Think the NYSE Is Bad?

Carp about the pay garnered by Dick Grasso and other top folks at the New York Stock Exchange during their tenures at the largest, most important exchange in the world. Grouse about the specialist system and alleged trading improprieties, the sweetheart deals, the fact that Grasso's $140 million-plus compensation package was based less on the success of the NYSE as a quasi-official regulator, and much, much more on its success as a money making machine.

But what doesn't seem to be in question here is that, under Grasso, the NYSE was spectacularly successful. It withstood the biggest competitive challenge since folks gathered beneath the buttonwood tree in the 18th Century -- the ascendant NASDAQ with its technological, floorless network and its reputation as the exchange for companies that will mean something tomorrow.

Playing second fiddle
In the 1990s there was no clearer sign of the rise of the Nasdaq than the refusal of tech giants Microsoft (Nasdaq: MSFT  ) , Intel (Nasdaq: INTC  ) and Cisco (Nasdaq: CSCO  ) to make the move. No longer was the Nasdaq considered a minor league organization, a finishing school for companies on their way to the Show. In 2000, when Aeroflex (Nasdaq: ARXX  ) became the first company since 1939 to voluntarily leave the NYSE to list elsewhere, some wags took it as the beginning of the end of NYSE dominance.

There should be no doubt that Grasso was instrumental in turning back the tide for the NYSE. Without defending his pay package, I can make several arguments that his compensation came as a result of some outstanding leadership decisions and actions.

Notice which of the three major exchanges we're not discussing here? The American Stock Exchange. What once was firmly ensconced as the #2 exchange, its composite numbers announced alongside those of the Dow Jones Industrials, now languishes in near-irrelevance. The AmEx currently lists fewer than 1,000 companies, the preponderance of which trade at $3 or less and under $100 million in market cap -- companies "listed" only by the graces of a desperate AMEX not kicking them to the curb in contravention of its listing requirements. The AMEX's saving graces are its exchange-traded funds, the SPDR (AMEX: SPY  ) and Nasdaq 100 Trust (AMEX: QQQ  ) in particular. Its options trading arm has suffered substantial deterioration.

And then there were two
The AMEX isn't even its own entity anymore, having been bought by the Nasdaq five years ago. And now the National Association of Securities Dealers wants to sell, and private equity firm GTCR has stepped to the plate and announced its willingness to buy. List price for the once great AMEX is $110 million, $30 million less than Grasso's compensation package. That's a disgrace.

This week GTCR announced that it would reassess its offer to buy the AMEX, based on some new information it has received. What could possibly be so bad as to make $110 million for a major exchange unpalatable? It turns out that the CEO, Salvatore Sodano, has a compensation package that might cause Grasso to blush.

Under the terms of an agreement Sodano negotiated with previous Nasdaq chief Frank Zarb, Sodano received $4.4 million in 2002, and more importantly, would be eligible for a $22 million payday should AMEX be sold or merged. That's a full one-fifth of the value assigned to the entire exchange by GTCR. If Grasso's pay package was met with anger, Sodano's elicited disbelief. The NYSE at a minimum could be characterized as a successful business enterprise, AMEX gets low marks both as a regulator and a business.

Granted, Sodano didn't hold the reins during the AMEX decline -- he took over only in 1999, after the exchange had already become part of Nasdaq. But there has been scant improvement in the lot of the AMEX under Sodano's reign, and signs point to a laxity in enforcing even basic listing requirements, further diluting shareholder confidence in the exchange's standards. A December 2001 letter from Rep. John Dingell noted that of the 86 newest companies listed, 29 did not meet its minimum listing requirements on the day they opened for trading.

It just gets worse
More than 160 companies do not meet the AMEX minimum share price of $3 per share alone, and haven't for years in some cases. PLC (AMEX: PLC  ) last hit the minimum in February 2000, Xcelera (AMEX: XLA  ) in early 2002. Picadilly Cafeterias (AMEX: PIC  ) currently sells at $0.21 per share and has a market cap of $2.4 million. That's not just microcap, that's nanocap, and it has no business being on any one of the three big boards.

Things are not much better on the business front. A seat on the AMEX has dropped in price by 70% since 2000, and the company has responded by raising prices specialists pay on exchange traded funds. Add to this an SEC probe on the way AMEX handled its options orders, and you have a great big mess.

There are good companies listed on the AMEX. Given the exchange's willingness to ignore its own listing requirements for the sake of keeping more stocks on the board, I'd chalk that up to historical accident rather than anything done by AMEX management in the past several years. Given this policy to ignore its own rules, investors should take cold comfort in any company's status as an AMEX-listed company. That's no endorsement at all.

Fool on!
Bill Mann, TMFOtter on the Fool Discussion Boards

Bill Mann's offers to take his sock drawer public were sadly rejected, even by AMEX. Bill owns none of the companies mentioned in this article. For smaller companies that we do like, please consider taking a free trial of Motley Fool Hidden Gems, where Bill is next month's guest analyst. The Fool has a disclosure policy. To comment or to join Bill's email list, please respond tobillm@fool.com.


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