What are financial reports?

1. What are financial reports? And why should anyone care what the auditors think?

2. Three types of OpinionsUnqualified, qualified & Adverse • Unqualified (aka “Clean”) • “We believe these financial statements are (1) fairly presented in (2) accordance with GAAP (3) consistently applied” • Normal result of an audit • When problems are later found, there is a restatement and explanation

3. Three types of OpinionsUnqualified, qualified & Adverse • Qualified • “We believe these financial statements are (1) fairly presented in (2) accordance with GAAP (3) consistently applied; except for (4) {List Exceptions} • Qualified opinions may result from legitimate operations • Often are a result of ‘contingent claims’ • E.g., large class-action lawsuits such as Monsanto dealt with for Asbestos

4. Three types of OpinionsUnqualified, qualified & Adverse • Adverse • “We DO NOT believe these financial statements are (1) fairly presented in (2) accordance with GAAP (3) consistently applied; THE AUDITORS DISAGREE WITH {List Exceptions}” • Very rare; results from a breakdown of communications with the client

5. Sarbanes–Oxley Act of 2002 • Public Company Accounting Reform and Investor Protection Act of 2002 • commonly called SOX or SarBox • United States federal law passed in response to a number of major corporate and accounting scandals including those affecting Enron, Tyco International, and WorldCom (now MCI). These scandals resulted in a decline of public trust in accounting and reporting practices. • Named after sponsors Senator Paul Sarbanes (D–Md.) and Representative Michael G. Oxley (R–Oh.), • Act was approved by the House by a vote of 423-3 and by the Senate 99-0. • The legislation is wide ranging and establishes new or enhanced standards for all U.S. public company Boards, Management, and public accounting firms. • The Act contains 11 titles, or sections, ranging from additional Corporate Board responsibilities to criminal penalties, and requires the Securities and Exchange Commission (SEC) to implement rulings on requirements to comply with the new law. • Establishes a new quasi-public agency, the Public Company Accounting Oversight Board, which is charged with overseeing, regulating, inspecting, and disciplining accounting firms in their roles as auditors of public companies. • The Act also covers issues such as auditor independence, corporate governance and enhanced financial disclosure.

6. Monsanto • INDEPENDENT AUDITORS’ REPORT • To the Members of Renessen LLC • Bannockburn, Illinois • We have audited the accompanying consolidated balance sheets of Renessen LLC (A Development Stage Company) (the “Company”) as of August 31, 2003, December 31, 2002 and 2001 and the related consolidated statements of operations, members’ interest (deficiency) and cash flows for the eight months ended August 31, 2003 and for each of the three years in the period ended December 31, 2002, and the cumulative period from January 7, 1999 (date operations commenced) through August 31, 2003. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. • We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. • In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company at August 31, 2003, December 31, 2002 and 2001, and the results of its operations and its cash flows for the eight months ended August 31, 2003 and for each of the three years in the period ended December 31, 2002, and the cumulative period from January 7, 1999 (date operations commenced) through August 31, 2003 in conformity with accounting principles generally accepted in the United States of America. • The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As described in Note 2, the Company’s recurring losses from development stage activities and the Members’ minimum funding commitment expiring on January 31, 2004 raise substantial doubt about its ability to continue as a going concern. Management’s plans concerning these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. • /s/ DELOITTE & TOUCHE LLP • Chicago, Illinois • September 25, 2003

7. Monsanto SOX • CERTIFICATIONS • I, Terrell K. Crews, Executive Vice President and Chief Financial Officer of Monsanto Company, certify that: • 1. I have reviewed this transition report on Form 10-K of Monsanto Company; • 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; • 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; • 4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: •  a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; •  b) [Reserved] •  c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based upon such evaluation; and •  d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and • 5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function): •  a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and •  b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. • Date: November 25, 2003 •  /s/ Terrell K. CrewsTerrell K. CrewsExecutive Vice President and Chief Financial OfficerMonsanto Company

