Thirty years on: How Thatcher's Big Bang revolutionised the Square Mile

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IT was past midnight and a slew of traders at venerable stockbroker Hoare Govett were sitting idle. It was just months after Big Bang, which had peeled back centuries of practice in London, flinging it open to a brave new world of innovation.

During the frenzy, Hoare Govett had decided 24-hour trading was the future. There was just one problem: no one wanted to trade in the dead of night.

“Who wants to trade shares at 3am in the morning?” says Adam Pollock, who worked at the broker in the late Eighties. “Things did settle down eventually.”

Hoare, then one of the big three City brokers, along with Cazenove and Rowe & Pitman, had introduced a night trading team to take advantage of Big Bang, a wheeze which it quickly realised was a dud.

Another more popular ploy were the free fry-ups in the seventh-floor canteen of its Chancery Lane office trying to entice brokers to get into work earlier with the sizzle of bacon and eggs.

The moves were part of dozens of initiatives and schemes put in place after Big Bang to try to adapt to the new, often bewildering, rules of engagement. 

Big Bang 2.0: where next for the City?

The City still lives with the technological changes wrought from Big Bang and the present tech revolution will change the City to the same degree over the next 30 years.

Steve Grob, director of group strategy at Fidessa, which provides the systems to most of the City’s trading desks, says: “The next big wave is going to be how the ease, convenience and automation of our daily digital lives can be brought into the world of trading.

“When millennials enter the trading world they’re going to find it odd to come into one specific room and strap themselves into one specific bunch of screens and trade because that’s not how they live their digital life”.

Juan Pablo Urrutia, from e-broker ITG, thinks we’ve already had another Big Bang in financial markets — Mifid, a 2007 EU regulation to make it easier to trade across the Continent.

“It did something very similar to Big Bang and maybe 30 years on, in 2037, the discussions around it will be in the same vein,” he says.

More ink has been spilled on Big Bang than its creators would ever envisage. But with Brexit focusing the minds of the money men, many are looking to the past for clues to the future.

Big Bang happened because the London Stock Exchange was breaking competition law — namely the  Restrictive Practices Act 1976. It was a raft of reforms, which came in 30 years ago tomorrow, that swept away centuries of Dickensian-style finance from London.

It ushered in computer trading, Wall Street investment banks — and a culture shock for City types. “The stock market used to open at 9.30 — I’d get in at 8.30 and I’d be turning the lights on,” says Lee Morton, who joined Hoare in 1980. “After Big Bang we started opening earlier and earlier.”

Big Bang was concocted outside the Square Mile in Whitehall’s corridors of power, triggered by the head of the competition watchdog, Lord Borrie.

The Labour peer — who only died at the end of September — had accused the exchange of acting like a cartel. 

In the old days, brokers would physically go down to the Stock Exchange to buy and sell shares for clients. They would do this by haggling with a market maker, known as a jobber, who acted much like a bookmaker does, quoting different prices for the shares. 

Typically a broker would get paid a fixed fee to buy or sells shares or gilts or arrange a loan. Although there were dozens of brokers in the City, the market operated as a giant monopoly.

“It was incredibly uncompetitive,” says David Buik, a market veteran who’s worked in the City since 1962. “No one would undercut anyone else.”

Emboldened by then-prime minister Margaret Thatcher’s rebuke to establishment officials, Borrie threatened to sue the LSE unless changes were made. A peace settlement orchestrated between Borrie and LSE chairman Sir Nicholas Goodison paved the way for the monopoly to be smashed.

The LSE agreed completely to dismantle the age-old system through which shares were bought and sold and abolish fixed commissions paid to the broker. Fund manager Paul Mumford worked at a broker called Nivison and was at the coal face during the change.

“It completely changed my life,” he says. “I’d been a stockbroker for 25 years and Big Bang changed everything. Commissions were smashed, I thought the future looked bleak. I decided to jump over the fence and move into fund management and Big Bang was the start of it all.”

Along with the abolition of fixed commissions, Big Bang also triggered a mergers and acquisitions boom in the City as US investment banks swarmed in to take advantage of the new rules.

City stockbrokers used to operate as partnerships, with a cadre of partners controlling the firm via their equity stakes. This partnership model meant City brokers were normally smaller in size than traditional banks. 

“It was incredibly uncompetitive. No one would undercut anyone else”

David Buik, market veteran 

“There was lots of self-regulation and a much greater sense of responsibility,” says Numis founder Oliver Hemsley. “If they were to be successful they had to live or die by their colleagues’ decisions and that mattered to their profits. It was more of a clubby atmosphere but that was not necessarily a good thing: there was more complacency. There’s more competition now.” 

Big Bang permitted these brokers to become incorporated entities, sweeping away the clubby partnerships and making them easier to be sold.

It also permitted brokers to merge with jobbers, creating a one-stop shop for trading. 

Very few senior partners, many near retirement, coud resisted deep-pocketed investors.

Hoare Govett, for example was sold to California-based Security Pacific in the months after Big Bang. Rowe & Pitman was bought by Mercury Securities — also owned British merchant bank Warburg. Only Cazenove, thought to be the Queen’s stockbroker, remained independent (it succumbed to JPMorgan in 2004).

But the US invasion wasn’t all plain sailing. “Initially there was a big culture clash with the foreign buyers,” Pollock says. “Most of the American firms when they bought a broker thought they’d bought a bank and didn’t really understand that they had bought a corporate relationship. They were in at 7 o’clock and not going out for lunch.”

This was at odds with the bon viveur culture of the time. One worker at Hoare Govett had the nickname “split-second” because that was the amount of time you had to catch him between getting back for lunch and the markets closing at 4.30. 

The final piece of the jigsaw was one we are still living with today: the move from face-to-face open outcry trading to electronic systems. The most tangible change in the days after Big Bang was how stock prices could now be viewed on screen, using a system called Seaq. It took some time to get used to. 

 “One of my colleagues on the desk started asking for price and size for an order and didn’t realise it was on his screen — what he was saying had become obsolete,” says fund manager Terry Smith. “It did produce a culture shock and a different kind of work ethic.”

Buik says: “Open outcry was there one day and gone the next. Human outcry was gone and it was nerds looking at screens. It was a little unnerving.” 

The alarm clocks are set earlier, but, with Brexit on the horizon, the  money men may yet be scrambling to adapt again.

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October 26, 2016 |
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