DAX index turns 25
July 1, 2013
Even the guy who came up with the index didn't really believe in its success. The German benchmark stock index DAX started out without anyone pinning huge expectations on it.
"No one thought the DAX would turn into such a big thing," former financial news editor Frank Mella from the "Börsen-Zeitung" business newspaper recalled. "First, it had to prove its worth against a number of other German indices."
It all began in 1987 when Mella's publisher asked him to create a new stock index. Shortly after, Mella came up with a 30-page document that would change the stock exchange community in Germany.
"I thought I'd done my bit by handing in my blueprint, but the publisher liked my ideas very much," Mella said.
First steps
Mella says there was utter turmoil before the DAX came into being. "Malicious gossip in London had it that the Germans had only few stocks to trade, but no shortage of indices," he said. He talks about a total of 11 indices, among them one compiled by the "Börsen-Zeitung", German daily "FAZ" and the Commerzbank. They were all compiled independently with the help of methods that seem old-fashioned by modern standards.
"The index of the Börsen-Zeitung was compiled with a programmable table calculator," Mella said. "Every half hour an employee fed the values of those 30 stocks of the Frankfurt Exchange into the calculator which came up with an index value four times a day."
Nowadays, mainframe computers calculate the DAX in a very precise fashion down to a second. Since such computers have been put in place, the Frankfurt Stock Exchange is almost completely deserted. Stock brokers are few and far between, with journalists and visitors taking over.
"Today, anyone with an Internet connection can engage in stock trading activities," said Fidel Helmer, an advisor to the Hauck und Aufhäuser private banking group. The 66-year-old used to be a chief stock trader. He joined the exchange in 1970 which has become his second home ever since.
"My wife wouldn't like me to be home all day long," he said. "I'm much too young for that anyway, and I still have fun doing what I do."
New concept for Frankfurt
The DAX started out with 1163 points back on July 1, 1988. If you look at the board today, you quickly realize that the index must have gone up most of the time in its 25-year history. And that was the visionary intention of its creator.
At first glance, the idea behind it seemed a bit crazy, but Mella wanted to give it a go. While visiting US futures exchanges, he thought of applying forward transaction mechanisms to stock indices. "That was a completely new concept for Frankfurt," he said.
In other words, the DAX enabled investors to trade in futures and options - that is to allow them to speculate on the future development of the index. That meant the DAX had been more than just a pure performance index right from the start.
Strict rules apply
The DAX lists 30 German companies, a cross section of the domestic economy. The firms have to undergo regular checks, meaning some can be chucked out of the index, while others may join instead. The list of accession criteria is long. The company in question has to be listed in the so-called Prime Standard where very strict transparency rules apply. Its shares have to traded in the Xetra electronic system. Similarly important factors are market capitalization and turnover.
But can those 30 firms really claim to be representative for the whole economy? "I remember a former central bank president saying the DAX is not representative, and he's most likely right," Mella said. He points out that in calculating a nation's gross domestic product (GDP), parameters are part of the equation which are not represented in the DAX, such as trade volumes, crafts, agriculture and other factors.
"What you can say is that the DAX is representative for the German stock exchange as such as it deals with 60 percent of overall market capitalization and almost 80 percent of stock trading turnover," Mella explained.
Ten years ago, he withdrew from the daily dealings at the stock exchange. But he hasn't lost sight of the DAX - he follows its development on a monitor at home.