8. GM Auditor Report • REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM • General Motors Corporation, its Directors, and Stockholders: • We have audited the accompanying Consolidated Balance Sheets of General Motors Corporation and subsidiaries (the Corporation) as of December 31, 2005 and 2004, and the related Consolidated Statements of Income, Cash Flows, and Stockholders’ Equity for each of the three years in the period ended December 31, 2005. Our audits also included the Supplemental Information to the Consolidated Balance Sheets and Consolidated Statements of Income and Cash Flows and the financial statement schedule listed at Item 15 (collectively, the financial statement schedules). These financial statements and financial statement schedules are the responsibility of the Corporation’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. • We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. • In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of General Motors Corporation and subsidiaries at December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2005, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. • As discussed in Note 1 to the consolidated financial statements, the Corporation: (1) effective December 31, 2005, began to account for the estimated fair value of conditional asset retirement obligations to conform to FASB Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations, (2) effective July 1, 2003, began consolidating certain variable interest entities to conform to FASB Interpretation No. 46(R), Consolidation of Variable Interest Entities, and (3) effective January 1, 2003, began expensing the fair market value of newly granted stock options and other stock-based compensation awards issued to employees to conform to Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation. • We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Corporation’s internal control over financial reporting as of December 31, 2005, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 28, 2006 expressed an unqualified opinion on management’s assessment of the effectiveness of the Corporation’s internal control over financial reporting and an adverse opinion on the effectiveness of the Corporation’s internal control over financial reporting. • /s/ Deloitte & Touche llp • Deloitte & Touche llp • Detroit, Michigan • March 28, 2006 • II-52

9. GM SOX • CERTIFICATION • I, G. Richard Wagoner, Jr., certify that: • 1. I have reviewed this annual report on Form 10-K of General Motors Corporation;  2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;  3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;  4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: •  a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;   b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;   c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and   d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and • 5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function): •  a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and   b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.Date: March 28, 2006 • /s/ G. RICHARD WAGONER, JR.    G. Richard Wagoner, Jr.   Chairman and Chief Executive Officer   

10. GM SOX • Exhibit 31.2 • CERTIFICATION • I, Frederick A. Henderson, certify that: • 1. I have reviewed this annual report on Form 10-K of General Motors Corporation;  2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;  3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;  4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: •  a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;   b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;   c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and   d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and • 5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of the directors (or persons performing the equivalent function): •  a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and   b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.Date: March 28, 2006 • /s/ FREDERICK A. HENDERSON    Frederick A. Henderson   Vice Chairman and Chief Financial Officer   

11. GM SOX • GENERAL MOTORS CORPORATION AND SUBSIDIARIES •       Our independent registered public accounting firm, Deloitte & Touche LLP, audited management’s assessment of internal control over financial reporting and has issued an attestation report on management’s assessment, included in Part II, Item 8 of this annual report on Form 10-K. •     /s/ G. RICHARD WAGONER, JR.  /s/ FREDERICK A. HENDERSON    G. Richard Wagoner, Jr. Chairman and Chief Executive Officer March 28, 2006  Frederick A. Henderson Chief Financial Officer March 28, 2006 Limitations on the Effectiveness of Controls •       Our management, including our CEO and CFO, does not expect that our Disclosure Controls or our internal controls will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within General Motors have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with associated policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. • II-50

12. What is Auditing? And who are the consumers?

13. Auditing • An audit is an evaluation of an organization, system, process, project or product. • performed by a competent, independent, objective, and unbiased person or persons, known as auditors. • One purpose is to make an independent assessment based on management's representation of their financial condition (through their financial statements). • Another purpose of the audit is to ensure the operating effectiveness of the internal accounting system is in accordance with approved and accepted accounting standards, statutes, regulations, or practices. • It also evaluates the internal controls to determine if conformance will continue, and recommends necessary changes in policies, procedures or controls. • Auditing is a part of quality control certifications such as ISO 9000.

14. Financial Audits • Financial audits are typically performed by firms of practicing accountants due to the specialist financial reporting knowledge they require. • The financial audit is an assurance or attestation functions provided by accounting firms, whereby the firm provides an independent opinion on published information. • Internal auditors, who do not attest to financial reports but focus mainly on the internal controls of the organization. • External auditors • including US's Certified Public Accountant (CPA) after which HK’s system is patterned, and • UK's Chartered Certified Accountant (ACCA) and Chartered Accountants

15. History • Independent auditing developed with the expansion of the British Empire in the 19th century • Prior to the 1930s, corporations were required neither to submit annual reports to government agencies or shareholders nor to have such reports audited. • The 1929 crash initiated to pressure for audit of publicly traded companies; • In the UK, the London Association of Accountants successfully campaigns for the right to audit companies in 1930 • In the US, the Securities Exchange Act of 1934 required all publicly traded companies to disclose certain financial information, and that financial information be audited. • The establishment of the U.S. Securities and Exchange Commission (SEC) created a body to enforce the audit requirements.

