Once upon a time, the American Stock Exchange was seen as the New York Stock Exchange’s junior sibling. Now, after NYSE Euronext’s acquisition of Amex in October, it legally is. With a new market structure, technology and pricing, the renamed NYSE Alternext expects to rebound from Amex’s doldrums of the past decade and boost its market share. But the eventual fate of Alternext will likely depend on NYSE Euronext’s ability to grow the small-cap market.
“Amex is in a better place now,” said Patrick Healy, CEO of Issuer Advisory Group, a firm that advises companies on listing venues. “The companies listed on Alternext are far better off as a result of being at 11 Wall Street. The management of NYSE is solid, the strategy is more sound and the history is better.”
Amex has literally come full circle. Over the course of a century and a half, Amex’s predecessor Curb market moved from several locations on the streets outside the Big Board, exposed to the wind and rain, to Amex’s home for 87 years at 86 Trinity, to the NYSE’s Garage trading floor. The exchange’s current relationship with the New York also retreads familiar territory: It must define its market in the Big Board’s shadow.
Third Leg
By most accounts, NYSE Euronext spent $260 million in stock to acquire Amex mainly for its floor-based options market and its ETF listings. The weak third leg of the stool was the equities market, which had lost more market share than the other products. By early last month, when Amex’s equities market moved onto the NYSE floor, Amex’s share in its own listed names was under 15 percent, less than a third of its level in 2005.
The Amex market for equities trading is small. Amex-listed volume in its entirety represents just a few percentage points of overall U.S. consolidated equities volume. But the equities market gives NYSE Group, which oversees the U.S. markets, a chance to reshape its footprint on the listings front. This comes at a time when cutthroat secondary market trading has forced NYSE to compete against strong rivals for its own listed volume. As an incubator market, the junior venue offers NYSE Euronext a way to expand its role in the capital markets and to go after smaller companies it once automatically ceded to Nasdaq.
Amex has watched its prospects diminish over the past decade. Its equities market share has dropped, its valuable ETF trading was siphoned off by other markets, and the number of companies it lists has declined. In 1991, Amex had 860 listed companies. That number dropped to 690 in 2001, and is now about 550.
So now it’s New York to the rescue. The purchase is the second for Amex, which was bought by NASD in 1998. At the time, NASD owned Nasdaq and thought a pair of exchanges could provide technology cost savings and new opportunities. The New York’s purpose in resuscitating Amex now is to open a new flank in its listing war with Nasdaq. To date, it has played a mostly defensive role in the battle for listings as Nasdaq poached its companies. Now it can go after Nasdaq across a range of market caps.
Alternext’s minimum listing standards are similar to those for companies shooting for Nasdaq’s lowest listing tier, called the Nasdaq Capital Market. The smallest public float acceptable to Alternext is $3 million. On Nasdaq, it’s $5 million. Shareholders’ equity can be as low as $4 million on both exchanges. Operating profits in the latest fiscal year can be as low as $750,000 on both exchanges. Both venues take into account a variety of statistics when deciding whether or not to list a company.
NYSE Euronext changed the name of Amex to NYSE Alternext US last month. However, the exchange operator may rename Alternext as part of a listings rebrand. Euronext launched the Alternext junior market in Europe in 2005 to compete with the London Stock Exchange’s AIM market for micro-caps, but the Alternext brand has no traction in the U.S.
According to Joe Mecane, executive vice president for U.S. markets at NYSE Euronext, Amex’s equities market has a role at the parent company as a listings market and trading venue. “We never had a platform to market smaller-cap stocks and to target smaller-growth companies, so companies usually started out on other venues,” he told Traders Magazine. “Now, if a company starts on our growth platform and becomes large enough to qualify for a NYSE listing, we already have them in our family. It’s harder to do that if they start out on Nasdaq.”
With the Amex acquisition, NYSE Euronext has dropped NYSE Arca as an equities listing platform. Instead of supporting three listings markets, which was the original plan when NYSE Euronext announced the Amex deal in January 2008, the exchange operator now has two. “Equities will now list on either NYSE or Alternext,” Mecane said. Arca as a listings venue is geared solely to ETFs.
