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Commentary: The Amex: Worth More Dead Than Alive?


Rumors of the American Stock Exchange's demise are back in vogue. On Nov. 11, the Amex announced that the Securities & Exchange Commission is considering civil action against three Amex executives. Chief Executive Salvatore F. Sodano, President Peter Quick, and General Counsel Michael J. Ryan Jr. were named in an investigation into the exchange's regulation of options trading. All three, still at the exchange, declined to comment. On Nov. 17, Chief Regulatory Officer Glen Barrentine was told he is also a subject of the investigation. The Amex board named an acting CRO, though Barrentine will remain at the exchange.

When it got wind of the inquiry last year, Chicago buyout firm GTCR Golder Rauner LLC pulled out of a sweet $110 million offer to buy the money-losing Amex from the National Association of Securities Dealers. So Amex' 834 members then voted to buy it themselves for an undisclosed amount by Dec. 1. That may not fly now because the SEC, which must approve the buyout, is already leery about how well member-owned exchanges police themselves. Think New York Stock Exchange.

It's time to recognize that the sum of Amex' parts may be worth more than the whole. "Amex as an institution lost its reason for being long ago," says James J. Angel, associate professor of finance at Georgetown University. "The real question is whether it should start liquidating the assets and put them to better use."

Start with its 83-year-old headquarters at 86 Trinity Place in Lower Manhattan, worth at least $67.5 million, say real estate experts. If it gave up its battle for market share against the NYSE, NASDAQ, and several electronic exchanges (ECNS), Amex could capitalize on the area's post-September 11 development boom and carve its distinctive 14-story Art Deco building into, say, luxury condos.

Originally called the Curb, Amex began trading on the street outside the NYSE before it moved into that building in 1921, when it won a coveted exchange license. These things are worth a bundle: Archipelago Holdings LLC, for instance, ponied up $40 million to the Pacific Exchange (PCX) in 2000, plus gave up a 10.8% equity stake to gain the Pacific's license and become a regulated exchange. An outfit like INET, the nation's largest ECN, might be tempted to buy Amex' license to avoid the long and expensive application process.

Making Amex profitable is a monumental task. In options trading, one of its main businesses, Amex has fallen to No. 3 behind the Chicago Board Options Exchange and New York's International Securities Exchange. ISE plans a public offering that bankers say could reap as much as $750 million, a war chest that Amex cannot match. Worse yet, the ISE is lobbying hard to abolish exclusive options listings on exchanges. If the Justice Dept. and the SEC find such listings anticompetitive, it's another nail in Amex' coffin.

Although Amex pioneered exchange-traded funds (baskets of stocks that resemble an index but trade like a single security), it is also now losing out to electronic rivals ArcaEx and INET. Even the NYSE is gaining in ETFs, winning 11% of the volume. The most heavily traded ETF -- the NASDAQ-100 "Cubes" -- will move from Amex to NASDAQ on Dec. 1.

Amex' small- and micro-cap companies often shine -- the Amex Composite Index, up 15%, has beat the Standard & Poor's 500-stock index so far this year, and for the past three and five years, too. Yet Amex can't win here, either. It's now losing trading volume in its 801 listed companies to other markets. Until recently, such trading was "the only thing that kept Amex alive," says Georgetown's Angel.

Nimbler rivals and regulatory scrutiny are forcing all markets to make over their businesses. For some, that means going electronic. For others, it means going public and answering to shareholders. Amex must figure out how to make itself whole again, or head to the scrap heap as used, albeit valuable, parts.

By Mara Der Hovanesian


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