Deutsche Börse AG
Deutsche Börse AG
Neue Börsenstraße 1
Web site: http://www.deutsche-boerse.com
Sales: EUR 1.1 billion (2002)
Stock Exchanges: Frankfurt
Ticker Symbol: DB1
NAIC: 523210 Securities and Commodity Exchanges
Deutsche Börse AG operates a range of trading institutions out of Frankfurt, Germany's financial hub. It vies with the London Stock Exchange and Euronext, a French-Belgian-Dutch exchange, for control of Europe's capital markets. Deutsche Börse offers trading in cash securities on the Frankfurt Stock Exchange and trading in futures and options through the Eurex market, which it co-owns with the Swiss exchange. The company is notable for its use of technology, in particular the electronic trading platform Xetra, to achieve efficient trading. Deutsche Börse also offers settlement and clearing services through its subsidiary Clearstream and market information through the DAX index as well as through private information services for professional investors. Deutsche Börse's broad umbrella of services and vertically integrated structure allow it to play a part in nearly all stages of the trading process.
CEO Werner Seifert is credited with transforming the Frankfurt Exchange from a provincial market to a major player on the European stage. The Frankfurt Exchange most recently rose to prominence in the mid-1990s through a dynamic program of technological improvements, mergers, and partnerships. But Frankfurt's status as an international financial center has waxed and waned many times over the centuries since the exchange was founded in the 16th century.
From Medieval Market to Capital Source for Europe's Dynasties
Frankfurt has a long history as a center for trading and commerce. Emperor Ludwig the German gave the city the right to hold an annual fair back in the mid-ninth century, and after 1330 the city was allowed to hold a second fair in the spring as well. Frankfurt grew in importance as a regional center for trading in various commodities. In the early 16th century Martin Luther referred to the city as the "silver and gold hole" of the German Empire. Protestant merchants from France and the Netherlands came to Frankfurt to escape religious persecution and contributed to the establishment of wholesale commerce and banking institutions. People from all over Europe exchanged goods and money in Frankfurt. However, there was little trading in credit or currency beyond what was immediately related to commodity exchange.
The official founding of the Frankfurt Stock Exchange is generally considered to have occurred in 1585 when a group of merchants met at the fair and agreed on uniform exchange rates for the many different kinds of coins that came to the fair from surrounding regions. Up until that meeting, currency exchange was quite chaotic: exchange rates fluctuated arbitrarily and swindling and usury were common. Now that rates were agreed upon, trading in bills of exchange began as an activity separate from commodity trading.
For over a century, merchants met to set rates in an open field in front of the Frankfurt town hall. In 1694, the meetings moved to the Großer Braunfels building at Liebfrauenberg, one of the most important and spacious buildings in the city. The Exchange Rules and Regulations were enacted in 1682, creating an official structure for exchange activities.
Near the end of the 17th century, occasional trading in promissory notes and bonds began and non-merchants were now able to take part in exchange activities. In 1707 the directors of the Frankfurt Stock Exchange met and formed the Deputies of the Merchants as the official body representing trade in the city. In 1808 the Deputies were formed into the Chamber of Commerce and the stock exchange came under their umbrella as a public sector institution.
Trading in government bonds developed in the last decades of the 18th century. In 1779 the German Emperor in Vienna needed to borrow an unprecedented sum denominated in the millions. Bankhaus Bethmann arranged the loan by issuing fractional bonds to many small lenders, who then gained the right to share in some of the regular interest earnings. It soon became common to arrange large bond issues in Frankfurt on the precedent set by Bankhaus Bethmann.
Bankhaus Rothschild in Frankfurt became the leading capital intermediary for the European dynasties in the early 19th century. Frankfurt rivaled London and Paris as a center for international capital. In 1843 the exchange outgrew its meeting space and built a new headquarters, the Alte Börse or Old Stock Exchange, on the Paulsplatz. Before long, this building became cramped as well, so in 1879 the Exchange moved to a prestigious new building, the Neue Börse or New Stock Exchange.
