It was supposed to be a marriage that would turn the frog into a prince.
But it is a marriage that needs a heavy dose of Dr. Laura, Wall Street observers contend.
Two years after the merger between the American Stock Exchange and the National Association of Securities Dealers was consummated, the Amex is still a distant third to the New York Stock Exchange and Nasdaq.
There are also rumblings about broken promises at the place traders once called the Curb exchange.
Today, some of the floor brokers at the 89-year-old stock and options exchange are having second thoughts about their young and glamorous partner. They are wondering, for instance, where is the new and modern, spacious home that they were promised.
Investment Program
The NASD pledged to spend at least $110 million on a technological investment program. The plan called for constructing a sparkling, 700,000 square foot trading floor, or substantially expanding or upgrading the exchange's existing headquarters.
But the Amex is still located in the cramped and antiquated building at 86 Trinity Place in Lower Manhattan.
One of the biggest beefs among disgruntled Amex traders has nothing to do with the building's decor and everything to do with listings.
"We were promised 250 new listings by Frank Zarb, [NASD's chief executive]," an Amex trader said, who spoke on the condition of anonymity. "Where are they? In this business your word is your bond."
Although the exchange has gained over a hundred new listings in the past year, he said, this number is far below what members anticipated when they signed on to merge with the NASD. Today, the exchange has 779 listings, only slightly higher than the 770 in 1998.
In a letter to Amex members in May 1998, Zarb vowed that "the combination will attract a wider spectrum of issuers, both domestic and foreign." At the time, Zarb raised the prospect of some of the smaller Nasdaq stocks transferring to Amex so that they might succeed under an auction system.
Two years later some traders are wondering aloud. "I don't think the merger accomplished a damn thing," said George Reichhelm, a specialist at the Amex. "[The NASD] didn't pay anything for it [the Amex]. If the [Amex] management wanted it to succeed on its own they could have done so easily."
"[The Amex] management received a big bonus for the merger," he added. "They were in cahoots with a competitor, Frank Zarb, to do away with competition."
Reichhelm said that Zarb promised the Amex membership that the exchange would become more competitive with Nasdaq in the trading of smaller cap issues. "He [Zarb] guaranteed he would do that. He lied. They [NASD-Amex] haven't done a thing about it," he said.
Dismisses Criticism
Frank Zarb, through a spokesman, declined to comment for this story. But Amex and some NASD officials claim that the disenchanted group represents only a small section of the total membership. Most greeted the merger with open arms and enthusiasm, officials say.
"In any organization there will always be some people who are unhappy," said Robert Rendine, an Amex spokesman. "The vast majority of the membership supported the merger."
Some traders do see merit in the merger. "I think under the current leadership the Amex will be an innovator and we will make strong inroads within the investment community," said Howard Lasher, an independent floor broker, and an Amex member for 34 years.
One sign of life: The exchange's average daily volume of 29 million shares in 1998 has almost doubled to about 55 million today. (That clearly pales in comparison, of course, to the record-setting two billion share days on Nasdaq.) On the options side in 1999, the Amex had record volume of 129.7 million contracts, an increase of 33 percent from the previous year's record level. The record-setting pace continues. For the first quarter of this year, 51.2 million contracts traded on the Amex.
Steven Lesser, senior vice president, member liaison at the Amex, said much renovation and expansion is taking place on the exchange's floor. "We have enhanced the mezzanine floor with state-of-the art technology," he said. "Major construction was done in less than five months. A new trading floor [is coming]."
Other technological developments, including improvements on the exchange's automated execution systems, are underway. Last September, Salvatore F. Sodano, chairman and chief executive of the American Stock Exchange, who is also a member of the NASD board of governors, said that about $30 million had been spent on upgrading and automating the exchange.
Sodano said that by 2001 the much needed technological advancements would be achieved, including the introduction of an electronic system that routes orders from member firms directly into specialists' books.
Traders would obviously welcome the systems changes. In recent years, the Amex has lost a sizeable number of its top tier listings to the New York Stock Exchange and Nasdaq. Defections from the Amex to the Big Board included Hasbro and Viacom. Only eight of the 25 most actively traded companies listed on the Amex in 1995 still remain on the exchange.
Besides its troubles with dwindling listings, the Amex has been hit by allegations that it turned a blind eye to price-fixing and inflated spreads by some of its options traders.
Last year, Business Week published a cover story by Gary Weiss entitled "The American Stock Exchange: Scandal on Wall Street." The magazine concluded that the abuses at the exchange were costing the public about $150 million a year.
Price-Fixing Investigation
Currently, the U.S. Department of Justice and the Securities and Exchange Commission are negotiating with the Amex to settle a year-long investigation of the alleged price-fixing, affecting the entire U.S. options industry. The Chicago Board Options Exchange, the Pacific Exchange, and the Philadelphia Stock Exchange would also participate in the proposed settlement.
