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Exchanges Gone Wild


Does this wave make any sense?


What if you pay property taxes quarter after quarter, year after year, to your municipality? And what if instead of using that money to improve roads and schools, et. al., your town went "public" and some of that money simply went to some shareholder somewhere? You would feel pretty hosed, no?

Of course this is an imperfect analogy, but it is a similar principle to what is going on in the rush of every exchange in the world to morph from non-profit quasi-public institutions to hyper-growth IPO's and publicly traded stocks. All those commissions you pay on each trade? They used to go to offset the expense of running an exchange, as well as capital improvements, mostly in constantly updating the technology. Now? Well, let's just say they will have to make some concessions to new masters, the "beat by a penny" crowd.

Time was when the value of a seat on an exchange was based on the money one could earn as a member. And that was reflected pretty purely in the monthly lease price. Seat owners were generally investors willing to risk capital in order to generate a decent return in the form of lease payments.

Today? There is a total disconnect between sale and lease prices. Floor business on the AMEX for example is troubled, and has been for a number of years. You can lease a seat easily, and at $350-$400 per month or so, depending on the duration. The sale market, however, has exploded in recent months, as a seat just changed hands for $175,000.

Now do the math, the lease return is microscopic, if you can get ahead of all the other lessors who are on the board.

Of course the rationale is that seat ownership now has little to do with floor membership as a business. Rather, it is basically a share of stock in the AMEX itself and their ability to turn a profit. Or rather, a speculation on what someone else will pay for the AMEX profit-generation capabilities, either in the form of an IPO or a takeover from another exchange.

Is this capitalism? Yes, but it was capitalism in the old system too. Exchanges invested in technology and capital improvements at the behest of their memberships. It was move forward, or perish.

So for now, we all overpay per transaction. But what about in some unannounced bear market somewhere down the line, will investors feel so sanguine? I suspect not. The same way in 2002, investors started caring about Wall Street research that was more stenography than anything else, I imagine these issues will crop up.

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