Thirty years since Big Bang transformed financial markets

Thursday marks thirty years since the Big Bang, when technology exploded onto the financial markets, transforming the industry.

LONDON, ENGLAND, UK (OCTOBER 25,2016) (REUTERS) – Bang! It was the explosion in financial markets heard across the world 30 years ago which transformed the City of London from a cosy network of long-established firms into a cut-throat landscape dominated by foreign banks.

Thursday marks the 30th anniversary of Big Bang, a package of reforms across the securities industry that shaped the City that exists today, putting London alongside New York as the world’s two dominant financial centres.

This year’s anniversary has extra significance. International firms that arrived on the back of Big Bang are considering whether to stick with London or move operations and jobs elsewhere following Britain’s vote in June to leave the European Union.

“Now of course you have got a whole industry that is much more vibrant, much bigger, much more open for people to actually be successful. However, with it has also come the failures, and of course a lot of that has meant further regulation is required,” said Justin Urquhart Stewart, Co-Founder of Seven Investment Management.

“Prior to Big Bang, if you had a compliance officer, no one really knew who he was or where he was. Now you have compliance companies and compliance departments, and they’re still trying to keep up to try and make sure the industry is properly controlled.”

Although the full impact of Big Bang evolved over years and the reasons for the reforms went back more than a decade, the transformation is associated with an overnight jolt – on October 27 1986.

There were several parts to Big Bang: it abolished minimum fixed commissions on trades; it removed “single capacity”, which since 1911 had separated the role of brokers, who acted as agents for clients, and jobbers, who made the market and provided liquidity by holding stock on their books; and it allowed foreign ownership of UK brokers, to fix capital shortfalls at many firms.

Big Bang also introduced electronic share trading, which did away with the need for face-to-face share deals and made trading far quicker and more efficient.

The changes were brought in to head off an investigation by the competition watchdog, which wanted to take the stock exchange to the Restrictive Practices Court.

Big Bang sparked profound changes across the City.

Brokers, jobbers and merchant banks started merging. Some were bought by UK clearing banks, but many more were snapped up by big US, European and Asian banks.

Well-known firms such as James Capel, Schroders and Warburg kept some branding in bigger firms, but other old names such as Pinchin Denny and Scrimgeour Kemp Gee were easily swallowed.

Culture also changed. Hours became longer, lunches shorter and pay rose. The business became more aggressive and less clubby.

“Away went the old partnerships, the old boys club. Boys – because it was nearly all men, white men. And of course the houses themselves were informally divided according to their different religion. So you had Protestant, Catholic and Jewish,” said Urquhart Stewart, “Big Bang changed all that.”

Critics reckon many of the banking industry’s misconduct problems of the past decade can be traced to Big Bang, as it gave rise to a bonus culture that undermined the City’s long-standing code of conduct and integrity.