Salvatore Sodano, the chairman of the American Stock Exchange, informed 700 securities firms earlier this month that the exchange was eliminating fees on some of its premier products, including the NASDAQ 100 Index Shares, known simply as the Q in the canyons of Lower Manhattan.
Sodano's offer was not an act of charity but rather a counterattack.
He was responding to the New York Stock Exchange, which tomorrow will begin trading three of the AMEX's most successful products -- exchange-traded funds based on the NASDAQ 100, the Standard & Poor's 500-stock index and the Dow Jones Industrial Average.
Exchange-traded funds, securities built from baskets of stocks grouped by a particular sector or index, have become immensely popular trading vehicles for large and small investments alike, accounting for much of the recent success of the AMEX.
The most widely traded of all the funds is the Q, which uses the ticker symbol QQQ and is sometimes called the Cube or Qube. Its shares mimic the performance of the NASDAQ 100, perhaps the most important technology stock index in the US.
Diversification and lower fees
Since the Q's debut in March 1999, investors have pumped more than US$24 billion into the fund. Its daily volume of more than 60 million shares is driven by the entire universe of traders, including hedge funds, mutual funds and individual investors seeking exposure to the technology sector. Investors have embraced exchange-traded funds, or ETFs, because they offer the diversification and low fees of traditional indexed mutual funds yet can be traded throughout the day.
In addition, options based on the funds are used widely, and the funds can be sold short, a strategy that lets investors profit when share prices fall.
Demand for exchange-traded funds has transformed the securities business.
The Qs alone accounted for 70.7 percent of the 52 million shares the AMEX traded daily in 2000, on average. This year through June, they accounted for 53.2 percent of the average daily volume of 72 million shares. The exchange received US$0.60 to US$0.73 on most shares traded, fees that have fallen by the wayside as competition looms from the Big Board.
A total of 106 funds trade on major exchanges, including spiders, as those that track the S&P 500 are known, and those tracking sectors like chemicals or real estate or national stock indexes from major markets like Japan to smaller ones like Belgium.
Still, the New York Stock Exchange expects to start new funds of its own once it has seized a share of trading of the current funds. The AMEX is also planning new funds and has started AMEX ETF Services Ltd, a consultant for companies seeking to build funds, Sodano said.
The exchange will seek patent protection on its next round of offerings, he said.
Competition is rampant. Regional stock exchanges in Chicago, Boston and Cincinnati and electronic communications networks such as Archipelago and Island trade some of the larger exchange-traded funds.
"The challenge is to take order flow and get the opportunity to build a new business, said Catherine Kinney, the head of client services at the Big Board.
Looking for liquidity
The AMEX, owned by the National Association of Securities Dealers, which also owns the NASDAQ, started the business in 1993, when it began listing the S&P 500 fund.
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