1986 London Finance - Financial Steps

1986 London Finance: The Big Bang

1986 was a watershed year for London’s financial markets, irrevocably altered by a series of deregulatory measures collectively known as the “Big Bang.” These changes, implemented on October 27th, fundamentally reshaped the City of London, transforming it from a relatively closed, clubby environment into a modern, globally competitive financial center.

Prior to the Big Bang, the London Stock Exchange operated under a system of fixed commissions and a rigid separation of roles. Firms were either brokers, who executed trades for clients, or jobbers, who acted as market makers, buying and selling shares for their own account. This system, while seemingly stable, stifled innovation and limited access for foreign firms. Commissions were artificially high, and the separation of roles prevented firms from providing a full range of services.

The Big Bang addressed these issues through a series of bold reforms. Fixed commissions were abolished, forcing firms to compete on price and driving down transaction costs. The separation of brokers and jobbers was eliminated, allowing firms to act as both agents and principals, creating integrated securities houses. Membership of the London Stock Exchange was opened up to foreign firms, injecting new capital and expertise into the market.

The motivations behind the Big Bang were multifaceted. The Conservative government, under Prime Minister Margaret Thatcher, was committed to deregulation and free market principles. There was also a growing recognition that London was falling behind other financial centers, particularly New York, which had already embraced deregulation. The threat of competition from foreign exchanges spurred the government to act decisively.

The consequences of the Big Bang were profound. The City of London experienced a surge in activity, attracting significant foreign investment and creating thousands of new jobs. The market became more liquid and efficient, benefiting investors. New financial instruments and trading techniques were introduced, further stimulating growth.

However, the Big Bang also had its downsides. The increased competition led to a wave of mergers and acquisitions, consolidating power in the hands of a few large, global financial institutions. The shift to computerized trading systems created new risks, including the potential for system failures and market manipulation. Concerns also arose about the ethical implications of the new, more aggressive financial culture.

In conclusion, the Big Bang of 1986 was a pivotal moment in the history of London’s financial markets. It transformed the City into a global powerhouse, but also introduced new challenges that continue to shape the financial landscape today. The legacy of deregulation remains a subject of debate, with proponents emphasizing its benefits in terms of efficiency and innovation, while critics point to its contribution to financial instability and inequality.