All is not doom and gloom at the Amex. The plan by the NASD to spin off the Nasdaq Stock Market in a private placement this year could be more good news for the second largest U.S. auction market and options exchange.
Of the projected $1.1 billion that will be raised, the NASD has earmarked $215 million for the Amex. That sum represents four times the exchange's working capital.
"The NASD plan offers significant funding as well as the freedom for the Amex to pursue our aggressive growth strategy," said Sodano earlier this year.
But some traders at the Amex suspect that this money will never materialize.
"I'll believe it when I see it," Reichhelm sniffed. Despite the strongest bull market in history, equity trading volume for many of the Amex's listings still remains stagnant.
Nonetheless, there are new products capturing the imagination of a growing number of professional and retail investors – exchange-traded funds, also known as ETFs. While some pros contend they are saving Amex from certain collapse, they add that they would likely have succeeded without the Nasdaq and Amex linkup.
The ETFs are based on indexes from broad markets, such as the Dow Jones Industrial Average, the Nasdaq 100 Index, industry sectors and foreign markets.
The products are unique because index mutual fund shares can now be bought and sold throughout the regular trading day. Previously, they could only be traded at a set price at the end of the regular session at 4:00 p.m. ETFs can be purchased through most broker dealers.
ETFs Contribute Volume
Today, two-thirds of the daily volume on the Amex is derived from ETFs.
For the first four months of this year, the average daily volume in index shares was more than 29 million shares. A total of 45 ETFs, with about $40 billion in assets, are currently traded on the Amex. And plans are in the works to launch dozens more later this year.
The ETFs are said to suit cost-conscious investors who do not enjoy paying out management fees to mutual funds. They have tax advantages as well. Like stock ownership, taxes are only paid when the ETFs are sold. Normally, capital gains taxes are due on most funds each year, with the exception of those in a tax sheltered plan such as a 401(k).
Exchange-traded funds have been quickly imitated by competing exchanges, including the Big Board. Nathan Most, a former head of new products for the Amex and one of the creators of these index funds, said recently that there's nothing about the ETFs that other exchanges can't learn.
The Amex is not sitting back. It is currently working on a plan to introduce tradable, actively managed mutual funds next year.
The Amex is also joining the global equity trading bandwagon. Last month, the Amex announced that it plans to form a joint venture with the Singapore Exchange (SGX) to list its exchange-traded funds on the Asian exchange by the first quarter of 2001.
"This [joint venture] is a testament to the fact that ETFs have appeal around the world," Sodano said in a statement. "The Amex-SGX union will create a low-cost, efficient market network that enables investors, across time zones, to diversify their portfolios."
The Amex has also tapped a highly regarded brokerage firm executive to be its new president: Peter Quick, 44, previously president and chief executive of Quick & Reilly, the national discount brokerage firm, which is owned by the FleetBoston Corporation.
Quick, son of Quick & Reilly co-founder, Leslie C. Quick Jr., is no stranger to the Amex. He previously served on the Amex Member Firm Committee and as an Amex official. Quick has also served on the Securities Industry Association Operations Committee and chaired the SIA Clearing Firms Committee.
"The Amex has reinvented itself by focusing on the key strengths of its business lines," Quick said in a statement.
Formidable Challenges
But the Amex still faces formidable challenges. Patrick Healy, a former manager of financial policy and strategy at the NASD doubts whether the Amex over the long run will be able to aggressively compete with the Big Board.
"In the past two years the entire top end of its market has been beheaded," said Healy, president of the Issuer Network, a capital markets consulting firm based in Chevy Chase, Md.
"There's no question that Amex will be a leader in the derivatives business," he added. "The big question is, can the Amex effectively compete and remain in the equities business?"
Bill Singer, a securities attorney who has represented the Independent Floor Brokers Association, a group affiliated with Amex floor brokers, believes the exchange has a tough road. "The American Stock Exchange will basically become an options exchange and an index incubator," he predicted. "I tend to doubt whether it will maintain significant listings much longer."
The Amex believes reports of the demise of its equities business are greatly exaggerated.
"The [companies] that would get lost in the shuffle at Nasdaq or NYSE," said Amex's Steven Lesser, "are going to get value-added service here. Our equities business is growing and will continue to grow."
"We are a niche market," added Perry Peregoy, Amex senior vice president of equities. "There are thousands of public companies that would benefit significantly from our service offerings and [auction] market structure. As more mid-size companies identify our exchange it will become more successful."
That could help make Zarb's dream of more listings become a reality. But for now, some traders say they have heard the promises before.
