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Last Updated: Thursday, 26 October 2006, 21:44 GMT 22:44 UK
London insiders remember Big Bang
FTSE's fortunes since the Big Bang in October 1986

Twenty years ago, on 27 October, 1986, the cosy gentleman's club of the City of London was transformed by a series of changes that have come to be known as the Big Bang.

London's financial services industry was reborn as a global financial powerhouse, and the late start, long lunch, early finish went out the window.

Over the past two decades what was a rather parochial scene has been transformed as a number of foreign banks and trading companies have moved in.

However, the introduction of a more US-style business culture has made the City not only more diverse, but also more cut-throat.

Two veterans of those times, who are still working in the world of finance, look back at what the Big Bang changes have meant for the City.


David Buik of Cantor Index

By 1986 it had become apparent that the LSE was in danger of being found guilty of orchestrating an impenetrable cartel for fixed commissions.

Also at that time brokers and stock-jobbers alike seemed to be cocooned within a fortress of protectionism, which from a global perception was a totally unacceptable business practice.

The Thatcher administration had been in power for seven years. The creation of wealth was on its way - nationalised industries were being privatised and the froth generated from floating the likes of the Halifax and Abbey National on the stock exchange was evident.

Merchant banks such as SG Warburg, Schroders, NM Rothschild, Samuel Montagu, Hill Samuel and Morgan Grenfell were absolutely 'coining it in'.

Financial society had just about heard of Goldman Sachs and Salomon Brothers, but they were not the powers in the land they are today.

In 1986, these US investment banks aspired for greatness but had yet to achieve it in London.

However, change was imperative and it was imperative for the cartel of fixed commissions to be broken.

Acceptable equilibrium

The City had to become more competitive and more transparent.

To achieve acceptable equilibrium, the day of the stockbroker and jobber was numbered. The prognosis for small stock brokers, apart from a few specialists, could only be described as fairly terminal.

Many merchant banks and overseas banks looked for favourable deals, whereby market makers, utilising the services of the best brokers and jobbers available, could be harmonised.

History tells us that there was only one unqualified success from all these ventures and that was the acquisition by Warburg of Ackroyd and Smithers, Rowe & Pitman and the government gilt broker Mullens & Co.

In 1986 at the start of Big Bang there were no less than 21 gilt-edged market makers - ridiculous, as there was nothing like enough business to go round

This conglomerate eventually fell into the arms of the UBS/Phillips & Drew/Swiss Bank empire.

As for the rest the rest of them, Barclays Bank paid a huge price for bedding-down Wedd, Durlacher and de Zoete and Bevan.

Deutsche Bank struggled almost as much with Morgan Grenfell, who under Christopher Reeves pioneered the acquisition of Pinchin Denny and Myers & Co.

However, under the supreme guidance of Edson Mitchell they eventually got their joint act together.

Chase Manhattan gleaned nothing from buying two smaller stock brokers.

Midland Bank bought W Greenwell and eventually this outfit went into the HSBC portfolio that had acquired James Capel, the prince amongst research brokers.

Kleinwort Benson bought Grieveson Grant, and NM Rothschild, Smith Brothers.

Market knowledge

There were also numerous less meretricious deals involving smaller banks. Many of these deals turned out to be fairly expensive exercises because everyone was terrified of missing out.

Of the bigger fish in London only Schroders and Lazards declined to take part. Their judgement at the time turned out to be spot-on.

Lazards was a particularly influential adviser in mergers and acquisition activity despite dismissing the opportunity of securing mandates from the government for privatisation deals.

In terms of breaking the commission cartel, it was mission accomplished - but at what cost?

Cazenove continued to blossom and of all these financial titans it stood head and shoulders above its peers in terms of mergers and acquisitions and financial advice for FTSE 100 companies.

In 1986, at the start of Big Bang there were no less than 21 gilt-edged market makers - ridiculous, as there was nothing like enough business to go round.

Many fell by the way-side.

It is interesting to note that when Tonamura-San, Nomura's top man in London at the time, was asked why he was not participating as a market maker in gilts, he replied in an extremely measured, succinct and amusing manner.

"I am not good enough to play cricket at Lords, but I am about good enough to play baseball in Regent's Park."

Know your market he was saying. So, many of these new conglomerates either fell by the wayside or were acquired.

Business focus

The fact remains - "big is beautiful".

How true in the case of Goldman Sachs, Salomon Brothers, Morgan Stanley, Merrill Lynch, JPMorgan, and Lehman Brothers.

These investment banks all rose to the top of the pile in quick order. Only UBS, Deutsche Bank and a revamped Barclays have shone through from the initial European play-makers.