With the advent of the Industrial Revolution, more and more companies realized it made sense to finance costly projects by issuing shares. The first company share traded in Frankfurt was a participating certificate in the Austrian National Bank issued in 1820. In general, however, Frankfurt shied away from share trading and remained involved mainly with secure government bonds and funds. While other European exchanges welcomed stock corporations, Frankfurt gained the reputation of "solid Frankfurt" and set the standard for both foreign and domestic bonds. The exchange expanded enormously in the mid-19th century. Frankfurt listed many U.S. bonds during the American Civil War and contributed significantly to the financing of the Union cause.
Frankfurt finally recognized the importance of share trading in the later 19th century. During the "Gründerjahre" boom of 1870–74 about 860 stock corporations were founded in Prussia alone. Meanwhile, Berlin had just become the capital of the new German Empire and was using its political importance to steal some of Frankfurt's financial clout. Frankfurt put up a fight, relying on its strong international contacts, but the city's financial leaders finally conceded that the exchange needed to move beyond its focus on bonds and government securities. Frankfurt began campaigning to attract industry share listings and became a true stock exchange. The 1896 Stock Exchange Act established a uniform organization for Germany's exchanges, of which there were 29. Frankfurt was the second most prominent exchange in Germany after Berlin.
World Wars and Reconstruction
World War I severely damaged Frankfurt's standing as an international capital center. Germans sold their foreign shares and invested almost all capital in domestic government bonds. By the end of the war, Frankfurt had lost most of its international connections. Activity rebounded somewhat during the 1920s, but the worldwide financial crisis came in 1930, bringing runaway inflation and huge asset losses.
In 1933 the Nazis took over and centralized the nation's economic policy. The Frankfurt Stock Exchange was merged with the Mannheim Stock Exchange and the number of exchanges nationwide was reduced from 21 to nine. Under the stringent Nazi economic regime, free trade was suffocated. The majority of capital assets was directed to benefit the war economy. Frankfurt played only a minor role in financial transactions. The Neue Börse building was damaged in an allied air raid in 1944 and meetings had to be held in the basement.
After the collapse of the Nazi regime in 1945, the exchange closed for a few months and reopened in September. The Neue Börse was rebuilt. Frankfurt gradually came to play a major role in postwar reconstruction. In 1956 Germans were allowed to buy foreign securities once again and Frankfurt could reestablish some international connections. The Frankfurt exchange provided much of the capital for the "economic miracle" that made the Federal Republic of Germany a world leader economically. The Berlin exchange played a mostly ceremonial role at this time because of its awkward political situation. Frankfurt and Düsseldorf hosted the country's leading exchanges.
Reforming a Conservative Market: 1980s
After World War II Frankfurt once again became home to the nation's leading banks and financial institutions. But Germany's conservative financial culture kept the Frankfurt Stock Exchange from gaining much notice internationally. Much of Germany's postwar reconstruction was financed through close partnerships between banks and companies. Afraid of hostile takeovers, most companies preferred to raise capital through bonds or bank loans rather than share issues. Investors, in turn, put their money largely into bonds and savings accounts with predictable yields. Banks were the largest shareholders in the majority of companies; small investors were rare. An oft-quoted statistic was that the average German family spent more money annually on flowers than on shares.
In 1982 less than 500 companies were publicly listed in Germany. The election of the center-right candidate Helmut Kohl as Chancellor in 1982 triggered a rise in the market on expectations that he would implement business-friendly policies. Seventy companies went public between 1983 and 1987 and the Frankfurt Stock Exchange experienced a bull market through about 1986. Still, the exchange lacked volume and diversity compared to New York, Tokyo, or London.
Our mission is to improve the efficiency of markets. Our objective is to become the preeminent exchange organization. We will provide access to the most attractive securities and derivatives markets. Being the only fully integrated exchange organization worldwide, we offer a full range of trading, clearing, settlement, custody, information and infrastructure services at lowest costs. We will organize new markets and thereby improve their liquidity. We will provide first-class services targeted at intermediaries and vendors, investors and issuers worldwide. We initiate and support improvements of the regulatory framework and are open for valuable partnerships.
