Commentary: Has the Curb Market Moved into the Gutter?
Visitors to the American Stock Exchange building in lower Manhattan are greeted by a sign with a simple message: "Put Your Business Where the Future Is." For the third-largest U.S. stock market, a powerhouse in options but a perennial also-ran in equities, the sign is not so much a slogan as a plea. The Amex needs business--stock listings, to be exact--if the word "stock" in its name is to have any meaning. Well, two years after its merger with the National Association of Securities Dealers, the Amex is getting business, all right--from the smallest, least attractive stocks in existence.
At the venerable old exchange, once known as the Curb because its traders stood outdoors, officials take pride in the pace of new listings. A total of 73 companies joined the Amex this year, vs. the 83 companies that listed during all of 1999. But these numbers aren't so cheery as they appear. The roster of new listings is dominated by the very smallest microcap stocks. The median market cap is $66 million, meaning that half the new Amex issues are among the puniest stocks around.
The numbers are bad--and get worse. These stocks have been generally poor performers. There have been a few winners (table), but the exchange's laggards have suffered dizzying declines. Amex officials shouldn't be proud. They, and their bosses at the NASD, should be ashamed. They should get the Amex out of the microcap business, and fast--to keep it from squandering its reputation and lending its considerable cachet to marginal stocks.
For the Amex, which has been casting around for a role for itself, microcaps fill a crucial void--a "niche" that Amex officials feel has been neglected. Perry Peregoy, the Amex' senior-vice president for equities, says small companies "have been overlooked from a visibility and awareness standpoint, and we thought that the auction market offered the benefits of good market structure" as well as the "service offerings" the Amex could provide--such as investor relations support.
But the Amex' emphasis on microcap stocks flies in the face of history. Even a casual reader of the financial pages knows that microcaps are a perennial headache for regulators and above all for investors, because they have been prone to abuse by stock manipulators. And Amex officials are blithely ignoring their own history--their doomed experiment in microcap stocks of the early 1990s, the Emerging Company Marketplace.
The ECM was created in 1992 by former Amex Chairman James Jones as an "incubator" for what were billed as "some of the best companies in the country." ECM stocks were picked by a "blue-ribbon committee," and were supposed to benefit from association with the Amex--specifically by changing to the specialist-centered trading system used at the Amex, as opposed to Nasdaq's dealer market. ECM companies were also supposed to get help from the Amex staff with investor relations. They would get more visibility, Amex officials said at the time.BOTTOM OF THE BARREL. Sure, the stocks got "visibility," but that didn't prevent the ECM from being a disaster. For one thing, the stocks were, by and large, dogs. Of the 65 companies that listed on the ECM, just under a third were tiny, illiquid stocks from the bottom of the barrel of the world of equities, the OTC Bulletin Board. The average stock price was under $5, and the average market capitalization of ECM stocks was $29 million. And the Amex specialist system--a selling point--did not prove very effective for the stocks. "For small-cap stocks, you need the sponsorship of a market maker to put out research reports and attract investor interest. The specialist doesn't do that," notes Reena Aggarwal, a Georgetown University professor who has studied the ECM. The principle of "adverse selection" also hurt the ECM, she notes. It became a repository for poor-performing stocks, with the best stocks moving elsewhere.
Alas, the Amex' past failures are just ancient history to its current managers. Asked to explain how his listing strategy differs with that of his predecessors, Peregoy at first declined to do so at all, saying "I can't go back and understand why Jim Jones wasn't successful." But he later e-mailed a statement saying that "the most important differentiating factor is that this phase of our equities revitalization strategy focuses on small and midcap companies." He went on to emphasize the efforts of the Amex sales staff, and noted that "we are now rolling out an investor relations support program that provides direct assistance to companies."
Sound familiar? If so, the point seems lost on Amex officials. Asked about the similarities between the current crop of listings and the ECM's, Peregoy demurred, noting that he has only been at the Amex for a year. And the subject, it seems, doesn't especially interest him. "I haven't done any critique or history of [the ECM]," he says. "DOG FACTOR." Perhaps he should. He would find that the Amex' new listings, though not quite as small on average, bear a striking resemblance to the companies that joined the ECM. Indeed, tiny OTC Bulletin board stocks actually are a greater source of new listings for the Amex than they were for the ECM. So far this year, more than half of the new Amex listings--45 of 73--were OTC stocks. The ECM drew criticism for its ex-OTC stocks, which were just a third of its listings.
The "dog factor" is another ECM similarity. Of the 83 stocks of operating companies that listed on the Amex during 1999, 50 have declined so far this year, and another four have been delisted. The comparable numbers for the "Class of 2000" are 35 decliners out of 73. And this hasn't been a terrible time for microcaps. The Russell 2000 index of small caps gained 4% during that same period, and the Amex composite index was up a healthy 7%. SUBPAR PERFORMANCE. Peregoy is not troubled by the awful numbers--and he released numbers of his own. They show that, on average, new listings this year have fallen 23% since they joined the Amex--which, he notes, is the same subpar performance recorded by the tiny companies that join the Nasdaq Small Cap market. But it's hard to see how matching the losses of new entries to Nasdaq's lower tier--that market's version of the ECM--bodes well for the Amex. Increasingly, the Amex is loading up on losers, just as the ECM did. And that, Aggarwal notes, was one of the factors that hurt the ECM.
All this has some veteran Amex watchers shaking their heads. "They tried this before--they tried to go for some of the very small stocks," says Nathan Most, a former high-level Amex executive who designed the Amex' successful exchange-traded funds and is now chairman of Barclays Bank's ETF unit. In the early '90s, he "watched all this going on and I just concluded that it just wasn't going anywhere because there was no basic place for the exchange in equity securities."
The Amex is not necessarily at the end of the road as an equities exchange. Its obituary has been written many times, always prematurely. The Amex has a long, often troubled, sometimes glorious history. The new guard at the Amex should read up on it one of these days.By Gary WeissReturn to top