Amex: The Indexes Exchange?

April 01, 1999

It's beginning to look like one. The first index-based unit investment trusts to trade on the American Stock Exchange were the Standard & Poor's Depository Receipts, or SPDRs, in 1993. For a long time they were the only such product, but more recently there has been an almost overwhelming increase in the number and volume of what the Amex refers to as 'index shares.' They have radically transformed the once tired old Amex.

SPDRs have been joined by MidCap SPDRs, MSCI WEBS, DIAMONDS, Sector SPDRs and Nasdaq 100 shares. According to Clifford Weber, vice president of product development at the Amex, on any given day such index shares can be anywhere from one-half to two-thirds of the Amex's total volume.

'Index shares make up a significant portion of our activity,' understates Weber. From the beginning of the year through June, trading in index shares on the Amex averaged 15.4 million shares a day, he said. That translates into 48% of the Amex's average total daily volume over the six-month period.

By the standards of Nathan Most, the former senior vice president of the Amex who developed the original SPDRs (see article p. 36), the fact that the SPDRs have essentially doubled the Amex's volume means that his products have more than fulfilled their purpose. '

One of the reasons I started down the road to developing SPDRs and similar products was that the Amex was not having any meaningful volume increases. It had been at about 20 million shares for 15 years,' Most said. Most cited a lack of new listings as the root of the problem.

'I said if the Amex can't get new meaningful listings, then let's develop our own products,' he said. 'My main purpose was to lift the Amex's volume.'

Most is currently the president and chairman of the board of the WEBS Index Fund, which was organized and set up by Morgan Stanley. He is also the creator of the MidCap SPDR and helped to develop the original WEBS for Morgan Stanley. It might be possible to describe him as the father of the index share.

Barclays Global Investors' recent filing with the SEC to create index funds based on approximately 45 indexes indicates that there may be many more of these kinds of products coming in the future.

It's a fairly shocking number of filings that includes indexes from most of the major index providers in the United States, such as Russell, Standard & Poor's and Dow Jones. The indexes run the gamut from the S&P/TSE 60 to various Dow Jones sectors.

The products based on these indexes, however, will not be ordinary index funds (which are also proliferating, see story on following pages), but exchange traded funds.

This is not new territory for BGI. It is also the investment manager behind the World Equity Benchmark Shares (WEBS) which are exchange traded funds that began trading on the Amex three years ago. The WEBS track MSCI indexes for different countries; there are over 15 WEBS products currently traded.

BGI is hoping to release its new exchange-traded products in the first quarter of 2000, said Deborah Larson, a public relations specialist for BGI.

What they mean for the Amex, which has continued to lose stock listings to the NYSE, remains to be seen, of course, but Weber says, 'We think these products are the way of growth.' They obviously lay the groundwork for a possibly large expansion of Amex volume. Most agrees. 'I think there is definite interest in (index shares) throughout the world,' he said. 'I think there will be a significant increase in the number of products.'

Index shares are a continuation of the indexing trend begun in the 1970s by Burton Malkiel's book 'ARandom Walk,' Most explained. While it took quite a while for the movement to reach fruition, Most thinks investors finally came to see that indexing is cheaper, safer and often more profitable than direct investment.

He also allowed the possibility that the Amex might eventually deal solely in index shares, though he does not necessarily believe that is a desirable prospect. 'These products are not limited to the Amex. Any exchange could pick this up,' he said. Most added that he thought the Amex's specialist system, different from Nasdaq's market maker system, makes the Amex uniquely suitable for the listing of certain more ordinary common stocks.

Nevertheless, Amex is suddenly by far the leading exchange for trading index shares in the world. Though there are index futures and options aplenty traded elsewhere, no-one even remotely approaches its market share in what is seen as an increasingly important investment product with a bright future - one that is giving the Amex a big, new lease on life.


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