Nothing stands still in the City.
The world's financial services powerhouse has seen it all, from boom and bust to bouncebacks and Brexit. Its skyline has changed almost beyond recognition over the last three decades, as have the markets it serves.
As we mark the 30th anniversary of the so-called Big Bang, we cannot help but peer into an uncertain future. What the Square Mile and Canary Wharf will look like in a decade’s time will be largely down to how Theresa May handles the next 24 months as she prepares to tackle the most complicated diplomatic negotiation the UK has faced in a generation.
The fact the City has so much at stake in the upcoming negotiations is largely down to a previous occupant of No 10 and the way which they responded the last time London’s status looked at risk. Not Dave, Gordon, or Tony, but the only other woman to have popped the keys to Downing Street inside her handbag and headed across the Channel to do battle: Margaret Thatcher.
It is difficult to underestimate the impact the changes made then have had on our financial services sector
– Richard Stone, The Share Centre
It was a cold, drizzly Monday morning in October 1986 when the Iron Lady changed the course of global finance, and the face of London.
The Big Bang at 30
The Big Bang was the culmination of a series of niche technical reforms to the rules governing London’s financial markets, but its effect was transformative. The process threw open the City to the free-market principles Thatcher held dear and, though she could not possibly have foreseen the effects her actions would unleash, these same principles have served the City, for better and worse, over the last three decades.
Richard Stone, chief executive of The Share Centre, one of the retail trading platforms which has 1986 to thank for its very existence, said the changes did nothing less than “enable London to gain and build a position as the world's leading centre for financial services.”
The package of reforms, which went live on 27 October 1986 – 30 years ago today – focused on three key areas:
Open-outcry, the system which had dominated the buying-and-selling of shares since the creation of the joint stock company, was ditched. Traders no longer had to bark their orders across trading pits or catch the attention of market makers with hand signals. Electronic trading was in. Stocks could be bought and sold from upstairs, from the comfort of a leather-back chair with a coffee or a cocktail in hand.
Paul Mumford, a fund manager at Cavendish who was a broker of two-decades experience back in 1986, explained the change:
“The old fashioned system meant every time you bought or sold a share you had to fill in a transfer form. The seller then had share certificates, which had to go with the transfer form. The broker would then pay the selling broker. The forms would then be sent out to company registrar, the registrar would change the name, he would then issue a new certificate.
“This process took a bloody age. Today, you press a button.”
Companies and individuals were suddenly permitted to take on multiple roles. Pre-1986, “Jobbers”, the market-making middlemen who bought and sold shares with brokers, were banned from dealing directly with the public or investors. “Brokers”, the salesmen who placed orders on behalf of investors and the public, were likewise barred from acting as market makers. The system was called “single capacity” – meaning you could only do one thing at one time.
Market participants seemed to be cocooned within a fortress of protectionism
– David Buik, Panmure Gordon
Big Bang changed that. Those doing the buying and the selling didn’t have to go to the jobbers, who typically made their money on the difference – the spread – between how much they paid and received for a share, meaning one less middleman to deal with.
For Juan Pablo Urrutia, general counsel at ITG, the breakdown of the barriers was the “key thing” in the big bang reforms, as it allowed big international – mainly American – players to come to town.
Not only could brokers now play both sides of the market, they were also fair game. Stockbrokers, previously individuals, were allowed to organise themselves into companies rather than just partnerships. The process of charging fixed commissions was also ditched – clients were gifted the power to negotiate.
Competition, innovation and globalisation were unleashed on London, breaking up the “cartel” and smashing into the “fortress of protectionism,” as city grandee David Buik puts it.
Bang and crash
Despite what the name suggests, “the story of the Big Bang is that it wasn’t a one-off event”, the London Stock Exchange’s global head of equities Brain Schwieger told City A.M. When he came to the market in the late 1990s, the effects were still being felt.
“I suppose that’s how you could draw parallels with the universe’s big bang, as the universe continues to evolve and feel the effects of its big bang, so do the financial markets.”
In fact, for the stock market that day, it was a bit of an anti-climax. The FTSE 100 closed Friday 24 October at 1,577 points. It closed Monday 27 October – Big Bang day – at 1,586. A 0.6 per cent climb.
But, over the final two months of the year things started to pick up, with a six per cent assault between November and December.
The market kept climbing through the spring and summer of 1987 as investors began to get used to the new rules, and lower commissions meant buying and selling were a touch easier.
Within 11 months of the Thatcher government's reforms, the bluechip index was running at full-pelt, up a massive 50 per cent since the changes. It turned out, in a pattern traders would become increasingly familiar with, they were actually running toward a cliff. By the time the end was in sight, it was too late to stop.
Rules allowing traders to short (bet against) stock, exaggerated the inevitable fall and the FTSE 100 lost one-third of its value, falling below its pre-Big Bang level throughout October 1987.
Some first anniversary.
The next few years saw a more gradual but definite transformation across the City. First, the ranks of financial services swelled.
From a total of one million employees on the eve of the reforms, another 100,000 people piled into the UK’s finance and insurance sectors over the next 18 months.
The million who were there first, also started to shift.
Read more: The Big Bang democratised investing
“Big Bang forced me to jump over the fence and become a fund manager,” said Cavendish’s Mumford.
“Before, stockbrokers earned their living from charging commission. After, commissions were slashed and the big brokers felt they could undercut everybody else, as higher volumes would compensate for lower prices.”
