Amex Delistings Send Signal: Time to Raise Standards
The American Stock Exchange suddenly is talking tough about quality--as in the quality of the mostly small, often speculative companies whose stocks it lists.
In a surprise announcement last week, the New York-based Amex said it had begun delisting procedures against Conversion Industries of Pasadena and one of its affiliates, Beta Well Service.
Delistings by stock exchanges are rare enough, but the Amex’s decision is all the more remarkable because it is punitive in nature. Citing unspecified “disclosure” problems with Conversion and Beta, the Amex is essentially telling the companies it no longer wants their business. The exchange hasn’t delisted a company for cause since 1971.
What did Conversion and Beta do wrong? The Amex won’t say exactly, pending a hearing Monday at which Conversion and Beta will plead their cases. But the Amex’s new chairman, Richard F. Syron, makes it clear that the alleged failure of the companies to follow Amex rules involves serious infractions. Delisting is “not something done casually,” Syron said. “I did not come in and say, ‘Go find me two (companies) to hang.’ ”
The latter statement is a reference to Syron’s ascension to Amex’s top post on April 1, and subsequent Wall Street speculation that he wants to clean up the Amex’s image as a home for a lot of lousy little firms of questionable management.
To be sure, the Amex--whose roots as a formal stock exchange extend back to 1911--has plenty of legitimate stock listings, including entertainment giant Viacom, toy maker Hasbro and the New York Times Co. And the exchange has successfully carved an important niche for itself since 1975 as a leading stock options trader.
But the Amex, with 873 listed companies currently, has long struggled to compete with the vastly larger New York Stock Exchange (which has more than 2,300 companies) and the electronic Nasdaq Stock Market (with 4,600 companies). To stay in business, some Wall Streeters contend, the Amex has been virtually forced to accept a lot of chaff--marginal firms that couldn’t go elsewhere.
“I always get my best ideas on the Amex,” says one “short seller”--a professional trader who profits by betting on specific stocks to decline.
The 50-year-old Syron, who left the presidency of the Federal Reserve Bank of Boston to take the Amex post, argues that the exchange’s image is “a bum rap.” Nonetheless, he said, “we’ve got to change that image from the inside out.”
The inference is that the Amex needs to do a better job of policing itself, and perhaps must set higher internal standards for investor protection.
In the battle for business among the three principal stock markets, Syron notes, there are only two important competitive issues. One is service to the listed companies, meaning the trading liquidity offered and the quality and efficiency of the pricing mechanism for the stocks.
On that count, with the electronic Nasdaq market named Tuesday as the target of a federal probe into alleged broker price fixing, the Amex (and NYSE) “auction” systems--where a human “specialist” serves as a traffic cop for all trades--may get an automatic image boost.
The other key issue, Syron says, is fairness to the investor--the ability of the market operator to guard against the listing of companies that are less than honest, or outright frauds.
“Fairness has to do with what kind of risks you take with what kind of companies,” Syron said. Beyond some basic standards, he’s not interested in regulating the “business risk” of Amex stocks, he said. In other words, if a company is small and speculative, the business risk should be apparent. “That kind of risk is core to capitalism,” he notes.
But regulatory risk is another matter, Syron said. If a stock is listed on the Amex, its investors should be able to assume that the exchange holds the company to high standards of disclosure about the business and its progress, or lack thereof.
“We can have companies with business risk, but then we have to be extremely vigilant” about reducing regulatory risk, Syron said.
The question is, how tough can Syron afford to be in trying to change the Amex’s culture? As an ex-Fed official, he is expected to be more of a cop and less of a promoter than the previous chairman, former Congressman James Jones. But the Amex’s image problems predate Jones, extending back to the term of Arthur Levitt Jr. from 1978 to 1989.
Levitt, now chairman of the Securities and Exchange Commission, is a champion of investor protection today. Yet some Wall Streeters say Levitt could not raise the perceived quality of the Amex as a place to list a stock in the ‘80s. Hence, Jones’ entry in 1989 found the Amex starving for business, prompting Jones to focus heavily on attracting new listings--some of dubious quality.
Syron, by sanctioning two delistings this early in his term, seems to be signaling that he’s willing to give up quantity for quality. Speculators may not appreciate that, but true investors probably will.