In terms of breaking the commission cartel, it was mission accomplished - but at what cost?

Perhaps the most positive result that transpired from "Big Bang" was that the city became very professional.

Business, instead of sex, parties and football, is now the topic of conversation - and at shorter, non-alcoholic, lunches.


Terry Smith of Collins Stewart Tullett
'Big Bang was a wild success'

'No-one wants to read about Big Bang - it's been a disaster.'

Those were the words of my publisher when I suggested a book on Big Bang in the 1990s.

'The only monument to Big Bang will be the swimming pools which stockbrokers built with the gains from the sale of their firms to hapless foreign banks,' they continued.

How wrong can you be? We now know that Big Bang was a wild success. It cemented London's place at the centre of the world's money and capital markets.

But to be fair to my publisher, at the time it may not have seemed like it.

The decision to remove fixed stockbroker's commissions and allow brokers and jobbers to combine in so-called dual capacity firms that could sell shares and bonds to investors, and trade in them as principals, swept away a whole way of life in the City.

Away went a lifestyle of getting in late - the gilt market didn't open until 10am - having a long and boozy lunch, and going home early.

Bonded words

The new, mainly US, owners of the securities firms post-Big Bang lived by Michael Douglas' axiom in the movie Wall Street, namely that 'lunch is for wimps'.

The British owned partnerships that had dominated the stock market all disappeared.

They were acquired by foreign banks and securities firms and often closed after incurring disastrous losses.

And for the first time we started to hear about "conflicts of interest" and whether analysts and salesmen could be trusted if their firms had a position in the shares they were selling or were doing a deal for the company whose shares they were recommending.

What was less predictable was the far broader impact reforms had on the markets in London as a whole

It all seemed a long way from the stock exchange's motto of Dictum Meum Pactum - my word is my bond.

So how has Big Bang been a success?

Sweeping away the quaint customs of the pre-Big Bang Stock Exchange has made London the centre of the world's capital markets.

The London Stock Exchange (LSE) is attracting companies from the US, Asia and the former Soviet bloc all of which want to sell shares and raise capital.

Wall Street is, and probably always will be, a strong rival because it has the advantage of servicing companies and clients in the world's largest economy - the US.

To survive and prosper, the City of London must do what it has accomplished throughout history: service the world economy.

Market professionals

London has of course been helped in this by the 'own-goal' the US has engineered with its Sarbanes-Oxley law.

This over-enthusiastic slamming of the stable door after the Enron/Worldcom horses had bolted means that Wall Street is no longer necessarily high on the list of where international companies think of floating or raising capital.

What was even less predictable in the success of Big Bang was the far broader impact reforms had on the markets in London as a whole.

A great deal has been written about the attempt, by Nasdaq - the US exchange that is now the LSE's largest shareholder - to acquire it

The so-called Over the Counter, or OTC, financial markets are now much larger than the market for quoted companies. This is not widely recognised, as these markets do not enter the popular consciousness to the same degree as the stock market.

One reason for this is that they are markets for professionals - the main players are banks and investment banks, institutional fund managers, hedge funds and private equity funds.

Individual investors cannot deal in them and have no direct exposure. But the OTC markets for foreign exchange, bonds, commodities and financial derivative products are all much larger than the stock markets.

The Big Bang reforms indirectly boosted London's position in these important OTC markets because they made London attractive to the banks and investment banks with their proprietary trading operations, the hedge funds and private equity funds that dominate this environment.

Free flow

Lastly, what of the debate now, 20 years after Big Bang, about the ownership of the LSE itself?

A great deal has been written about the attempt by the US exchange Nasdaq, which is the LSE's largest shareholder, to acquire it.

Questions have been asked whether this would mean creeping US regulation of UK markets and whether foreign ownership of the LSE is desirable.

This debate is mostly irrelevant.

London's success post-Big Bang was in no way handicapped by the fact that most of the key players in the securities markets were owned by American, European and Japanese banks.

It doesn't matter if the LSE is owned by a foreign stock exchange provided it continues to operate in London, and is staffed and regulated by people in London.

Today, ownership of most major companies is not confined to the country in which any company is physically located. We can all buy shares in Nasdaq if we want.

We exist in a world with a free flow of capital, in which the main shareholder in a company quoted in London may be a hedge fund legally domiciled in the Cayman Islands but managed by a fund manager in Connecticut.

That freedom is in part due to Big Bang. We should embrace it not fear it.

Warning as City toasts Big Bang
26 Oct 06 |  Business
From UK coffee house to bourse?
21 Dec 04 |  Business

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