His experience was fairly typical. Panmure Gordon’s Buik made the same journey from middleman to buy side.
London’s position as the premier home of merchant banks also dwindled. In their place came American giants, and those that realised scale was the name of the game in the post-Big Bang era.
“Big Bang opened up London markets to the international banks. A lot of traditional stockbroking firms that were with the London Stock Exchange before simply aren’t there any more. The banks have moved into their place,” the LSE’s Brian Schwieger said.
ITG’s Urrutia added: “It had a huge impact on the way in which firms from outside the City were able to consider strategically investing in London. That probably is the biggest change. That is the thing I would argue brought the US investment banks and caused the acquisitions and mergers which took place from 1986 onwards.”
The list of mergers and acquisitions is lengthy: Barclays bought jobbing outfit Wedd Durlacher; UBS snapped up Aykroyd and Smithers, Mullens and Co and Rowe and Pitman; Deutsche Bank gobbled up slices of Morgan Grenfell and Bankers Trust. Citibank bought part of Schroders, and HSBC snapped up James Capel, Midland Bank and Samuel Montagu.
The markets are definitely more efficient now … but in terms of having fun in your job, it was definitely more fun back in those post-Big Bang days
– Brian Schwieger, London Stock Exchange
With more big banks in town, economies of scale were achieved and the execution side of the transaction could be run as a loss-leader. Unsurprisingly, a lot more business occurred. In the months before the Big Bang, the average number of trades in London-listed shares was 20,000, amounting to around £700m in value.
This year, the average has been more than 45-times as many: 976,000 with an average of £5bn worth of equities changing hands every day.
Real companies also flocked to list in London after the creation of the FTSE in 1984 and the Big Bang in 1986. Three of the biggest ever floats on the London market took place between 1986 and 1989. Thatcher got the ball rolling herself with the 21 November floating of British Gas, in a $7.7bn sell-off in November 1986, followed by British Steel two years later in a $4.5bn float.
For those working inside the banks, “the whole culture of trading and customer relations during this embryonic time changed unrecognisably,” according to Buik.
“Markets became very much more competitive. The big players quickly started to dominate. Brokers and market makers quickly learned that they were working for their employers, as it became more apparent that clients were becoming increasingly price and cost conscious.”
A 22-year journey
But with the smooth also came the rough.
“Did Big Bang have an impact right up until 2008?” asks ITG’s Urrutia. The answer: “Undoubtedly.”
Opening the markets up to technology meant telephones and fax machines in 1986. By the eve of the financial crisis it stood for high frequency and algorithmic trading.
“It was still human-to-human trading in 1998,” said LSE’s Schwieger, who was starting his career at Morgan Stanley at the time.
“Back then, a trader would know all of his counterparts and everyone had a nickname. That’s completely changed now, it’s all electronic.”
Cavendish’s Mumford also says the Big Bang gave power to the hedge funds and the growing practice of short-selling accentuated downswings in the market.
“One of the things that did happen was that hedge funds emerged. They became a big influence on the market. If the market was falling away, maybe you had an overreaction because people were able to go short of shares and it was fairly easy money.”
The bonus culture, too, had its foundations in the Thatcher era of financial market deregulation.
The next big bang?
Looking back on a career of more than 50 years, Cavendish’s Mumford concludes: “Without the Big Bang, London wouldn’t be the city it is today.”
However, the main fear whispering through the towers of Canary Wharf is that London might not look the same in years to come. Mark Carney said earlier this week that the biggest banks have contingency plans in place that could see them move operations into Europe within the next year, if they deem it appropriate.
Anthony Browne, head of the British Bankers Association, said smaller firms could move some operations by Christmas.
Some City players believe for London to maintain its edge over some of the most challenging years in its history, the principles of the Big Bang need to be seized.
“Digital is potentially the saviour of the Brexit scenario,” Richard Theo of Wealthify told City A.M. “It can bring borders down meaning you don’t have to relocate. We’ll look back at this [Brexit] as an irrelevance if we get digitisation right.”
With landmark EU-originated Mifid II rules on the horizon, some are nervous. “The rule book is getting pretty fat,” Theo said. “You need to pay high-flying lawyers just to understand it. The risk is that we’re becoming anti-competitive.”
Assessing the regulatory landscape, ITG’s Urrutia said: “Since 2008, things have changed dramatically. The latest incarnation of Mifid, which is due to be implemented in 2018, is trying to ‘put the genie back in the bottle’.
“But it’s just not possible. It’s playing with free markets, and sometimes politicians and regulators are successful and sometimes they are not. If left to its own devices, innovation will happen much more naturally and frequently.”
Six of the best: London IPOs
|British Gas||November 1986||£5.5bn|
|British Steel||November 1988||£2.5bn|
|Standard Life||July 2006||£2.4bn|
|Royal Mail||October 2010||£2bn|
He concludes: “Brexit could become hugely transformative, and it could spur a whole host of innovation. But clearly it depends on how it goes.”
Whatever happens, the City is facing a period that has the potential to be as seismic as 1986. The question is whether the post-Brexit opportunities will be seized or squandered.
Before big bang, brokers and fund managers used to wear ties. The partners used to wear top hats to the trading floor, and if you ever wore brown shoes you got sent home.
– Paul Mumford, Cavendish