16. History since 1980 • The Pro-business Reagan administration in the US, and the Thatcher regime in the UK lifted many of the controls over the profession • Leading to abuses that resulted in the crashes of 1987 and 2001 • Since then, the Sarbanes-Oxley Act (SOX) has forced an expansion of audit responsibility and driven up audit revenues (and costs) • One study estimated the net private cost of SOX to amount to $1.4 trillion in the US. • It is an econometric estimate of “the loss in total market value around the most significant legislative events”—ie, the costs minus the benefits as perceived by the stockmarket as the new rules were enacted.

17. Audit Firms • The largest accounting firms (the 'Big 4' or ‘Final 4’) audit nearly all of large quoted/listed companies. • In addition to providing audits, they also provide other services including tax advice and strategic consultancy • The 5th largest firm, Grant Thornton, has only around 10% of the revenues of KPMG

18. Worldwide Big 4 revenues • The revenues of the big accounting firms grew by a healthy 15% last year. • They are in effect, the back office of the global markets • They are a “private police force… hired, fired and paid for by company management” • The “big four” firms employ around half a million people

19. Worldwide Big 4 revenues

20. Stages of an auditPlanning and risk assessment • Timing: before year-end • Purpose: • to understand the business of the company and the environment in which it operates. • to determine the major audit risks (i.e. the chance that the auditor will issue the wrong opinion). • For example, if sales representatives stand to gain bonuses based on their sales, and they account for the sales they generate, they have both the incentive and the ability to overstate their sales figures, thus leading to overstated revenue. • In response, the auditor would typically plan to increase the rigour of their procedures for checking the sales figures.

21. Stages of an auditInternal controls testing • Timing: before year-end • Purpose: to assess the internal control procedures • (e.g. by checking computer security, account reconciliations, segregation of duties). If internal controls are assessed as strong, this will reduce (but not entirely eliminate) the amount of 'substantive' work the auditor needs to do

22. Stages of an auditSubstantive procedures • Timing: after year-end • Purpose: to check that the actual numbers in the Income Statement and Balance Sheet (and, where applicable, Statement of Changes in Equity and Cash Flow Statement) are reliable, by performing tests that use the numbers provided. • Methods: • where internal controls are strong, auditors typically rely more on Substantive Analytical Procedures (the comparison of sets of financial information, and financial with non-financial information, to see if the numbers 'make sense' and that unexpected movements can be explained) • where internal controls are weak, auditors typically rely more on Substantive Tests of Detail (selecting a sample of items from the major account balances, and finding hard evidence (e.g. invoices, bank statements) for those items

23. Recent Audit Report Card • In 2005, 174 auditors were inspected by the Public Company Accounting Oversight Board (PCAOB) • almost half have been deemed to have some trouble doing their job satisfactorily. • On January 19th 2006, Grant Thornton became the latest. • Fifteen of its audits were found to have significant “deficiencies” and one client had to restate at least part of its financial statements as a result of the inspection. • Some audits by the “Big Four” accounting firms have also been found wanting (A few clients of each of the four restated their accounts) • At least 19 of PwC's audits, for instance, were found to include deficiencies. • Most of these failures resulted from accounting firms’ inability to properly audit computer based accounting systems

24. New Business Models • The business of providing high-end temporary accounting help is already worth $5 billion a year • Siegfried Group has seen Revenues sextuple in the past two years, to $73m. • In 2003 its core accounting business had just 15 clients; last year it had 100; by the end of May it had 155. • More than 50 of these are among America's largest companies. • Siegfried has even received business from a Big Four accounting firm. • Siegfried's astonishing growth is explained by what it does not do: consulting and auditing, the signature products of the big firms. • Siegfried is on the other side of the outsourcing boom: it is an insourcer.

25. Audit Phases • Planning and risk assessment • Timing: before year-end • Purpose: • to understand the business of the company and the environment in which it operates. • to determine the major audit risks (i.e. the chance that the auditor will issue the wrong opinion). For example, if sales representatives stand to gain bonuses based on their sales, and they account for the sales they generate, they have both the incentive and the ability to overstate their sales figures, thus leading to overstated revenue. In response, the auditor would typically plan to increase the rigour of their procedures for checking the sales figures.

