Magazine article The Spectator

How the London Stock Exchange Was Saved

Magazine article The Spectator

How the London Stock Exchange Was Saved

Article excerpt

If it had not been for Big Bang, there would almost certainly not be a London Stock Exchange worth fighting over today. But so much changed in the securities market in 1986 that it is difficult now to separate the essential reform described here by Sir Martin Jacomb from the events that accompanied it.

Wearing red braces and shouting into the brick-sized mobile phones of that era were not conditions of the agreement reached between the government and the Exchange but, like so much of 1980s culture, they were all of a piece with Big Bang.

What really transformed the Stock Exchange, as much as the agreement negotiated by Cecil Parkinson in his brief three months as trade secretary between the 1983 election and the affair that provoked his resignation, was the new technology that accompanied Big Bang. It is still developing today.

When fixed commissions went, so did bowler hats and long lunches. Screen-based trading made it unnecessary to staff the iconic hexagonal kiosks on the Stock Exchange floor -- and safer to stay at your desk with a sandwich. Lunch was for wimps after that, and the American houses cruelly imposed new hours on London, forcing pinstripes to rub shoulders with the overalls of cleaners and labourers for whom the early morning Tubes had been introduced.

So the game changed from gentlemanly amateurism to professional greed. The future was set when comedian Harry Enfield's Loadsamoney character became a role model instead of a parody. Not only did foreigners play by their own rules, but 'dual capacity' trading brought together the Essex barrow-boys of market-making (as stockjobbing was renamed) with the stockbrokers of Surrey -- like a rugger match between a public school and the local borstal.

It took a long time to resolve that culture clash. Introducing brokers to the jobbers' approach to risk tested the new regime to near destruction. Just days after Big Bang, Morgan Grenfell's joint head of securities trading was caught insider-dealing; by December, inspectors had gone into Guinness; within a year UBS's new Phillips & Drew subsidiary and NatWest's new jobbers were up to their necks in Blue Arrow shares.

The 1987 market crash was the first time that brokers lost their own money and the ensuing months saw many hasty corporate marriages expensively annulled.

Today's heavy-handed regulation owes much to the mistakes made after Big Bang.

Integrating securities with banking forced the City to adopt 'Chinese walls', even though that negated much of the expected synergy.

The first City watchdog, the Securities and Investments Board, was established in 1986 but stable doors were fortified as scandal escalated, and an even wider regulatory regime was imposed that is still adding to its armoury.

The five years between Black Monday and Black Wednesday were an expensive learning curve for the Exchange as well as its members. The booming privatisation programme, lower transaction costs and the halving of stamp duty that accompanied Big Bang caused trading volumes to explode -- yet with barely a hiccup, the new technology coped. The other half of stamp duty was set to be abolished when the Taurus computerised clearing system was introduced -- but the Exchange could not repeat its IT success and, after successive delays, Taurus was humiliatingly abandoned in 1993, costing the Exchange £75 million and its member firms four times as much. The hubris of Big Bang turned into nemesis: gradually the Exchange, having already lost its derivatives business to Liffe, was stripped not only of clearing but also of regulation, listing and discipline, which went to the FSA. …

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