To achieve these goals we build on our uniquely skilled professionals and the power and reliability of our fully integrated electronic systems. Thus, we create superior shareholder value.
By the mid-1980s financial leaders were taking a serious look at the need to rejuvenate share trading in Germany and win back the listings that were being lost to London and Paris. Trading in Germany remained confusing and expensive compared with other European exchanges. The eight regional German exchanges published different prices for the same shares. A stock market turnover tax made investing more expensive than in neighboring nations. The regulatory environment was simultaneously restrictive and permissive; government regulations limited the types of trades that could be carried out, companies were not required to disclose much financial information, and certain standard laws such as a prohibition on insider trading did not exist in Germany. Another drawback was that the exchange was only open for floor trading from 11:30 a.m. to 1:30 p.m. each day. Banks traded with each other after hours over the phone.
The Kohl regime responded to the concerns of financial reformers. In 1985 zero-coupon bonds and floating-rate notes were permitted. By 1987 foreign-owned banks were allowed to lead manage German bond issues and participate in government bond syndicates. The Federation of German Stock Exchanges, led by Rudiger von Rosen, was established in 1987 to represent the interests of the eight regional exchanges. The federation's efforts played a role in the abolition of the stock exchange turnover tax starting in 1991.
The Frankfurt Stock Exchange survived crashes in October and November 1987 and increased its status as the nation's leading market. It accounted for 70 percent of share turnover in Germany in mid-1988, up from 50 percent a year before. In 1988 the exchange introduced the DAX, a blue-chip index for about 30 companies. The DAX replaced the FAZ index, published by the newspaper Frankfurter Allgemeine Zeitung, as the standard tool for tracking the stock market.
A prominent voice for change was Rolf Breuer, a director at Deutsche Bank. He told the Economist in 1989, "our stock-exchange structure is primitive, old-fashioned and customer-averse." In particular, he asserted the need for an international options and futures market in Frankfurt. Trading in derivatives was traditionally viewed as a slightly disreputable activity in Germany and as a result trading in options was hemmed in by legal restrictions. But by January 1990 the necessary legal changes had been made and the Deutsche TerminBörse (DTB) opened. The DTB was a screen-based futures and options exchange. Critics said that the electronic system would not work in hectic market conditions, but the DTB successfully handled 34.8 million contracts in 1992, up from 6.8 million in its first year of operation.
The Frankfurt Stock Exchange also advanced in its use of technology. The IBIS system was introduced in April 1991. IBIS was a screen-based interbank system offering quick access to prices on the most heavily traded stocks. After a year IBIS accounted for about a third of turnover in the 30 most frequently traded stocks. "Finanzplatz Deutschland," the ideal of Germany as a financial center for a unified Europe, was gradually taking shape.
A Unified Exchange: 1992–97
In 1992 the German finance ministry presented a plan expressing support for a single unified stock exchange in Germany and for increased transparency and regulation. The unified exchange came closer to reality with the creation of Deutsche Börse on January 1, 1993. Deutsche Börse was a holding company for the Frankfurt Stock Exchange, the derivatives market Deutsche TerminBörse and the settlements organization Kassenverein. The seven regional German exchanges owned a 10 percent share in the company but also continued an independent existence. Frankfurt-based banks and brokers owned the majority of the new entity. Rolf Breuer became chairman and Rudiger von Rosen, former managing director of the Frankfurt Stock Exchange, was named CEO.
The establishment of Deutsche Börse set a pattern of vertical integration for the Frankfurt exchange. As Breuer said in the Financial Times in 1993, "Right from the beginning of the process of placing an order, to the end where the order is wound up, the client need only deal with one organization. The whole process has been brought under one roof—for derivatives as well as for securities—something you don't find in London, Paris or New York." Frankfurt was also a leader in terms of technological sophistication and efficiency: trades were settled within 48 hours compared with up to three weeks in London.
