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Amex Potential Sale Opens Debate On New Owner's Strategy

A potential sale of The American Stock Exchange, a traditional floor-based equity exchange, to a Chicago-based private-equity firm, is sparking industry speculation as to what the new owners will do to recoup their investment.

A potential imminent sale of the troubled Amex -- an auction-driven floor-based equity and options exchange -- to GTCR Golder Rauner -- has sparked speculation as to what the new owners will do to recoup their $100 million investment. A deal could occur as early as this week, according to published reports. A GTCR spokeswoman said she had no comment at this stage.

If the American Stock Exchange is sold, the new owners will be faced with major decisions such as whether to keep or turn the open-outcry equity and options floor into an electronic exchange. "There are certain things you could do to the Amex to make it look more attractive," Sang Lee, vice president of the securities and investment practice at Celent Communications, who speculates that dumping the equity business is one such strategy.

"One of the main stumbling blocks is Amex's equity operations," says Lee. "When you compare it to the NYSE or Nasdaq, it's a second tier operation, says Lee.

Among the possible suitors for the options component is The New York Stock Exchange or Eurex, the German derivatives exchange, which has stated plans to launch a U.S. registered exchange that offers a full range of derivatives in early 2004.

"The NYSE is not happy with the equity operations, but if they got rid of it, the NYSE might be interested in purchasing component of the options business as well as the ETFs," says Lee.

However, market professionals disagree. "I think the equity side is very important, not because of the trading, but because of the quote revenue it generates," says Samuel Lek, chief executive officer of Lek Securities, a direct-access brokerage firm that is a member of the Amex. Lek notes that a quote on the Amex costs 40 times as much as a quote on the NYSE, because there are hardly any stocks on the Amex as compared to the NYSE.

Lek also points out that the NYSE already owned an options business and sold it to the Chicago Board Options Exchange. NYSE is not interested in the options business "because it is a distraction," he says.

Andrew Schwarz, who runs AGS Specialists LLC, an independent trading firm on the AMEX floor, contends, "There is a place for an equity exchange that can offer companies a difference between a dealer and an auction marketplace," suggesting that perhaps Amex can step in where Nasdaq is falling apart. "You're talking about listing fees, maintenance fees and tape revenue lost to ECNs with ETFs," and a lot of that is (due to) fee structure which is imposed by the NASD, he says, noting that it's cheaper to trade an ETF on an ECN than it is on the Amex."

Moreover, Schwarz doesn't think the new owners will turn the Amex into an electronic exchange. "I know enough to know that nobody who is smart would turn the Amex into an electronic market."

"Someone who is going to spend that money is looking for a market structure where you trade three main products -- equities, options and ETFs -- and service the customers," says Schwarz, adding: "Maybe I'm wrong and they'll close the doors and turn it into an electronic exchange. I don't see how that model for that price would work, when you can buy an ECN for nothing."

Amex was put on the auction block in mid-2001 and has been up for sale more than two years. "They haven't been able to get another exchange to buy them," notes Lee.

While declining to comment on the alleged deal, the Amex released a formal statement regarding the sale: "As has been publicly reported going back two years, the NASD has expressed a desire to focus solely on regulation and to divest itself of its ownership of the American Stock Exchange. The Amex has been working to determine which of the interested parties represents the best strategic fit for our business. Until there is a definitive agreement, we will not have any comment." Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio

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