I’m always stopped by a picture taken early on October 27, 1986. The London Stock Exchange floor is crowded, with men in shirtsleeves gesturing at one another and jobbers crammed around their pitches. In retrospect, the reason for this crowding is almost comical. The brand-new electronic system that was supposed to render all of this outdated had malfunctioned. Because the screens wouldn’t cooperate, traders resorted to the old method on the day that the City of London was meant to take a leap into the future, shouting across the room. By lunchtime, the floor was quiet, the deals had moved to the dealing rooms, and the technology was acting appropriately. It didn’t get very loud again.
Big Bang was that. Everyone is familiar with the seven-letter crossword clue answer, but beneath the neat phrase was one of the most significant weekends in contemporary British economic history. After being deregulated, the London Stock Exchange became a private limited company. For generations, fixed minimum commissions had subtly shielded brokers’ earnings; however, they were eliminated. The “single capacity rule,” which served as a barrier between brokers and jobbers, was lifted. Previously kept at a distance, foreign banks were now permitted to fully own member companies. It’s important to keep in mind that this wasn’t just a generous gift from a free-market government. It originated from an agreement reached in 1983 to resolve an antitrust lawsuit filed against the Exchange by the Office of Fair Trading. A courtroom was the alternative, which contributed to the arrival of reform.
Before all of this, the City was, by most honest accounts, a pleasant place to be if you were already inside. The pre-Bang routine can be summed up as follows: Old Etonians arrive in the middle of the morning, have a lengthy lunch with good Bordeaux, have a few drinks at the club, and then head back to the verdant suburbs. Although it sounds somewhat like a caricature, the main idea is still true. About a thirteenth of New York’s volume was traded in London, and the cosiness came at a direct cost to investors. Reading the Bank of England’s own dry assessment from early 1987 gives the impression that even the regulators were a little taken aback by how quickly the old world collapsed. Three-quarters of the business had left the floor in a matter of weeks. Approximately 95% of it had by December.
The fact that the effects were so uneven intrigues me. Stamp duty was reduced that same day, and commission on a sizable institutional deal was cut in half, indicating a decrease in transaction costs. The level of liquidity increased. Where there had previously only been a few jobbers, the market for the most actively traded shares became noticeably more competitive, with dozens of market makers.
Pretending otherwise would be dishonest because those are genuine gains. However, within months, over half of the approximately 200 initial member firms were absorbed into larger groups, with many of them losing their names completely. Large international banks quickly entered the market. The center of gravity started to shift eastward toward the glass towers that would eventually become Canary Wharf, salaries for traders and even IT workers went vertical, and champagne became a cliché for a reason.
It’s difficult not to interpret the entire episode as a trade-off that no one fully understood at the time. The stated objective was achieved, and on its own terms, Britain was successful in creating a financial hub that could truly compete with New York. Additionally, it made a city much more concentrated in the hands of big institutions, which may have created the conditions for dangers that emerged much later. Even now, those who worked on the floor get together for reunions to remember the noise and raise money for charitable causes. You can infer something from that. Reunions are not held for a spreadsheet.
The dispute hasn’t really been resolved after forty years. London became modern thanks to the Big Bang, which also quickly made some people extremely wealthy. Reasonable people continue to disagree on whether it improved the system or just made it larger, and they most likely will for some time to come.