- Frankfurt merchants meet to establish uniform exchange rates.
- The Exchange Rules and Regulations are enacted, providing an official administration for the exchange.
- Bond trading develops when Bankhaus Bethmann arranges a loan for the Emperor.
- The Frankfurt exchange sells its first share in a stock corporation.
- The Frankfurt exchange builds its own headquarters, the Alte Börse.
- A new headquarters, the Neue Börse, is opened.
- The Nazis take power and Frankfurt's international financial connections are stifled.
- Germans are allowed to buy foreign securities again; Frankfurt helps finance postwar reconstruction.
- New legislation starts to make the Frankfurt exchange more efficient and more attractive to foreign investors.
- A German futures and options exchange, the Deutsche TerminBörse, is opened.
- Deutsche Börse is created as a holding company for the Frankfurt Stock Exchange and other entities; Werner Seifert becomes CEO.
- The Neuer Markt and the Xetra electronic trading system are introduced.
- The German and Swiss derivatives exchanges merge to form Eurex.
- A merger with the London stock exchange is announced but falls apart.
- Deutsche Börse completes an initial public offering.
- The Neuer Markt is shut down.
The exchange still faced its traditional chronic challenges, however: an underdeveloped investor culture in Germany and an inadequate regulatory regime that repulsed foreign investors. Breuer recruited a new CEO to bring a spirit of change to the Börse: Werner Seifert. Seifert was a Swiss national with a background at management consultant firm McKinsey & Co. He had no expertise in stock exchanges, but he had an aggressive approach that promised to shake up Germany's conservative financial culture. He disdained national loyalties and planned to pursue whatever route would achieve efficient capital markets and low-cost trades.
Frankfurt's regulatory regime finally caught up with contemporary standards when the Financial Markets Promotion Act was passed in 1994. Insider trading was now a crime for the first time. Interest in investing was still low, but the younger generation, which was poised to inherit significant amounts of money soon, had the potential to energize private investing. The Börse was hoping that the initial public offering (IPO) of Deutsche Telekom, scheduled for November 1996, would attract new investors. The IPO proved to be the second largest in the world, raising more than $13 billion. However, the company promised so many dividends and incentives that an investment in its stock was almost as secure as buying a bond. Still, the IPO was seen as a strong step toward the development of a stockholding culture in Germany.
Becoming an International Force: 1997–2003
Since taking over as CEO, Seifert had been laying the ground for technological improvements at Deutsche Börse and looking ahead to the planned introduction of the euro. His initiatives took off in 1997. In March of that year the Neuer Markt was established as a European alternative to the NASDAQ, intended to attract small companies in growth industries such as technology. Companies had to fulfill stringent requirements to be listed on the Neuer Markt, including providing quarterly reports and publishing accounts according to international standards. The new market took off with a flurry of IPOs and rapid share gains. It also attracted new investors to share trading. By 2001, over 20 percent of Germans owned equity funds and shares.
In November 1997 Deutsche Börse introduced Xetra, an electronic trading platform intended to replace IBIS. Seifert, a jazz enthusiast, composed and performed a song on piano to mark the occasion. Xetra automatically matched buyers and sellers of more heavily traded stocks. It cost less and was more transparent than floor trading.
With the introduction of the euro looming in 1999, financial analysts began speculating about the advent of a single pan-European trading system. Seifert worked to position Deutsche Börse as a leading player in any mergers and consolidations that might occur. In late 1997 the Börse launched a campaign to win back some of the futures trading that was dominated by London. The following year Deutsche Börse merged its derivatives subsidiary DTB with the Swiss derivatives exchange Soffex to create the Eurex exchange. In less than a year Eurex had attracted 95 percent of trading in Germany's Bund government bond futures back from Liffe, the London derivatives market. The move demonstrated for the first time that Frankfurt was able to challenge London's financial supremacy.
