10 May 2022
You will often hear investors refer to "Big Bang", which took place on 27 October 1986. But what was Big Bang? Was it really such a big issue? Has it had any lasting effect on the London Stock Exchange share trading?
In short, Big Bang was the day on which the London Stock Exchange (LSE) was deregulated. The changes were put into place by the then Conservative government under the premiership of Margaret Thatcher. While there were numerous issues to consider, one which stood out was an anti-trust case brought by the previous Office of Fair Trading concerning fixed commission rates.
Under the previous government, the LSE faced legal action because of the historic rules on fixed commissions. These rules were deemed anti-competitive as were an array of "traditional" activities centred around the LSE. On 27 October 1986, fixed commissions were removed with the introduction of new legislation, prompting a considerable change in the structure of the London stock market.
While there was massive coverage of Big Bang, and it is still mentioned today, very few people were aware that the LSE became a private limited company on that day. This released the LSE from previous restrictive rules and regulations and opened up the stock market to external corporations and overseas companies. Consequently, the London Stock Exchange Group floated on the stock market in July 2001.
Big Bang also prompted a significant switch from open outcry, pit trading, to electronic trading. Previously, despite being recognised on the world stage, the LSE was only able to turnover 1/13th of the New York Stock Exchange volume. Something needed to be done!
The introduction of electronic trading allowed orders to be placed on the telephone and via computer. While today we may see this as a relatively small issue, at the time, it was monumental!
One of the many issues covered by Big Bang was the independence of market-makers and stockbrokers. This led to some of the oldest market-makers on the LSE being acquired by banks, thereby creating substantial financial groups. A change in the regulations also allowed foreign membership of the LSE, which prompted the arrival of US financial giants. In many ways, this led to the modern-day trend of "too big to fail", with financial giants dominating stock markets worldwide. So, the consequences of Big Bang were not all foreseen or positive.
In the immediate aftermath of Big Bang, there was a degree of "self-regulation". Perhaps this was best described as light-touch regulation. While there were high hopes that light-touch regulation would support ongoing changes and improvements, this proved not to be the case. In 2001 the Financial Services Authority (FSA) was created specifically to regulate the UK financial services industry.
As the UK financial services industry continued to grow, it became evident that further regulation would be required. Consequently, the FSA was abolished on 1 April 2013 and replaced by the Financial Conduct Authority and the Prudential Regulation Authority. While regulating the financial services industry is fluid and challenging, we have seen massive changes since Big Bang.
The theory behind Big Bang was essentially based on introducing competition into the LSE and removing some of the traditional regulations. The introduction of competition will be one of the great legacies of Big Bang as companies such as GIS UK Ltd continue to grow and develop. Our ongoing investment in new technology allows us to maintain a highly competitive charging structure, as demonstrated by our growing volumes.
While Big Bang was the catalyst, the repercussions are still being felt today, with investors benefiting from low latency trading systems and electronic clearing and custody services. The sector has come a long way in a relatively short time and continues to evolve. What does the future hold?
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