Amex Gets New Lease on Life at the NYSE
December 3, 2008
Active specialists making tighter markets and improved technology are considered the linchpins to a bright future for the American Stock Exchange, now known as NYSE Alternext. NYSE Euronext completed its acquisition of Amex in October.
Today is just the third day the old Amex market has operated as NYSE Alternext in the Garage of the New York Stock Exchange. But hope is emerging that the new ownership and market model will enable the once-powerful Curb market to regain some of the ground lost in recent years.
For Bob Nunn, chief operating officer at Cohen Specialists, one of four specialist firms that transitioned to Alternext, technology is the key to success. "Technology is the backbone of it all," he said. "It will enable us to make better markets and to participate a lot more easily than we did at Amex." That could benefit the listings side of the business as well, he said.
Alternext is starting with approximately 15 percent of the market share in its own listed stocks, although NYSE Euronext expects that could double by the end of 2009. The innovative exchange-traded funds business, which Amex created in 1993, was recently moved over to NYSE Arca's faster electronic platform, which operates more like an ECN.
In Nunn's view, technology problems at Amex caused its drop-off in market share over the last several years, despite ongoing efforts to catch up with the rest of the marketplace. When the Amex membership bought the exchange back from NASD in 2004, he said, the exchange wasn't prepared to meet the requirements of Regulation NMS. "The new administration was under the gun to build a system to comply with NMS," he said. "Not a lot of effort was spent on integrating the specialists into the design of the front end and matching engine, so there was no way for specialists to interact with order flow in the way that we had been doing."
Now, Nunn and other specialist firms are counting on new ownership to help the exchange reverse that trend and improve the quality of its market. The other three specialist firms at the exchange are Kellogg Capital Group, J. Streicher & Co., and Brendan E. Cryan & Co.
The NYSE Euronext mothership would also like to strengthen its latest market. "We will look to do creative things to try to build up Alternext market share and activity over the next few months," said Joe Mecane, executive vice president and chief administrative officer for U.S. markets at NYSE Euronext. The exchange company has simplified Alternext's pricing for member firms and switched to a maker-taker fee schedule to be more competitive. The company also moved Alternext over to the rule set that constitutes the NYSE's new market model.
Nunn expects Alternext's market share to increase under NYSE Euronext's banner. In his view, the new market model will boost market share by making it easier for specialists to interact with flow. "Since the new market model rolled out [at the NYSE], there has been an increase in specialist participation in large-cap stocks and in market share, so they're already seeing benefits there," he said.
Patrick Fay, director of equity trading at broker-dealer D.A. Davidson & Co., agreed that being part of NYSE Euronext could increase volume in Alternext stocks. "We have more connections to the NYSE," he said. Before, "we didn't do enough business on Amex to warrant the cost of having a direct connection to that exchange." In addition, he said, Amex "was perceived as less customer-friendly, and many investors who previously shied away from Amex stocks may now return. There will be greater access and visibility for most of those listed equities, so it's reasonable to assume that volumes should go up."
Andy Schwarz, senior partner at AGS Specialists, hopes the move to the NYSE will improve prospects for Alternext. "I am cautiously optimistic the New York will understand the small-cap and micro-cap business," he said. "If so, it will be a great opportunity for specialists and for the country. General Electric can tap the credit market anytime, even if it must pay up for it at times, but access to capital doesn't exist for a $100 million firm." He added that Amex's goal had always been to help those companies by injecting specialist capital into the market to provide liquidity, which ultimately added value and enabled the companies to tap the secondary market to raise money.
AGS, currently the largest options market maker on Amex, is eager to come over to the NYSE once the new options pits are ready in the Blue Room and Extended Blue Room. However, the firm decided not to move its equities business over to Alternext because the cost was prohibitive. "Between compliance and technology, for us to start our own cash equities operation on the NYSE just wasn't cost-effective," Schwarz said.
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