Index shares take the floor as technology trading predominates

IT IS the realm of red, blue and green jackets, of trader badges and of high blood pressure. The American Stock Exchange or Amex, situated two blocks south of the World Trade Center and two blocks west of Wall Street in downtown Manhattan is - after the New York Stock Exchange - the oldest and largest floor-based exchange in the US.

While the NYSE trades only in stocks, the Amex trades both equities and derivatives. It recently completed a merger with the Nasdaq, the world's first electronic stock market, to form the newly named Nasdaq-Amex Market Group.

First port of call on a recent Foreign Press Association tour of the Amex was the 13th floor where coats were traded for bright red, blue and green jackets. It is obligatory for men who work on the floors of the stock exchanges to wear ties and traders' jackets. We were given a big, bold "trader" badge, a pencil and traders' note-pad with "to buy" and "to sell" orders written on either side.

According to Mr Joe Stefanelli, executive vice-president of the Amex, options trading was introduced on the Amex in 1975 and the Amex now accounts for about 30 per cent of the US equity options volume. But, by far and away, the fastest growing part of Amex's business is index shares.

In 1993, the Amex pioneered Index Shares with the introduction of SPDRs based on Standard & Poor's 500 Index. The Index Share Marketplace includes 30 products representing ownership in various domestic and international indexes. With $15.8 billion (€14.61 billion) in assets and volume averaging 9.3 million shares a day, Index Shares redefined the way baskets of securities are traded.

The Amex had its most successful launch of any product last week when it introduced the Nasdaq-100 Index Tracking Stock, which tracks the price and performance of the top 100 companies listed on the Nasdaq stock market. It enables investors to make a single investment in the Nasdaq-100 companies as a whole. On the launch date of March 10th, 2.6 million shares were traded and the following day that rose to 4.5 million. The previous Amex record volume was 1.7 million shares for a new product launch. The Amex also began trading options on the Nasdaq100 Index Tracking Stock the same day.

Some of the large non-financial companies that make up the Nasdaq 100 are Microsoft (which comprises 15 per cent of the total value) Intel, Dell, Cisco Systems, Northwest Airlines, MCI WorldCom, Yahoo! and Amazon.com.

The Nasdaq-100 Shares are listed under the symbol, QQQ, and traders told us they were simply known as the Qs.

Next stop on the foreign press tour was the trading floors - two large rooms with screen terminals perched overhead and news and ticker symbols flashing past. Some of the real-life traders had stayed behind after the markets closed to demonstrate how trading was done.

The Amex uses a specialist central auction market, which means there always needs to be a buyer and a seller for an order and a specialist who acts as a mediator to ensure the trade is two-sided and fair.

Seeing these specialists and traders re-enact business on a real day was bewildering. Orders were shouted, comprehended, and transacted with hardly a second delay. None of us could understand what was going on nor could get a word in edgeways! One trader explained the lingo. If he says 100,000 at $10, that means he's selling 100,000 shares at $10 each. If he says, 100,000 for $10, that means he's buying 100,000 for $10 each.

Blood pressures run high. Brokers phone in their orders to seats on the trading floor. These messages are then taken by the trader who runs over to the central auction system to conduct the trade. While this manual process has been around for hundreds of years, even the Amex is seeing the efficiencies of technology. Now, 70 per cent of its trades are conducted electronically and it makes you wonder, will there be a need for a trading floor such as this in the years to come?

The National Association of Securities Dealers (NASD), which owns The Nasdaq-Amex Market Group, has plans to revolutionise its trading technology. So, the Amex will have a state-of-the-art auction marketplace and the Nasdaq trading system will have a more efficient screen-based process for exchanging stocks. The NASD also envisions links to markets worldwide and is in talks with Deutsche Borse, the German stock exchange, to explore transatlantic opportunities.

On Amex, the development and integration of a new electronic order facility, or "book" is already under way. Using the electronic system, brokers anywhere in the world will be able to send orders to Amex for immediate execution - or place orders in the central electronic book.

With the Nasdaq-Amex Market Group, both Nasdaq and Amex listed companies have access to two Web-based products: Nasdaq-Amex.com (for investors) and Nasdaq-Amex Online (for companies). The Nasdaq-Amex Web site, at www.nasdaq-amex.com, averages 12 million hits a day.

All these enhancements take heed of the fact that US based on-line investing accounts now total more than three million - with 14 million accounts predicted by 2002. Global investment in US securities is following suit, with foreign purchases tripling from $4 trillion in 1990 to $12.7 trillion in 1997.