26. Audit Phases • Internal controls testing • Timing: before and/or after year-end • Purpose: • to assess the internal control procedures (e.g. by checking computer security, account reconciliations, segregation of duties). If internal controls are assessed as strong, this will reduce (but not entirely eliminate) the amount of 'substantive' work the auditor needs to do (see below). • Notes: • In some cases an auditor may not perform any internal controls testing, because he/she does not expect internal controls to be reliable. When no internal controls testing is performed, the audit is said to follow a substantive approach.

27. Audit Phases • Substantive Tests • Timing: after year-end (see note regarding hard/fast close below) • Purpose: • to collect audit evidence that the actual figures and disclosures made in the Financial Statements are reliable and in accordance with required standards and legislation. • Methods: • where internal controls are strong, auditors typically rely more on Substantive Analytical Procedures (the comparison of sets of financial information, and financial with non-financial information, to see if the numbers 'make sense' and that unexpected movements can be explained) • where internal controls are weak, auditors typically rely more on Substantive Tests of Detail (selecting a sample of items from the major account balances, and finding hard evidence (e.g. invoices, bank statements) for those items) • Notes: • Some audits involve a 'hard close' or 'fast close' whereby certain substantive procedures can be performed before year-end. For example, if the year-end is 31st December, the hard close may provide the auditors with figures as at 30th November. The auditors would audit income/expense movements between 1st January and 30th November, so that after year end, it is only necessary for them to audit the December income/expense movements and the 31st December balance sheet. In some countries and accountancy firms these are known as 'rollforward' procedures.

28. Audit Phases • Finalisation • Timing: at the end of the audit • Purpose: • to compile a report to management regarding any important matters the came to the auditor's attention during performance of the audit, • to evaluate and review the audit evidence obtained, ensuring sufficient appropriate evidence was obtained for every material assertion and • to consider the type of audit opinion that should be reported based on the audit evidence obtained.

29. Importance of Financial Statements • Two schools of stock price analysis: • Technical; all stock prices are set by trends indicated by prior prices • Fundamental; stock prices track the ‘value’ of the firm, which is reported in the financial statements • Audits assure that Financial Statements are ‘correct’ • Situation before 1930s • Financial statements were often not even kept • Misstatement of financial position was common

30. What are financial markets? And why are audits important to them?

31. Financial Markets

42. "Simple" auction markets • The prior four types of auction markets are "simple" in the sense that there is • (1) one seller and several buyers, or • (2) one purchaser and several suppliers • They are auctions in the popular sense

43. Matching Mechanisms • "Double" auction markets • A double auction assumes there are several market participants on both sides of the market who publicly announce their demand and supply prices • The market price (publicly announced) is the one that equates supply and demand (i.e., clears) • Securities exchanges tend to be double auctions. • Matching Mechanisms

44. "Double" auction markets • Though more complex, it is argued that: • ï double auction markets are efficient, i.e., that their prices reflect all available (price relevant) information • ï their current prices transmit the private information of the better-informed dealers to the less-informed, and • ï these prices correctly aggregate the possibly conflicting information available to the individual buyers and sellers.

45. Initial Public Offering (IPO) • Company gives shares to an underwriter, who is responsible for finding buyers • Or can run its own subscription (Google)

46. Financial Publishing • The most profitable part of the publishing industry • Is financial publishing • Run by DowJones, etc. • Financial statements, and reports using financial statements are a major input to the Financial Publishing industry • Much of the rest is ‘opinion’

47. Secondary Sales • Subsequent buyers can resell through brokers, • who will match selling requirements • limit, market, stop limit, short sale • with potent buyers • Called ‘clearing’ • Transfer of physical stock certificate, and of money are handled by transfer agent / clearing house • Important: there must be one central point for setting prices, holding all of the demand and supply information

48. Commissions • Who gets them: • Broker • Exchange • Clearing house • But brokers may ‘make markets’ • i.e., buy and sell from their own stock of securities • And thus make additional money on markups and markdowns of orders

49. Internet Trading • Firms like eTrade are essentially huge brokers • They have computers and economies of scale • They can find buyers and sellers cheaper than others • They have huge inventories for market making and short sales • They also have huge databases of research reports, financial statements, etc. • They are a modern alternative to paper publishing of financial information

50.  Market Models • What market models from existing industries can provide guidance in investment in electronic markets, pricing of services, and delivery of "products"? • At least three groups have an interest in market structure • The market owner-managers • The buyers, and • The sellers