American Stock Exchange (AMEX)

What it is:

The American Stock Exchange (AMEX) is a stock and options exchange in New York. 

How it works/Example:

Though not as large as the New York Stock Exchange (NYSE), the AMEX is a large exchange that serves as a market for equities, a variety of options and other derivatives, American Depository Receipts (ADRs), exchange-traded funds (ETFs), and other financial instruments. The first ETFs traded on the AMEX in 1993.

The AMEX was called the New York Curb Market until 1953 because it started on the street near the NYSE. It was originally established to trade stocks that did not meet the NYSE's stringent listing requirements. In 1998, the National Association of Securities Dealers (NASD) purchased the AMEX and operates it separately from its other exchange, the Nasdaq.

Trading on the AMEX
When an investor wishes to buy or sell a security listed on the AMEX, he or she places a trade by calling her broker or going to her online trading account -- the same as trading on the NYSE or Nasdaq. The order goes to a broker, who can get the order to the exchange several ways--through a regional exchange, electronic communications network, or directly to the AMEX. Either way, the order eventually reaches the floor of the AMEX where floor brokers and specialists handle transactions.

Floor Brokers

Floor brokers execute buy and sell orders on behalf of their clients or the firms they work for. If you wanted to sell some shares of Company XYZ, for example, you might call your broker down the streetThe definition of AMEX on InvestingAnswers and place a sell order. Your broker might in turn route the order to one of his firm's floor brokers who are actually on the floor of the exchange. The floor broker approaches the Company XYZ specialist (see below) and executes the trade. Some floor brokers are independent, meaning that they are not employed by any brokerage firm, but provide services to brokerage firms (i.e., they work for themselves). In either case, floor brokers are the people doing most of the shouting on the trading floor.

Being a floor broker requires owning a seat on the AMEX. A seat allows a person to trade on the floor of the exchange, either as an agent for someone else or for their own personal accounts (in which case, the person is called a floor trader).

Specialists

Although most buy and sell orders are matched electronically, specialists also match up brokers' buy and sell orders, and each specialist spirsalizes in certain listed securities.

A specialist has four roles. First, he is the principal; that is, he is the primary party to a transaction and his customers' interests come before his own. He must be willing to buy and sell out of his own inventory to steady the market if there is a buying frenzy or a huge sell-off. Second, he is an agent; that is he places orders on behalf of his clients and ensures that they get the best price as fast as possible. Third, he is a catalyst; that is, he reports the prices of his securities in a timely manner and he sets the opening bid prices of his securities every morning based on supply and demand. Fourth, the specialist is an auctioneer; that is, he must disclose what the best buying and selling prices are and ensure that orders are transacted properly.

The AMEX does not employ specialists. Rather, each specialist works for one of a handful of companies.

AMEX Regulation

The AMEX is registered as a self-regulatory organization with the Securities and Exchange Commission (SEC), the SEC and a variety of federal laws require the AMEX to have rules that prevent fraud, manipulative practices, and ensure fair trading activity. The AMEX also must enforce its rules, SEC regulations, and any other laws that affect its business or trading activity.

Why it Matters:

In general, the AMEX has a reputation for having more liberal listing requirements than the NYSE. For example, initial public offerings must have a market capitalization of at least $60 million to be considered for listing by the NYSE; the AMEX only requires $3 million to $20 million (the AMEX has four sets of listing standards). As a result, the AMEX is often home for smaller issuers and more unique securities than other exchanges.

Best execution refers to the imperative that a broker, market maker, or other agent acting on behalf of an investor is obligated to execute the investor's order in a way that is most advantageous to the investor rather than the agent.