) as well as the member regulation, enforcement, and arbitration operations of the New York Stock Exchange.  The US government agency which acts as the ultimate regulator of the US securities industry, including FINRA, is the US Securities and Exchange Commission (SEC).

Overview

The Financial Industry Regulatory Authority is the largest independent regulator for all securities firms doing business in the United States. FINRA's mission is to protect investors by making sure the United States securities industry operates fairly and honestly. In December 2019, FINRA oversaw 3,517 brokerage firms, 153,907 branch offices and approximately 624,674 registered securities representatives.

FINRA has approximately 3,400 employees and operates from Washington, D.C. and New York City, with 20 regional offices around the Unites States.

FINRA offers regulatory oversight over all securities firms that do business with the public, plus those offering professional training, testing, and licensing of registered persons, arbitration and mediation, market regulation by contract for the New York Stock Exchange, the NASDAQ Stock Market, Inc., the American Stock Exchange LLC, and the International Securities Exchange, LLC; and industry utilities, such as Trade Reporting Facilities and other over-the-counter operations.

FINRA was formed by a consolidation of the member regulation, enforcement, and arbitration operations of the New York Stock Exchange, NYSE Regulation, Inc., and NASD. The merger was approved by the United States Securities and Exchange Commission (SEC) on July 26, 2007.

History

The NASD was founded in 1939 and was registered with the SEC in response to the 1938 Maloney Act amendments to the Securities Exchange Act of 1934, which allowed it to supervise the conduct of its members subject to the oversight of the SEC.  In 1971, NASD launched a new computerized stock trading system called the National Association of Securities Dealers Automated Quotations (NASDAQ) stock market. The NYSE and AMEX stock exchanges merged in 1998. Two years later, the NASDAQ underwent a major recapitalization and became an independent entity from NASD. In July 2007, the SEC approved the formation of a new SRO to be a successor to NASD. The NASD and the member regulation, enforcement and arbitration functions of the New York Stock Exchange were then consolidated into the Financial Industry Regulatory Authority (FINRA)

Regulation and Licensure Functions

FINRA regulates trading in equities, corporate bonds, securities futures, and options. All firms dealing in securities that are not regulated by another SRO, such as by the Municipal Securities Rulemaking Board (MSRB), are required to be member firms of the FINRA.

As part of its regulatory authority, FINRA periodically conducts regulatory exams of its regulated institutions. FINRA recently released its tenth annual Regulatory and Examinations Priorities Letter for 2015, which impacts broker-dealers as well as their affiliated insurance companies and banks. In its Regulatory and Examinations Priorities Letter for 2015 FINRA has identified variable annuities as a significant area of focus for exams in 2015 and has pointed out particular elements of sales practices that will be reviewed.

FINRA licenses individuals and admits firms to the industry, writes rules to govern their behavior, examines them for regulatory compliance, and is sanctioned by the U.S. Securities and Exchange Commission (SEC) to discipline registered representatives and member firms that fail to comply with federal securities laws and FINRA's rules and regulations. It provides education and qualification examinations to industry professionals. It also sells outsourced regulatory products and services to a number of stock markets and exchanges; e.g. American Stock Exchange (AMEX) and the International Securities Exchange (ISE).

NASD, the predecessor of FINRA, founded the NASDAQ (National Association of Securities Dealers Automated Quotations) stock market in 1971. In 2006, NASD demutualized from NASDAQ by selling its ownership interest.

The NASD, later FINRA, publishes much educational information for the public and has been publishing and disclosing the education and exam requirements for USA based credentials, charters, designations and certifications that are offered by SROs for about a decade.

Arbitration of Disputes

FINRA operates the largest arbitration forum in the United States for the resolution of disputes between customers and member firms, as well as between brokerage firm employees and their firms. This function had been performed by both NASD and NYSE's regulation committee until their merger in 2007 to form FINRA. Each entity had its own set of rules on arbitration procedures. After its creation, FINRA Dispute Resolution harmonized the prior NYSE and NASD rules.  Virtually all agreements between investors and their stockbrokers include mandatory arbitration agreements, whereby investors (and the brokerage firms) waive their right to trial in a court of law. While arbitration cases are the usual resolution procedure of last resort, class action cases are brought and often permitted to go forward in courts as well, where binding arbitration contracts are sometimes rejected, typically after being ruled unconscionable; see Wilko v. Swan. Although the fairness of such mandatory arbitration clauses has been called into question, US federal courts have often found them to be lawful and have generally upheld both the enforceability and result of these arbitrations, except in the case of class actions.

As of May 2011, the pool of arbitrators consisted of 2,854 individuals classified by FINRA as industry panelists and 3,557 individuals classified as non-industry panelists.

In 1987, the United States Supreme Court ruled in Shearson/American Express Inc. v. McMahon that clauses mandating arbitration for disputes under the Securities Exchange Act of 1934 were enforceable. Three years later, it overturned Wilko completely in Rodriguez de Quijas v. Shearson/American Express Inc., extending the arbitration requirement to disputes under the Securities Act of 1933.   Thus, many securities disputes are now resolved in arbitration.