Listings Battle
NYSE Euronext has begun tightening Alternext’s listing standards, which are the lowest (or most lenient) of the three primary markets. Alternext management last month eliminated the appeals process for initial listing decisions when a company doesn’t qualify for Alternext, and did away with two “minimum numerical alternative listing standards” for those companies. The exchange did this, it told the Securities and Exchange Commission, to “strengthen and enhance its listing standards.” It said companies that didn’t meet the bar could trade on the OTC Bulletin Board or elsewhere.
NYSE has historically been the top dog in the listings game, although Nasdaq’s Global Select Market, its highest of three listing tiers, competes for the biggest names. Robert McCooey Jr., who is responsible for new listings and capital markets at Nasdaq, noted that last year Nasdaq transferred a record eight large companies, ranging in size from Solero to News Corp., from NYSE to its top-tier venue. NYSE won five companies from Nasdaq, including Monster Worldwide.
Amex and Nasdaq traditionally competed at the other end of the listings game. This year, Amex’s hemorrhage of companies continued. Nasdaq took 51 companies away from Amex, while other Amex names headed to the Big Board.
The Jump
Some designated market makers (formerly called specialists) see NYSE Euronext aiming for higher-quality stocks on Alternext that can make the jump to a NYSE listing. “I think we’ll see a larger variety of companies, including some higher-profile companies,” said Bob Nunn, chief operating officer at Cohen Capital Group. He pointed out that Devon Energy, the New York Times Co. and Viacom all got their start on Amex years ago, before transferring to the Big Board.
“I see the Amex going back to the way we were in terms of listings five to 10 years ago or more, where we really were the junior marketplace, the place companies got started,” Nunn said. “When they grew up and matured, they became larger and migrated to the New York platform.” He added that Alternext competes primarily with the third of Nasdaq’s three listing tiers. Those companies usually have a market cap of about $50 million.
IAG’s Healy throws a dose of cold reality on this picture. “NYSE wants Alternext to be the home for stocks that don’t qualify for New York,” he said. “It wants it to be an incubator market. But it’s hard taking a start-up public and it’s hard taking a thinly traded small cap to a bigger arena.” He added that while NYSE and Alternext “may be presented as the A-league and B-league,” the size and liquidity differences in their listed companies remain considerable.
Some are skeptical NYSE Euronext can pull off a junior market. “It’s a second try at the same plan,” said William O’Brien, CEO of Direct Edge, an ECN that plans to become an exchange. “The NYSE took a similar approach with Arca. They put the NYSE name in front and offered a junior version of the Big Board. It didn’t succeed in attracting more than a handful of equity listings.” Prior to joining Direct Edge, O’Brien headed new listings at Nasdaq.
In O’Brien’s view, if the listing brand is not an affiliation people are excited about, developing that market is an uphill battle. “A junior market also runs contrary to the NYSE’s whole listings value proposition, which has always been very focused on the NYSE brand,” he said. “It’s like Mercedes trying to sell a $15,000 car. People may not be receptive.”
Market Share
A big determinant of Alternext’s success in winning and holding onto listed companies may be its market share in the trading of those stocks. Listed companies typically expect the listing venue to be the dominant marketplace for their shares. But Amex has lost market share for years, so NYSE must reverse that trend.
“It’s a topic of conversation” with issuers, NYSE Euronext’s Mecane said about the relationship between listing and trading for NYSE names. “Most issuers realize the [trading] world has become fragmented, but we have dominant market share in our listed names.” NYSE Euronext counts volume on NYSE and NYSE Arca toward its total market share in NYSE-listed stocks. Consequently, Mecane said, both NYSE Euronext and Nasdaq OMX Group have maintained just over 40 percent market share in their listed names. McCooey at Nasdaq, however, views the inclusion of the two New York markets in those stats as a sign that the NYSE Classic auction-based model is losing ground to a purely electronic market model.
Mecane said he expects changes at Alternext to double that exchange’s market share to 30 percent by the end of this year. In his view, this will occur as DMMs are able to be at the inside market more often. DMMs, he said, are better off because of “the stability of the technology, the automation we’re introducing to the market, the technology for opens and closes, the benefits of a DMM model and new pricing.”
David LaValle, director of floor operations at Kellogg Group, a DMM firm for about 270 Alternext names, believes 30 percent is an achievable goal. “New York addressed a couple of our Achilles’ heels,” he said. “We faced technology challenges that affected how we interacted with orders. Pricing was also a hurdle relative to what order flow providers were used to.”
