The Big Board's Own Index

The New York Stock Exchange ticker rattled off a new quotation last week: "11 a.m. market down 1 cent, NYSE index 46.73 down 0.01." Thus, for the first time in its history and only after several years of on-and-off deliberation, the exchange issued its own index reflecting Big Board trends.

The exchange's action came as a be lated response to longtime criticism of established indexes, notably the famed Dow-Jones, produced by the publishers of the Wall Street Journal. Things got to the point where no less a tape watcher than Lyndon Johnson -- disturbed because the Dow apparently made the market decline in the spring of 1965 seem worse than it was -- urged that the stock exchange come up with a new way to measure the market.

How Dow Works. The major complaint against the Dow-Jones is that its industrial average, based on the showings of 30 key companies, has gone up and up over the years, reflecting the increase in the total value of the market but losing touch with actual stock prices.

The Dow began as an average of prices, the total price of the stocks being divided by the number of stocks. In its first year (1896), the prices added up to $491, which was divided by twelve, the number of industrials then listed, to yield an average of 40.94. Over the years, the number of stocks listed rose to 30, but not the divisor. In fact, each time a split or stock dividend occurred, the divisor was lowered, otherwise the Dow would have dropped abruptly without a corresponding decline in the stocks' intrinsic worth.

Now the total is divided by 2.245. Thus, as the Dow closed last week, the total price of the stocks was $1,997 and the point average 889.36. None of the individual stock prices were within miles of that figure, and most were actually listed at less than $100. At this overblown level, a shift of only 1% in actual market prices appears on the Dow as a dramatic change of nearly ten points--which many people mistake for $10.

How the New One Works. By relating itself more closely to the actual price of stocks, the Big Board's new index is frankly intended to flatten out, at least on paper, the market's daily changes (see chart). Exchange computers record all transactions--as many as 250,000 on a busy day--in all of the 1,254 common stocks listed. These are translated not into a point index but are given in dollars and cents, and a fresh quotation is turned out every half-hour.

To keep its index figure realistically close to the price of stocks, the exchange used the figure 50 as the base average value as of Dec. 31, 1965; the day actually closed at $53.54. All fluctuations are calculated against this base. Thus, since the market has gone down in the past six months, the index opened below 50. Like the Dow-Jones, the exchange's index will have a tendency to inflate with splits and new issues. But unlike the Dow, it will be adjusted to keep it close to stock prices. For example, if it reaches 100, it might be split 2 for 1 back down to 50.

In dry runs made for this year, the top-to-bottom exchange index showed almost exactly the same percentage changes as the selective Dow-Jones. But its point spread was smaller and the market decline did not seem so spectacular. It should be recognized, however, that neither will a market surge.

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