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January 3, 2006

Finding Amex's Salvation in New Technology

By Nina Mehta

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The American Stock Exchange often comes across as a creaky old ship in the securities markets-one that's been taking on water in recent years. Instead of developing a robust technology platform for equities, Amex watched electronic communications networks siphon off market share in its marquee exchange-traded funds. Its options market share also declined in the face of new electronic exchanges.

The NASD, which bought the exchange in 1998, never delivered on a promised $100-million investment to create a combined Amex-Nasdaq trading platform. In 2001 NASD decided to unload the exchange but couldn't find a willing buyer to see the deal through. Morale on the floor flagged. In November of last year, three top executives, including Salvatore Sodano, the exchange's CEO, got caught up in a Securities and Exchange Commission investigation of Amex's failure to enforce its options trading rules.

The run of lousy news hasn't helped volume. Amex's average daily equities volume for the first nine months of this year dropped 6 percent from last year's average while both the New York Stock Exchange and Nasdaq saw their daily volume increase. The New York now has 25 times Amex's volume. This past summer, Barclays Global Investors announced it would move 81 of its 82 Amex-listed exchange-traded funds to the NYSE by the end of 2007.

For the exchange that launched the first ETF in 1993, BGI's decision was a blow. "Our challenges are many," admits Neal Wolkoff, Amex chairman and CEO.

But Amex isn't capsizing. Instead, there's been a thorough changing of the guard, and for the first time in years, many feel the exchange is heading in the right direction.

Wolkoff, the former chief operating officer of the New York Mercantile Exchange, the booming energy and commodities exchange, took over the Amex reins earlier this year. The Amex membership last year bought the exchange back from NASD, and new management and blood reinvigorated market participants who had languished under the yoke of the NASD.

"There are lots of critics out there wondering why the Amex is even around," says Andrew Schwarz, founder of AGS Specialists, one of the largest specialist firms on the American Stock Exchange. "We have suffered through our previous ownership and the executive team that ran Amex into the ground for eight years. The question is, Did they do enough damage that Amex can't salvage itself?'"

The Amex's goal is to recapture trading volume, bring in more equities and ETF listings, and beef up the exchange's financial well-being. Pushed by customer demand and the needs of the new Regulation NMS environment, the exchange is aggressively pursuing a hybrid market structure. Front and center in this effort is a new, state-of-the-art trading platform called AEMI (pronounced AMY) for Auction and Electronic Market Integration. The platform will initially trade equities and ETFs, but has the capacity to trade all products.