TWENTY-FIVE years ago today the doors of the London Stock Exchange were blown wide open.
In one sweeping moment of market deregulation, London’s horizons suddenly broadened, and money flowed into the Square Mile. Outside investment broke up the LSE’s boys’ club and fixed commission charges for brokers, which effectively killed competition, were scrapped.
The brainchild of LSE chairman Sir Nicholas Goodwin and trade and industry secretary Cecil Parkinson, the Big Bang of 1986 set London on the path to becoming the international financial centre it is today, as technology trumped tradition and a flurry of M&A expanded the City’s borders.
The trading floors of the Stock Exchange Tower on Old Broad Street fell quiet as high-tech computerised screens were introduced, ending the tradition of open outcry buying and selling that had defined equities trading in Britain for almost 300 years.
Outside ownership of firms that were members of the LSE was allowed for the first time, paving the way for US and European firms to snap up City stalwarts, and the idea of working-class jobbers (market makers) and upper-class brokers evaporated as firms began to integrate.
American money in particular was quick to arrive, as hungry investment banks fought for a piece of the City, picking off the capital’s historic houses one by one. Frustrated by Glass Steagall’s separation of retail and investment banking on home shores, ambitious US bank chiefs crossed the Atlantic in search of new money.
A notable entrant to the scene was Lehman Brothers, then a rapidly growing investment bank with a young upstart named Dick Fuld put in charge of its European expansion, which bought broker L Messel soon after deregulation.
And when the Americans came, the Brits were ready. Powerless in the face of the huge balance sheets wielded by retail banks as well as the Morgan Stanleys and Goldman Sachs of the world, in the lead up to deregulation a series of stock exchange couplings had taken place.
Pre-Big Bang the maximum ownership held outside of the Stock Exchange was 29.9 per cent, so the mid-80s saw SG Warburg snap up a stake in jobbers Akroyd & Smithers, while Rothschild took a share of Akroyd rivals Smith Brothers. The most astute American firms had even got in on the game early, with Citicorp buying 29.9 per cent of broker Vickers da Costa as early as November 1983.
And as soon as the day of reckoning came, consolidation started.
Quick off the mark to take advantage of the new stockbroking model was SG Warburg – the pioneering UK bank that issued the first Eurobond in 1963. Warburg snapped up the stakes it didn’t already own in stockbrokers Rowe & Pitman, jobbers Akroyd & Smithers, and gilt market-makers Mullens & Co. By 1987 it had brought them all under the Warburg umbrella – creating one of London’s first integrated merchant banking and stockbroking firms.
With the influx of American firms on the look out for talent and increasing rivalry among UK companies for home-grown hotshots, it wasn’t just jobbers’ fortunes that were on the up.
In 1979 a director at Morgan Grenfell took home £40,000. By 1986 average executive remuneration at the merchant banker had hit £225,000 – a five-fold increase in just seven years. Partners also cashed in as they sold out and the old partnership model faded away.
But as pay packets swelled, so did the number of hours that City workers had to put in to earn them. As one Messel’s broker lamented: “I have to get in at 8am now – before the Americans arrived the working day started at 9.15am… I arrive before the tea lady now.” While bankers’ waistlines may have shrunk as long lunches have given way to snatched sandwiches, there’s no doubt that elsewhere a huge amount of growth has taken place in the past 25 years.
In 1986 the daily turnover generated by foreign exchange was $50bn (£31.3bn at today’s rates) – in the year to April 2011 that figure hit $2,191bn. Private equity, which contributed just $360m to the UK financial sector in 1986, raised over $10bn last year.
So as the last of those that the remember the City pre-Big Bang start to retire, a very different London raises a glass to the next 25 years of growth.
THEN AND NOW: HOW THE CITY CHANGED
WITHIN eighteen months of the Big Bang reforms being announced, major consolidation of the UK’s fragmented financial systems had begun, with all the main jobbers and eighteen out of twenty brokers entering into partnerships.
• From the US, Citicorp bought Vickers da Costa and Scrimgeour Kemp-Gee, plus Seccombe Marshall Campion, while
Merrill Lynch bought gilts jobber Giles & Cresswell and Lehman Brothers bought L Messel. Chase Manhattan snapped up brokers Laurie Milbank and Simon & Coates.
• NatWest bought jobber Bisgood Bishop, plus brokers Fielding Newson-Smith and Wood Mackenzie.
• SG Warburg bought Rowe & Pitman, Akroyd & Smithers and Mullens & Co. It was later bought by the Swiss Bank Corp, which merged with UBS in 1998.
• Barclays Bank bought Wedd Durlacher and de Zoete & Bevan and formed the fully integrated BZW.
• Midland Bank bought broker W Greenwell. Midland was subsequently bought by HSBC in 1992.
• Hill Samuel was bought by TSB in 1987 after UBS withdrew from a takeover bid.