Out on the Street

Why the American Stock Exchange is collapsing.

Yesterday six companies whose stocks had previously been listed domestically only on the New York Stock Exchange agreed to have their stocks listed on the rival Nasdaq exchange. The movement by blue-chip names like Hewlett-Packard and Charles Schwab to allow investors to trade their shares on both bourses is a win for Nasdaq in its 30-year battle for market share against the NYSE. The competition between the NYSE and Nasdaq has been not merely a contest between two institutions, but between two ways of doing business. The NYSE favors the old-fashioned open-auction model with specialists standing on the floor directing traffic, whereas the Nasdaq is a wholly electronic marketplace. 

What has gone unnoticed as the two stock market titans vie loudly with each other is the slow collapse of another longtime pillar of the stock markets: the American Stock Exchange. Located just a few blocks west of the NYSE in lower Manhattan, the Amex has been owned by the National Association of Security Dealers—the same organization that owns Nasdaq—since 1998. In recent weeks, long-standing members have abandoned the business. Meanwhile, NASD has been trying to unload its acquisition, but efforts to find a buyer have failed. Unlike the NYSE, which managed to preserve its market-leading position under assault from an electronic exchange, Amex has been undone by the rise of electronic trading.

Amex has always been the unglamorous stepsister to the NYSE, but it has nonetheless played a vital role in the development of U.S. equity markets. It started life as the New York Curb Exchange in 1842, when brokers and traders began to gather on the curb outside the New York Stock Exchange to trade stocks that didn’t qualify for admission to the more exclusive NYSE. In 1921, the Curb Exchange moved inside—to its present quarters on Trinity Place. In 1953, it changed its name to the American Stock Exchange.

For the past half-century, the Amex has remained a destination for smaller companies that couldn’t meet the NYSE’s listing standards. As the Nasdaq rose in the 1970s and 1980s, the Amex found it difficult to garner new stock listings. Still, Amex’s traders developed important niche lines of business. It emerged as the largest options exchange in the United States. And in the 1990s, Amex introduced the popular Exchange Traded Funds—baskets of securities that trade like a single stock.

In 1998, the National Association of Securities Dealers acquired Amex. Part of the rationale for the deal was that NASD would provide the necessary resources to upgrade Amex’s technology and infrastructure so that it could compete more effectively in the brave new world of electronic trading. In exchange, the parent company of Nasdaq would gain a foothold in the growing options and ETF business and potentially get a leg up on the NYSE.

In the past decade, the competition between Nasdaq and the NYSE for market share and listing supremacy generated a great deal of heat and light. It was a battle between New Economy and Old Economy, tech stocks and industrials, cool electronic trading and the frenzied televised melees on the floor of the exchange—between tomorrow and yesterday.

But while the NYSE managed to hold its own in stock trading, Amex’s options business proved more susceptible to the disruptive technology—and faced yet more in May 2000, when the International Securities Exchange opened for business. An all-electronic market unfettered by expensive infrastructure costs, the ISE has swiftly eaten Amex’s lunch as companies with options have begun to list on multiple exchanges. Last week ISE announced that it had finished 2003 as the world’s largest stock option exchange, with a 30 percent market share. By contrast, Amex’s market share in equity options has fallen from about 30 percent in 2001 to about 22 percent last year.

Nobody better understand the need to sell a declining asset than Wall Street traders. And so as electronic competition gnawed at its position, Amex’s owner, NASD, sought an exit strategy. Last summer, it agreed to sell Amex to private-equity firm GTCR Golder Rauner for $110 million. But the deal quickly fell apart. And last November, NASD announced a plan to sell the Amex to its members. No price was announced, but it’s a fair bet it’ll be a lot lower than $110 million.

In fact, in the last few months alone, Amex has proved to be a rapidly declining business. Several companies have literally walked away from the Amex. Knight Trading, the large specialist firm that oversees trading in dozens of Amex securities, last week said it would shutter its posts at the end of January. In December, Goldman Sachs unit Spear, Leads & Kellogg sold a portion of its American Stock Exchange business. * A third specialist, Van der Moolen Holding, also left the building late last year.

The ultimate measure of anything on Wall Street is its market price. At the height of the boom, an Amex seat traded hands for $725,000. As recently as last Oct. 31, a seat traded hands for $120,000. But according to Amex, the most recent sale of a seat was for a mere $76,000, less than some traders spend on a new sports car.

With the market-makers leaving, investors flocking to other exchanges, and no buyers surfacing, the Amex is today a lonely place. The tape tells it all. Yesterday, according to the American Stock Exchange, investors traded 68.5 million shares of stock and 816,843 options contracts. By contrast, investors traded 1.45 billion shares of stock on the New York Stock Exchange and about 1.4 million options contacts on the ISE. If the trend continues, the American Stock Exchange could be out on the curb again.

Correction, Jan. 16, 2004: The original version of this piece stated that Goldman Sachs unit Spear, Leads & Kellogg divested its Amex business in December. In fact, Spear, Leeds & Kellogg sold only a portion of its American Stock Exchange business. The unit reduced its coverage of options index products, but has maintained its single-stock specialist business. ( Return to the corrected sentence.)