On the pricing front, NYSE Euronext last month scrapped Amex’s outdated transaction schedule, which imposed fees on both liquidity providers and takers. When Amex became Alternext, it opted for a maker-taker model, charging liquidity takers 25 cents per 100 shares and giving liquidity providers 15 cents per 100 shares.
Andy Schwarz, senior partner at AGS Specialists, believes Amex’s transaction pricing helped price the exchange out of the equities business. “The problem at Amex was that we could never hold market share because the costs were so big,” he said. “Over the last few years, Amex’s costs were so high and the business so poorly managed that Amex literally couldn’t compete with the Chicago Stock Exchange, Nasdaq or Knight. Every time a broker did a transaction on Amex, they’d be hit with a transaction fee. At Knight, they paid you for the order flow.” AGS will move its options business to the NYSE floor in February, but has transferred its equities pad to Cohen.
Four specialist firms on Amex moved over to Alternext. These are Cohen Capital Group, Brendan E. Cryan & Co., Kellogg Group and J. Streicher & Co. Several of these firms absorbed the books of Amex specialists that did not move due to the costly compliance. A handful of individual Amex brokers came over to 11 Wall Street last month, and their ranks are expected to increase once the options traders settle into the NYSE trading rooms in the first week of February. To ease interaction between the equities markets, Mecane says, Big Board brokers were grandfathered in as Alternext members, and vice versa.
The Alternext DMMs are at Posts 1 and 2 in the New York’s Garage. The options market will be in the Blue Room and Extended Blue Room, where construction on the pits is still taking place.
Alternext is also in the process of getting more tools to beef up its trading capabilities. This month, Mecane said, Alternext DMMs will be upgraded to the same version of NYSE’s technology that Big Board DMMs use, which includes enhancements to the opening and closing processes. In addition, DMMs can use algorithms to make markets on Alternext, something they couldn’t do previously. On Amex, they changed quotes manually, which meant slower markets and less time at the inside market.
Another change in the offing is the ability to quote to four decimal places for stocks that trade under $1. Currently, Alternext isn’t able to do this, but it should have the functionality soon. The ability to quote at finer increments for low-priced stocks, warrants and SPACs gives DMMs “another opportunity to aggressively compete for market share,” Cohen’s Nunn said.
Big Participation
In the trading arena, the NYSE’s New Market Model is now the rule set that applies to Amex stocks. The new model allows dealers to trade on parity with floor brokers instead of having to take a back seat. It provides new pricing incentives for DMMs to quote aggressively, and pares down their negative obligations. Former specialists have lost their informational advantages, but can now interact more readily with incoming flow. This model, NYSE Euronext’s Mecane said, distinguishes both NYSE and Alternext from Nasdaq and the other markets that don’t have “dedicated liquidity providers” obliged to make markets in specific names or at specific times. “Market makers elsewhere have no obligation to participate, and when markets are volatile, especially in thin names, the quotes can go away,” he said. “Based on the number of erroneous filings [at other markets] in stressful periods during 2008, you can see that there was not enough liquidity in the books.”
Jonathan Q. Frey, managing partner at J. Streicher & Co. a specialist firm that got its start in 1910 when Amex was still known as the New York Curb Exchange, stresses that specialists are critical for small-cap stocks in particular, and that they’re now better positioned to interact with order flow because of NYSE’s technology. He added that for less-liquid Alternext stocks, specialists can easily be the majority of daily traded volume. “The last time the Amex was busy was when we still had a strong market before Regulation NMS and could interact with order flow,” he said. Frey’s grandfather started J. Streicher & Co., and Frey’s great-grandfather Emanuel Jackson had been a stockbroker outside on the Curb in the 1800s.
Kellogg’s LaValle agrees. Many Alternext stocks, he said, have specialist participation rates of 20 percent, 45 percent or even 70 percent. That compares with a DMM participation rate on the NYSE that recently was in the single digits. “Small caps are less-liquid stocks,” LaValle said. “They’re a different breed from the stocks traded on the New York.”
DMM participation is said to reduce volatility, especially for small caps. “A high participation rate means investors can get in and out at price points much close to the last sale,” Cohen’s Nunn said. “Someone is committing capital who’ll participate when there’s a huge gap in liquidity, which there often is in these names.” He argues that a more consolidated market for less-liquid stocks helps investors get better prices, which makes for a more stable marketplace for those names.