The developments of 1997 and 1998 put Frankfurt in a position to negotiate a partnership with the London Stock Exchange. In July 1998 the two exchanges announced their intention to create a common electronic trading platform for the top European stocks. Soon other European exchanges came on board, forming the eight-member European Exchange Alliance. But visions of a pan-European exchange proved to be difficult to achieve in reality. The various exchanges could not agree on whose trading technology to use and many of them still felt strong national loyalties. The alliance never achieved more than a few lukewarm agreements.
Mergers and takeovers became the preferred tool for working toward European consolidation. Deutsche Börse united its settlement and clearing unit with the Luxembourg-based Cedel in late 1999 to create Clearstream. The Börse was attracted by the efficient technology Cedel used in clearing. In March 2000 the Paris, Amsterdam, and Brussels exchanges merged into an entity known as Euronext, which became a strong rival to Deutsche Börse in the battle for control of Europe's capital markets. A few months later Deutsche Börse and the London Stock Exchange countered with their own merger plan. The two exchanges announced in May that they would combine to form the largest exchange in Europe, to be known as iX for International Exchange. It was a measure of how far the Frankfurt exchange had come that Deutsche Börse would control 50 percent of the merged entity and Werner Seifert would be CEO. But the deal fell apart suddenly in September when the London exchange announced it was withdrawing from the merger to concentrate on fending off a hostile bid that had just been launched by OM Gruppen, an exchange operator in Stockholm. The London-Frankfurt deal had been beset by difficulties well before it fell apart. The two sides never agreed to use a common regulatory system and traders on either side did not like the proposal of locating the blue-chip market in London and the growth market (Neuer Markt) in Frankfurt. Some also criticized Seifert's abrasive negotiating manner.
After the merger fell apart Deutsche Börse moved ahead with plans for a public listing. The company did not exclude the possibility of acquiring the London Exchange outright with the funds it would raise. The IPO occurred on February 5, 2001, and raised $930 million with a sale of 27 percent of Deutsche Börse's shares. For the time being, a union with the London Exchange remained on the back burner. Instead, Deutsche Börse used the capital from its share issue to acquire its partner's stake in the settlement firm Clearstream in April 2002. The acquisition allowed Deutsche Börse to further exploit synergies among its subsidiaries operating at various stages of the share trading process.
In the fall of 2002 Deutsche Börse announced that the Neuer Markt would be shut down. After a period of astounding growth the market had been hurt even more severely than its competitors when the technology boom fizzled. The value of companies listed had dropped more than 96 percent since the high in March 2000. In addition, several scandals had emerged in connection with the companies listed on the Neuer Markt. A new market segment known as the Prime Standard was created to carry on the stringent standards for corporate disclosure associated with the Neuer Markt.
After the economic slowdown that started in 2001, trading activity decreased and revenues from the trading of cash securities went down. The Eurex exchange, on the other hand, was bringing in large profits as investors sought to hedge their risk with derivative contracts. Deutsche Börse continued efforts to attract listings and cut the costs of trading. In March 2003 the company launched the TecDAX as a blue-chip index for technology shares. The company also created a central counter-party to act as a reliable intermediary in share trades. Deutsche Börse was also looking to establish an American presence and set up a partnership with the Chicago Board of Trade Clearing Corporation to lay the ground for launching a futures and options exchange in the United States. By 2003, Deutsche Börse had consolidated its position as one of the top exchange operators in Europe and was starting to extend its reach to other continents.
Cedel International S.A. (Luxembourg); Clearstream International S.A. (Luxembourg); Filinks S.A.S. (France); Deutsche Börse Systems AF; Deutsche Börse Systems Inc. (U.S.A.); entory AG; Xlaunch AG; projects IT-ProjektBörse GmbH; Eurex Zurich AG (Switzerland; 49.97%); Eurex Frankfurt AG (49.97%); Eurex Clearing AG (49.97%); Deutsche Börse Computershare GmbH (51%); Infobolsa S.A. (Spain; 50%).
Euronext; London Stock Exchange Limited.
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—Sarah Ruth Lorenz