PCX Seat Lease Market Collapses
Wall Street Letter
03/19/02
Raul Gallegos
Seat lease prices at the Pacific Exchange can't fall any lower--they now go for zero dollars. An oversupply of unused seats and a renewed fee imposed on memberships has forced many PCX seat owners to give away leases during past weeks. In return, lessees usually agree to pay the $750 monthly dues per seat the Exchange reimposed on seat owners at the beginning of the year, seat lessors say. "This is outrageous. There's simply too many seats," says Abby Fox, who owns one seat which she has already agreed to lease for free starting in April as a way to avoid paying the monthly dues. Dale Carlson, spokesman for the PCX, explained that there are a number of factors that contribute to the decline in seat prices, including decimalization, universal multiple trading, the collapse of the Nasdaq Stock Market, and the decline in overall market volatility.
Beginning in January, the exchange reinstated the payment of dues for all members regardless of whether their seats were being leased or not. Fees on inactive seats were waived for 18 months as part of the demutualization transition, Carlson explained.
As exchanges feel the economic pinch, the PCX is seeking ways to cover its operating costs. Seat prices at the exchange have declined dramatically since 1998 when seats sold for as high as $500,000. At some point leases went above $10,000 a month, lessors say. Now seats are selling for $40,000 and leases have touched rock bottom. A group of frustrated seat owners have recently threatened to take over the exchange to try and rectify the undervalued seat prices (WSL, 2/25).
In the past few weeks, some owners have signed lease agreements that require the leasee to pay as little as half the dues, or $325 a month. Seat owners estimate that approximately 100 seats are vacant, which pushes leases down. Many decry the exchange's unwillingness to purchase seats so as to raise the prices. Meanwhile, owners have to make do with what they can. Some owners have even decided to sell their seats but there are few takers. Dan Pecoraro, a retired floor broker, decided to sell all five of his seats in December. "I saw this coming," said Pecoraro. "A cannibalization of the lease rates was bound to happen. You end up eating your foot to save the rest of your body." Other owners consulted agree that the phenomenon is affecting the entire lease market.
Still, other owners caution against selling seats, arguing that they maintain hidden value. The industry as a whole is going through a slump period that cannot be blamed on the exchange leaders only, says Sheldon Cohen, seat owner and advisor to the PCX board. When Archipelago ECN goes public in two years, seats values could rise because the PCX owns approximately 5% of Archipelago.
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