The Big Bang
The "Big Bang" is a term used to mark the changes which occurred in late 1986 to the organizations and practices of the City of London as Britain's financial center. Changes occurred as a result of the sudden deregulation that swept through the London Stock Exchange (the market place for trading corporate equity shares and U.K. government securities). Deregulation took place on October 27, 1986, and has dramatically changed both the Exchange and its members.
Prior to the Big Bang, membership to the stock exchange was limited to relatively small partnerships engaged either in stock brokering, buying or selling securities on an agency basis for clients, or jobbing, making a market for stockbrokers in securities listed on the stock exchange. There was also a relative decline in the status of the British securities market. In 1985, the London stock exchange's turnover was only 1/13th of the then number one ranked, New York Stock Exchange. Furthermore, technological development and expansion of transactions outside the stock exchange occurred. Advancements in the processing technology and developments in computers and communication technology led to a shift towards foreign and over-the-counter block transactions. This shift shook the foundations of the very existence of the stock exchange. Finally the Big Bang allowed the merging of job functions between the jobber (a dealer in stocks and shares) and the broker (a mediator between the jobber and the public). This merger led to the abolition of the distinction between stock-jobbers and stockbrokers in the London Stock Exchange. Taken as a whole the Big Bang:
- Introduced negotiated commission rates vs. previous minimum fixed commission.
- Allowed for the first time banks and financial companies could buy brokers and market making firms, or they could join to the London Stock Exchange themselves.
- Changed from open-outcry (shouting/hand signals) to electronic, screen-based trading. The supporters of electronic trading claim that it is faster, cheaper, more efficient for users, and less prone to manipulation by money makers and broker/dealers.
- Expanded the market. For example, the ratio that the financial sector occupied in England's GDP was 13.6% in 1985 (before the Big Bang) and rose to 17.2% in 1990 (after the Big Bang).
- Allowed people of lower classes to participate and gave them the chance to generate wealth from the stock exchange. This Liberalization in the London Stock Exchange was one of the biggest changes.
- The big bang created an economic boom which brought about nouveau riche (new money/people to acquire wealth within their generation). This economic boom lasted for 2 decades creating large profits for institutions US investment banks as well as in London with Citigroup and Bank of America.
- Also, the reason it got the name of the big boom was not because of how it affected just London. After the deregulations happening in London, similar actions took place in the Japanese financial markets therefore getting the name "the Big Bang"
The Big Bang's role in London as a financial center
Margaret Thatcher was a British politician who served as Prime Minister of the United Kingdom from 1979 to 1990 and the leader of the Conservative Party from 1975 until 1990. She is the first and only woman to hold either post. Thatcher began her economic reforms by increasing interest rates to slow the growth of the money supply, thus lowering inflation. Thatcher's political and economic philosophy emphasized reduced state intervention, free markets, and entrepreneurialism.
Thatcher's government claimed that the two problems behind the decline of London banking were over regulation, and the dominance of elitist old boys' networks (where men from elite schools dominated the market). They felt the solution lay in the free market doctrines of competition and meritocracy (where appointments are made based on talent rather than wealth).
The effects of the "Big Bang" were dramatic, although not quite as intended. London's place as a financial capital was decisively strengthened, to the point where it is arguably the world's most important banking center. An economic boom created a new class of 'nouveau riche' that has persisted for two decades, and the boom expanded beyond the City. The main results of the Big Bang in contribution to London's role as a financial center are:
1. Deregulation of the Markets- allowing people from the general public to trade on the London Stock Exchange. The Big Bang eliminated the 'middle man' also known as a stock-jobber, and formed a meritocracy based market.
2. Less intimidation for prospective traders- the change from the open cry format to an electronic screen based system made it easier to trade within the stock exchange
3. Abolished fixed minimum commissions for buying and selling securities
4. Substantially increased market activity
The Big Bang enabled London to capture the rapidly growing market of internationally traded securities which included equity and debt securities of the world's largest corporations and governments. The integration of securities brokerage and market making with other financial activities such as securities underwriting and commercial banking allows the British financial institutions to become more powerful international competitors. More importantly, it has encouraged the most powerful financial companies to conduct their international securities business in London.
Advantages of the London Economy since the Big Bang
In addition to the benefits listed in the section above, the positive effects of the Big Bang were:
- Brought on new ways of trading shares
- City expanded from its former boundaries around the old "square mile" and redrew the capital's skyline
- Property boom reflects the city's expansion since the Big Bang. The City expanded into the Docklands/New Warf area.
- Hedge-fund managers and private-equity firms have gravitated farther west to posh Mayfair and St James', helping to drive up office rents there and keeping trendy restaurants busy.
- Heathrow Airport is bursting at the seams, handling nearly 70 million passengers a year when it was designed for 45 million.
- Roads, trains and buses are jam-packed. But clearly for the money-men the attractions outweigh the hassles.
- The specialist workforce grew. The workforce that carries out international financial business has risen by 50% in the past 15 years
- London plays host to far more foreign banks than any other financial centre and has the biggest slice of the foreign-exchange market
- Big Bang was a turning point in the city's post-war history, securing its position as a centre for trading international equities.
- The city, long notorious as a stuffy place where the old school tie mattered more than the talent, became more of a meritocracy (idea that skill is based on merit not one's social position).
- The Sarbanes-Oxley legislation, passed after the collapse of Enron in order to stiffen up corporate governance, has put off foreign companies from listing in American markets. The London Stock Exchange has been the big beneficiary. Foreign firms have flocked to list on its main market.
David Lascelles, co-director of the Centre for the Study of Financial Innovation said, "There is just no comparison now between the city's standing today and 20 years ago. London wouldn't be in this position without Big Bang."
Disadvantages since Big Bang
- Negative/Dishonest atmosphere
- Critics say that the Big Bang created a negative atmosphere, with people doing anything it takes to get ahead in the markets. This means the Big Bang might have encouraged unlawful or unethical activity.
- Along that same note, it has also been speculated that this caused the collapse of the Barings Bank in 1995. What happened there was one man, Nick Leeson, an employee of the bank was involved in accounting fraud. When exposed, the incident resulted in the bank defaulting on all of its accounts and a loss of 827 million pounds. Not only that, but it was significant because the Baring Bank was the bank for the Queen, and it was the oldest merchant bank in London. It was so old that it had funded the Napoleonic Wars.
- Two Rules were created in the late 1980's to help out after the deregulation
- One rule dealt with securities houses that have markets in corporate shares, and it said that they were not necessarily obligated to trade with one another.
- The other rule dealt with the time frame as to when trades had to be reported. It was changed from a matter of minutes to the next business day.
- The criticism about these rules is that Americans believed that these rules favored Londoners and gave them an advantage.
- The deregulation favored big companies
- Many institutions that benefited from this change were foreign
- For example, US banks were one of the greatest beneficiaries from the deregulation. This is somewhat funny because the deregulation was meant to help London compete with foreign banks, including US banks.
- Also interesting to note, Sarbanes-Oxley Act benefited London
- This is definitely a downside to the deregulation. This example shows how the United States more heavily regulating its markets as a result of financial scandals, and it had a positive effect for London, which is not necessarily a good thing. Many people choose to do business in London instead of the U.S. in order to avoid the regulations.
The Effect of the Big Bang on London
London is now more competitive in foreign banking. The bottom line is that London is a MUCH stronger financial center as a result of the deregulation. Before the deregulation, London was losing its place in the competitive market, but after the Big Bang, it soon caught back up and strengthened its overall position. It is now arguably the most important banking center in the world.