Reserved Worldwide. I. Introduction 1. The Investment Environment The McGraw−Hill Companies, 2001           16 PART I Introduction     Meanwhile, however, the financial markets had discovered that zeros were useful ways to lock in a long-term investment return. When the supply of primitive zero-coupon bonds ended, financial innovators created derivative zeros by purchasing U.S. Treasury bonds, "stripping" off the coupons, and selling them separately as zeros. There are plenty of other examples. The Eurobond market came into existence as a re- sponse to changes in U.S. tax law. Financial futures markets were stimulated by abandon- ment in the early 1970s of the system of fixed exchange rates and by new federal regulations that overrode state laws treating some financial futures as gambling arrange- ments. The general tendency is clear: Tax and regulatory pressures on the financial system very often lead to unanticipated financial innovations when profit-seeking investors make an end run around the governments restrictions. The constant game of regulatory catch-up sets off another flow of new innovations.       1.5 MARKETS AND MARKET STRUCTURE   Just as securities and financial institutions come into existence as natural responses to in- vestor demands, so too do markets evolve to meet needs. Consider what would happen if organized markets did not exist. Households that wanted to borrow would need to find oth- ers that wanted to lend. Inevitably, a meeting place for borrowers and lenders would be set- tled on, and that meeting place would evolve into a financial market. In old London a pub called Lloyds launched the maritime insurance industry. A Manhattan curb on Wall Street became synonymous with the financial world. We can differentiate four types of markets: direct search markets, brokered markets, dealer markets, and auction markets. A direct search market is the least organized market. Here, buyers and sellers must seek each other out directly. One example of a transaction taking place in such a market would be the sale of a used refrigerator in which the seller advertises for buyers in a local newspaper. Such markets are characterized by sporadic participation and low-priced and nonstandard goods. It does not pay most people or firms to seek profits by specializing in such an environment. The next level of organization is a brokered market. In markets where trading in a good is sufficiently active, brokers can find it profitable to offer search services to buyers and sellers. A good example is the real estate market, where economies of scale in searches for available homes and for prospective buyers make it