London's "Big Bang" of 1986

The Big Bang refers to the sudden, revolutionary and comprehensive deregulation of financial markets in London on October 27, 1986. This event marked a significant transformation in the structure and operation of the London Stock Exchange (LSE), leading to increased competition, modernization, and the establishment of London as a leading global financial center. The reforms transformed the City of London from a rather parochial "gentleman's club" to a global financial powerhouse.
== Background ==
The origins of the Big Bang can be traced back to the early 1980s when the London Stock Exchange faced increasing pressure to reform its restrictive practices. These practices included fixed minimum commissions, the separation of brokers and jobbers, and the exclusion of foreign firms from membership. The Office of Fair Trading had initiated an antitrust case against the LSE under the Restrictive Trade Practices Act 1956, which led to an agreement in 1983 between the Thatcher government and the LSE to implement sweeping changes.
=== Key Reforms ===
The Big Bang introduced several key reforms that fundamentally altered the landscape of the London financial markets:
*Abolition of Fixed Commissions: The fixed commission system, which mandated set fees for trading, was abolished. This allowed brokers to negotiate their own commission rates, fostering competition and reducing trading costs for investors. The Big Bang abolished fixed commissions at the London Stock Exchange, which at the time was an exclusive association of small financial houses that dominated the U.K. trade in stocks and bonds. The move unleashed competition and broke down the barrier separating brokerage firms, which executed customer's trades, from proprietary trading firms. That separation had ensured that brokers didn't bet against their clients. It had also prevented firms from getting big enough to be a threat to the entire system. Without their fixed commissions, brokers and jobbers had to expand to stay profitable, so they merged with big global banks, such as Citicorp and Barclays Bank, and those banks got into securities dealing, which at the time was banned in the U.S. under the Glass-Steagall Act. They also began experimenting with new financial products including credit derivatives and structured investment vehicles.= 
*End of Single Capacity: The distinction between stockjobbers (market makers) and stockbrokers (agents) was eliminated. Firms were now allowed to operate in a dual capacity, acting both as brokers and dealers, which increased market liquidity and efficiency.
*Introduction of Electronic Trading: The traditional open outcry system on the trading floor was replaced by electronic, screen-based trading. This shift to electronic trading systems significantly increased the speed and volume of transactions, making the market more efficient and accessible.
*Foreign Membership: The LSE opened its membership to foreign firms, allowing international banks and financial institutions to participate directly in the London market. This influx of foreign capital and expertise further enhanced London's status as a global financial hub. The "Big Bang" introduced a more U.S.-style business culture in which the long (and often liquid) lunch went out the window and a cut-throat competitive atmosphere took its place. 
*Privatization of the LSE: On the day of the Big Bang, the LSE became a private limited company, freeing it from previous restrictive rules and regulations and enabling it to operate more competitively.
=== Impact and Consequences ===
The immediate impact of the Big Bang was a dramatic increase in market activity and trading volumes. The reforms led to a surge in the number of transactions and a significant reduction in trading costs. The introduction of electronic trading and the influx of foreign firms transformed the LSE into a more dynamic and competitive marketplace.
The Big Bang also had several long-term consequences:
*Consolidation and Mergers: Many traditional brokerage firms were acquired by larger banks and financial institutions, leading to the creation of substantial financial conglomerates. This consolidation was driven by the need to compete in the new, more competitive environment.
*Regulatory Changes: The initial period following the Big Bang was characterized by light-touch regulation. However, the need for more robust oversight became apparent, leading to the establishment of the Financial Services Authority (FSA) in 2001, which was later replaced by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) in 2013.
*Global Financial Center: The Big Bang solidified London's position as a leading global financial center, rivaling New York. The reforms attracted international banks and investors, making London a hub for global finance and interbank lending.
*Technological Advancements: The shift to electronic trading paved the way for further technological innovations in financial markets, including the development of low-latency trading systems and advanced electronic clearing and custody services.
== References ==
Category:Regulation
Category:Legislation