The American Stock Exchange, or AMEX, is the 3rd biggest exchange by volume in the United States. The AMEX is headquartered in New York City, and currently handles approximately 10% of all the securities traded in America.
While the AMEX was originally envisioned as a competitor to the dominant NYSE in American equity trading, it has since transformed into an alternate exchange for small and medium capitalization equities, exchange-traded funds (ETFs) and index-linked derivatives.
AMEX Auction System
The defining feature of the operation of the AMEX is its auction-based trading system. This means that traders are physically located in the exchange, and all transactions are performed verbally between traders. By contrast, most major equity exchanges are market-makers, where buyers and sellers interact electronically, with the exchange acting as the intermediary.
American Stock Exchange Securities
The AMEX has grown to specialize in the trading of small and medium capitalization stocks, exchange-traded funds and options linked to equity and other indices. The AMEX acted as a pioneer for the inclusion of both ETFs and index-linked options, both of which are now common features on many major exchanges. The AMEX continues to be an industry-leader in the trading of these more obscure securities, and many traders prefer to use the AMEX when trading in these securities instead of larger and less focused major exchanges.
Trading on the AMEX
Traders who wish to use the American Stock Exchange place an order with their broker, which is then passed on, often through other brokerage intermediaries, to the actual trading specialist on the floor of the AMEX. The original trade is usually bundled with a number of other trades, allowing the floor specialist to trade in larger blocks of securities.
AMEX and Listing Requirements
The AMEX is a popular destination for many small and medium capitalization companies because of the lower listing requirements for equities. Smaller companies often have a harder time meeting compliance requirements or find the cost of listing approval to be prohibitive. The lower requirements of the AMEX make it a more popular destination as it allows more companies to become listed at a lower general cost.
Day Trading and the AMEX
The American Stock Exchange is a great example of a more obscure venue where day traders can employ a number of advantages that would be less pronounced in major markets.
The focus on small and medium capitalization stocks allows the day trader to gain competitive insights into companies that are not covered, or covered less extensively, by major banks and other sources of regular equity analysis. Day traders are more likely to find undervalued or overvalued shares on the AMEX than they are on major exchanges.
The auction system employed by the AMEX means that there is a much lower influence of high-frequency trading techniques (HFT) on the exchange. The lack of HFT means that the AMEX has many more inefficiencies and arbitrage opportunities that are the bread and butter of many day trading strategies. Exchanges with electronic trading are likely to have most if not all of these opportunities quickly exploited by highly sophisticated trading programs, while dedicated day traders can still find opportunities to exploit on the AMEX.
The focus on index-related derivatives and exchange-traded funds presents the opportunity for the development of sophisticated trading positions that would not be possible without large trading volumes of these more obscure securities. Sophisticated derivative-based strategies are some of the best ways for day traders to produce reliable returns that ignore general market trends.
The AMEX is an often overlooked American exchange that offers a number of unique opportunities to day traders who are willing to look outside of the standard equity and derivatives based strategies, particularly by taking advantage of the exchange’s rare auction-based trading system.
By playing to the unique features of the AMEX as strengths, day traders can take advantage of the rare combination of more obscure and specialized securities with large trading volumes to enact day trading strategies that would not work on major exchanges.
However, it is critical that day traders first familiarize themselves with the operation of actual trades on the AMEX, as the lack of a market-making electronic trading system does take some time to become accustomed to.