For disputes over US$100,000 between customers and member firms, the panel that decides the case generally consists of three arbitrators: one industry (or, at the customer's timely discretion non-industry) panelist, one non-industry panelist, and one non-industry chairperson, according to the Code of Arbitration Procedure for Customer Disputes.  For disputes between an employee and member firms, all three arbitrators are industry panelists, according to the industry code.  For a given case, the two sides are provided separate lists by FINRA of ten local arbitrators for each category from which each party can strike up to four arbitrators and provide a ranking for the rest. Also provided are ten-year biographies and prior award histories for each arbitrator. FINRA will then provide the parties with the panel members by selecting the highest ranked available arbitrator from each category.

According to FINRA, there were 5,680 cases for arbitration filed in 2010, a decrease from the 7,137 cases filed in 2009. The percentage of cases in which customers are awarded damages has risen slightly from 42% in 2008 to 47–48% in 2010 and 2011.  FINRA rates any positive award to a customer as a win for the customer, regardless of the magnitude of losses or legal fees.

FINRA rules do not require parties to be represented by attorneys. A party may also appear pro se, or be represented by a non-attorney in arbitration. However, the third option is not advised since this may be the unauthorized practice of law.  Brokerage firms routinely hire attorneys, so a customer who does not can be at a serious disadvantage. One organization whose members specialize in representing customers against brokerage firms in FINRA arbitrations is the Public Investors Arbitration Bar Association (PIABA).  

In June 2006, Lewis D. Lowenfels, one of two partners at the New York law firm of Tolins & Lowenfels and co-author of the looseleaf treatise Bromberg and Lowenfels on Securities Fraud and Commodities Fraud, 2d said of the NASD arbitration process: "What started out as a relatively swift and economical process for a public customer claimant to seek justice has evolved into a costly extended adversarial proceeding dominated by trial lawyers and the usual litigation tactics."

Perhaps amidst speculation that the US Congress was contemplating passing legislation preventing mandatory arbitration clauses, FINRA announced in July 2008 that it would be launching a pilot program to evaluate all-public arbitration panels (thus not requiring an industry arbitrator to be on each panel).  In February 2011, FINRA announced that it would be making the program permanent. In that announcement, Richard Ketchum, FINRA Chairman and Chief Executive Officer stated "We believe that giving investors the ability to have an all-public panel will increase public confidence in the fairness of our dispute resolution process."There are those, however, who see valid reasons for including an industry arbitrator on each panel. According to Richard Jackson, a principal at the advisor firm of Schlindwein Associates, LLC "It's probably pretty important to have someone on the panel who has specific industry knowledge and past experience in that field to explain some of the complexities that may be at issue,"

FINRA does have a broker check system. This system lists the registered and licensed professionals. Those who have had complaints will also remain in the online system. Others who have passed exams, but have let their licenses retire, are not listed in the system if they had a clean record on their FINRA Form U5.

               Financial Industry Regulatory Authority - Wikipedia

Emerging Robotics for Construction of Buildings

Emerging robotics technology may soon help construction companies and contractors create buildings in less time at higher quality and at lower costs.

From: Perdue University

February 10, 2021 -- Innovators developed and are testing a novel construction robotic system that uses an innovative mechanical design with advances in computer vision sensing technology to work in a construction setting.

Purdue University innovators developed and are testing a novel construction robotic system that uses an innovative mechanical design with advances in computer vision sensing technology to work in a construction setting.

The technology was developed with support from the National Science Foundation.

"Our work helps to address workforce shortages in the construction industry by automating key construction operations," said Jiansong Zhang, an assistant professor of construction management technology in the Purdue Polytechnic Institute. "On a construction site, there are many unknown factors that a construction robot must be able to account for effectively. This requires much more advanced sensing and reasoning technologies than those commonly used in a manufacturing environment."

The Purdue team's custom end effector design allows for material to be both placed and fastened in the same operation using the same arm, limiting the amount of equipment that is required to complete a given task.

Computer vision algorithms developed for the project allow the robotic system to sense building elements and match them to building information modeling (BIM) data in a variety of environments, and keep track of obstacles or safety hazards in the system's operational context.

"By basing the sensing for our robotic arm around computer vision technology, rather than more limited-scope and expensive sensing systems, we have the capability to complete many sensing tasks with a single affordable sensor," Zhang said. "This allows us to implement a more robust and versatile system at a lower cost."

Undergraduate researchers in Zhang's Automation and Intelligent Construction (AutoIC) Lab helped create this robotic technology.

The innovators worked with the Purdue Research Foundation Office of Technology Commercialization to patent the technology.

This work will be featured at OTC's 2021 Technology Showcase: The State of Innovation. The annual showcase, being held virtually this year Feb. 10-11, will feature novel innovations from inventors at Purdue and across the state of Indiana.

              https://www.sciencedaily.com/releases/2021/02/210210091126.htm