Owning seats on stock and derivatives exchanges has long been a necessary evil on Wall Street. To trade for clients or for themselves, brokerages had to become members of what were essentially private clubs, such as the New York Stock Exchange and the Chicago Mercantile Exchange. These “seats” -- the chairs disappeared long ago, but the name stuck -- also conferred partial ownership. Rarely, however, did members expect these stakes to make them rich: Real profits came from the trading privileges.
Lately, the old order has been turned on its head. Everyone from longtime floor traders to hedge fund managers is snapping up seats as investments. The buying frenzy is so intense that seats on some exchanges have doubled or tripled in price in mere months. Some observers see a parallel to the dot-com boom.
“The market is getting very crowded,” says Jim Ginsburg, a former trader in the CME’s S&P 500 futures pit who now buys and sells exchange seats through Vernon & Park, a firm he founded in Chicago. It wasn’t long ago that most seat prices were in a deep trough. Trading volumes plunged during the bear market of 2000'02, depressing trading profits. At the same time, upstart electronic trading systems threatened to siphon business from open-outcry markets like the NYSE and the CME.
Since then, however, floor-based markets have embraced electronic trading and begun demutualizing -- becoming shareholder-owned, for-profit companies -- to better compete.
Perhaps no single event has drawn more investor attention to exchange seats than the CME’s demutualization and December 2002 IPO, the first by a U.S. exchange. Its shares have appreciated a whopping 765 percent since then, driven in large part by a migration of volume from its trading floor to its more efficient electronic system, Globex.
The CME’s success has prompted other bourses, such as the Chicago Board of Trade and the New York Mercantile Exchange, to demutualize. (The CBOT’s planned IPO has been put on hold following a reported buyout overture from the CME.) And investors have rushed in. CBOT seats, now worth $2.25 million apiece, have more than doubled in a year and are up fivefold from two years ago. At the Nymex a seat sold on June 8 for a record $2.49 million, up 24 percent from the previous high last October and 126 percent more than the price two years ago.
Meanwhile, the ranks of U.S. stock markets have been thinned by mergers to two major players -- the NYSE and the Nasdaq Stock Market, both of which have automated trading systems and monopolylike market shares. Nasdaq became public following a 2002 spin-off by former parent NASD; the NYSE will soon be public as a result of its impending acquisition of electronic market operator Archipelago Holdings.
News of that deal, which calls for holders of each of the Big Board’s 1,366 seats to receive both cash and shares in the merged company in exchange for their memberships, has sent the price of seats up 63 percent, to $2.6 million -- just $50,000 shy of their 1999 high.
Sharp investors are trying to find the next big plays. In June, Merrill Lynch and hedge fund Citadel Investment Group each bought 10 percent of the recently demutualized Philadelphia Stock Exchange. That move has strategic implications for both firms, but it has also stoked the mania for seats.
Under last year’s demutualization each Philadelphia exchange seat was converted to 100 shares. In private trading supervised by the exchange, those shares have tripled, to $900 each, since April. Seats at the Chicago Board Options Exchange, a rival of the Philly bourse, have appreciated by 153 percent since January -- 30 percent in July alone -- to $750,000.
Hedge funds and speculators have been among the most active buyers. Even obscure markets like the Chicago Stock Exchange and the New York Board of Trade have drawn interest. Is this a bubble about to burst?
“The low-hanging fruit has been picked,” says seat-trader Ginsburg, who has begun to think about taking some profits. “Valuations are in a lot of cases higher than they should be. The people who are showing up now may be a bit late.”
