How the London Stock Exchange was saved
Richard Northedge says the LSE is an attractive catch today thanks to the transformation that began in 1986 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.
The Exchange changed chief executives in quick succession as failure was followed by firings. Yet if focus was the new buzzword for the companies quoted on the stock market, so the Exchange’s own loss of ancillary activities proved to be its liberation. The automated Sets trading system, introduced in 1997, now handles £6 billion of deals a day; settlement has been reduced from the anachronistic 14-day account to a rolling two days; Aim, established in 1995, is the world’s most successful smaller companies market. Now that City investment banks are properly capitalised, they can handle without blinking huge deals like this month’s £2.9 billion rights issue for Xstrata. And the efficiency of the Exchange’s technology enables hedge funds and black-box traders to use London for a giant gambling spree that would not have been possible 20 years ago.
Foreign securities accounted for the bulk of the Exchange’s business as soon as bonds were brought within its ambit, but relaxed listing rules have made the London market the base for a host of overseas companies either registered abroad, actually located there or simply run by foreigners. Most of the leading London companies no longer present their profits in sterling. A name change to ‘The International Stock Exchange’ did not last long, but the London Stock Exchange is now a truly international business.
Indeed it is the international success that followed from Big Bang which has forced the world’s other leading exchanges to seek consolidation to remain competitive. London can take credit for driving the French, Belgian and Dutch exchanges to amalgamate as Euronext to try to stay ahead. That provoked Germany’s Börse to seek a marriage with London, in turn resulting in Euronext going for a merger with the New York Stock Exchange and making its US rival, Nasdaq, desperate to buy London. If Big Bang had failed, London would not now be a threat to its Continental and US rivals. Indeed, it is because the City is so successful despite investors still paying stamp duty that chancellors have never felt any urgency to deliver on the other half of that Big Bang promise.
Meanwhile the ‘ruling council’ that had held back the London Stock Exchange in the past was replaced in 1991 with a board of directors — the foundation of a modern governance system that in due course allowed the Exchange to be listed on its own market. Finally an institution that had not even allowed women on to its floor until 1973 demonstrated the extent of its progress by inviting one, Canadian-born Clara Furse, to become its chief executive in 2001.
The first phase of what has sometimes been called the Wimbledonisation of the City came with Big Bang, when overseas securities houses snapped up so many stock market firms that the Square Mile began to look like a British arena for foreign players. The next phase came when London’s own investment banks — Morgan Grenfell, Kleinwort Benson, Barings, Schroders, Warburgs passed into foreign hands. Now the City must be ready for the next phase, in which the arena itself becomes foreign-owned.
But without Big Bang, London would have remained a local market trapped in old-fashioned ways; the 1990s switch to electronic trading and the huge volumes that followed would not have happened. It is better to lose the Exchange to overseas ownership than to have had it shrivel though inefficiency. It was October 1986 that made the LSE such an attractive catch in October 2006.
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