Subject: Exchanges - Members and Seats on AMEX

Last-Revised: 2 Aug 1999
Contributed-By: Jon Feins (proclm at kear.tdsnet.com), J. Bouvrie (fnux at thetasys.com)

Most exchanges allow you to buy seats (become a member) without being a registered securities dealer. You would not, however, be allowed to use the seat to transact business on that exchange. You would be allowed to lease out the seat and would thus own the seat as an investment.

Here's the disclaimer right up front: I have been negotiating seat leases for investors for the last 5 years. My expertise is mainly on the American Stock Exchange (AMEX) and New York Stock Exchange (NYSE). I spent 5 years on the floor of the NYSE and NYFE before going to the AMEX for 3 years as a floor broker/trader.

Anyone can purchase a seat on a major stock exchange as an investment and lease it to either a floor trader, specialist, or floor broker. Most people do not realize that they can do this without any background and without taking a test. You do not even have to be a registered rep. or registered with the SEC. The return is between 12%-20% of the current seat prices depending on the supply and demand at the time the lease is negotiated.

The AMEX currently has a very high demand for leases. The last leases I negotiated were at a variable rate of 1 5/8%/month (19.5% per year) of the average seat sales as posted by the exchange in their monthly

bulletin. AMEX seats are currently quoted $565,000/bid - $690,000/offer. The last contracted sale was for $660,000 on 15 July 1999. You can call the AMEX's 24 hour market line 877-AMEXSEAT to hear the latest quote. Amex seats can be put in an IRA or a Keogh Plan making the investment even more appealing.

In late 1996, the AMEX approved a rule allowing individuals to own more than one seat. Since then seats have been slowly going up. Call the AMEX market line (212-306-2243) for the current price.

There are only 661 regular seats and 203 Option Principal Memberships (OPM) on the AMEX. Every Specialist and Floor Broker needs a regular membership to do business. A Trader can use either an OPM or a regular seat. If a trader wants to trade listed AMEX stocks (s)he needs to use a regular seat.

When applying for an AMEX membership you need to fill out an application which consists of:

  1. Information about the person applying for membership.
  2. Authorization form for orally bidding for or offering the membership.
  3. Personal financial statement.
  4. Completed U-4 for for background check along with a fingerprint form.
  5. Acknowledgement of non-eligibility of gratuity fund form.

After completing the paperwork a non-refundable application fee of $500 must be submitted to the exchange. About a week after processing your application you will be able to buy/bid for a seat. Other costs involved with the purchase of a seat on the AMEX include a one time transfer fee of $2,500 (If/when you sell the seat the buyer of your seat has to pay this transfer fee). When the seat is leased out a transfer fee of $1,500 is paid by the lessee. Your total costs are:

  1. Purchase price of the seat.
  2. $500 application fee.
  3. One-time $2,500 transfer fee.
  4. $24.50 Finger print processing fee.

When you sell the seat there are no costs, and the exchange will send you a check for the full selling price which they collect from the buyer of your seat.

In the deals that I broker, once an investor has purchased the seat I find a lessee. All my leases require a letter of indemnity from the clearing house of the lessee. A clearing house (Merrill Lynch, Paine Webber, Bear Stearns etc...) is used by the lessee to clear the trades they execute. Whether the lessee is a trader, specialist or a floor broker they must use a clearing house who charges them commissions for each of their trades and is liable for their losses. If a person who is worth $100,000 dollars loses $500,000 dollars the clearing house is liable for the losses of the other $400,000. The letter of indemnity from the clearing house states that they do not view the seat as collateral. In addition to this letter of indemnity, I only lease to people who are employed by a well-capitalized firm which also signs the lease as a guarantor. My leases have attorney reviewed modifications which further protect the interests of the owner of the seat. Just like a person who rents a house needs to be careful of who they lease to, so does the lessor of a seat.

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