Nasdaq’s McCooey, a former NYSE floor broker and governor, disagrees. He doesn’t think DMMs benefit investors. “There’s nothing new and helpful in a DMM model for issuers or investors,” he said. “It’s just another way for the floor to stay in business and make money.”
Human Value
Joe Ratterman, CEO of BATS Exchange, thinks specialists, or DMMs, could play a role in less-liquid names. “I don’t think the New York model makes sense for highly liquid stocks, but it may have some applicability to lower-volume stocks,” he said. However, he doesn’t support a market structure with what he describes as “privileged participants with mandated levels of participation.” In his view, that represents an exchange’s effort to try to control the risk-reward equation associated with trading particular stocks.
At market-making firm Knight Equity Markets, managing director Joe Ricciardi notes that the value of a specialist has changed in recent years. “For very active, tightly quoted stocks, the value of a human has diminished,” he said. “Do we really need a [specialist] in Ford and General Electric? Probably not. But as you move down the spectrum toward the less-liquid stocks with larger spreads, you need some human interaction, or a combination of automated and human interaction.”
Knight, which competes with DMMs for flow in listed stocks, interacts with Alternext and other exchanges mainly to liquidate or establish positions. In Ricciardi’s view, Alternext could become more competitive. “The venues that provide more capital, better executions, higher fulfillment rates and more-effective technology will typically see an increase in order flow,” he said. “If Alternext can do all of those things, they may see an increase in business.”
In the end, Alternext stocks will trade where customers can get the best executions. Routing decisions are based on price, speed, the ability to get filled, price improvement, fees and other factors. John Despotopulos, head trader at Lee Munder Capital Group, said his firm doesn’t trade a lot of Alternext-listed equities, but that when it does, the venue doesn’t matter. “Anything that improves on the technology at Amex is good, since it lagged the other major exchanges,” he said. “It was slower to execute on Amex, so if you were trading electronically, you’d avoid Amex.”
Patrick Fay, director of equity trading at broker-dealer D.A. Davidson & Co. in Montana, believes that being part of NYSE Euronext could increase volume in Alternext stocks. “We have more connections to the NYSE,” he said. Before, his firm didn’t trade enough 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, so it’s reasonable to assume that volumes should go up.”
SIDEBAR #1: AMEX’s Last Decade
Amex’s last decade is bracketed by two acquisitions. While NYSE Euronext is now its owner, Amex, in 1998, was bought by NASD, which then owned Nasdaq, with the hope that it could benefit from scale efficiencies and a dual market model. That experiment failed miserably, with the NASD not funneling the promised money into Amex to beef up its technology. The exchange languished, and in December 2004 the Amex membership bought back the exchange.
Amex brought in new blood to run its market. Neal Wolkoff, who had spent two decades at the New York Mercantile Exchange, was picked to turn the exchange around. That proved too hard. The remnants of tepid regulatory oversight within Amex and a scandal involving Salvatore Sodano, Wolkoff’s predecessor, coupled with continuing high operating costs and lousy technology, made a revamp tough. Amex incurred operating losses every year since 2001, according to a proxy statement the Amex Membership Corp. sent its members last May.
Wolkoff developed a new trading system to get the exchange ready for Reg NMS in the spring of 2007, but ongoing tech problems caused Amex to lag its rivals and lose market share across products. The relationship between management and the floor faltered as efforts to sell the exchange took on greater urgency.
“At the beginning, there was a whole wide range of options available to us,” specialist Brendan Cryan said. “We got caught in the confluence of a perfect storm. Our market share was dropping, the market was declining, and the systems weren’t capable of interacting with customers well. Our options became narrower.”
“Amex completely lost its focus, top down, beginning with the management prior to Sodano,” said Bob Nunn, COO at Cohen Capital Group. More recently, he added, the new Amex trading platform proved not to be specialist-friendly and was a leading cause in Amex’s market-share tumble. “In the end, there was not a wonderful relationship between Wolkoff and the floor,” he said. Wolkoff, now CEO of ELX Electronic Liquidity Exchange, declined to comment.
As 2007 wore on, specialist Cryan said last month, a sale of Amex was what was needed and expected. “Amex is Amex, it’s essentially gone,” he observed. “We suffered shocks like other markets, and at the end we packed up and marched off [to NYSE Euronext]. Amex lives on in our memories. But now is now.”
(c) 2009 Traders Magazine and SourceMedia, Inc. All Rights Reserved.
http://www.tradersmagazine.com http://www.sourcemedia.com/
