Big Bang (1986)

Big Bang is the name given to the deregulation of the London Stock Exchange that took effect on 27 October 1986. On a single day the exchange scrapped fixed minimum commissions, abolished the rule that kept share dealers and agents apart, opened its member firms to outside ownership and began the move from a trading floor to screen-based dealing. The changes transformed the City of London and its standing as an international financial centre.

The term is usually linked to a wider set of reforms under Margaret Thatcher's government, including a new investor-protection law passed the same year. It is distinct from the "May Day" abolition of fixed commissions in New York in 1975, from the Japanese financial Big Bang begun in 1996, and from the "Big Bang 2.0" label some commentators gave to UK reforms announced in 2022.

Imagine a market where every stallholder must charge the same fixed fee, where the people who take your order are forbidden from also owning the goods, and where newcomers are not allowed to buy a stall. Prices stay high and comfortable for the insiders. Then, overnight, the rules are torn up: fees can be bargained down, anyone can both take orders and sell from their own stock, and big outside firms can buy their way in.

That is roughly what happened to London's share market in 1986. At the same time, the traders stopped shouting prices at each other on a crowded floor and started watching prices on computer screens, so business could be done from any office. The market became cheaper for large investors, faster and far more open to banks from abroad.

Before Big Bang, the London Stock Exchange worked as a private club with three core rules.

• Minimum commissions. Members had to charge clients at least a fixed scale of commission, which kept costs high for big institutional investors.
• Single capacity. Firms were either brokers, who acted as agents for clients, or jobbers, who dealt in shares on their own account and set prices. No firm could do both.
• Closed membership. Outsiders, including foreign banks, were limited in how much of a member firm they could own.

Pressure built during the 1970s. New York's abolition of fixed commissions in 1975 made London look expensive, and the removal of UK exchange controls in 1979 let British investors buy overseas shares freely. The Office of Fair Trading had meanwhile taken the exchange's rulebook to the Restrictive Practices Court as anti-competitive.

In July 1983 the Trade and Industry Secretary, Cecil Parkinson, and the exchange's chairman, Sir Nicholas Goodison, settled the court case. The government agreed to exempt the exchange from the competition proceedings, and in return the exchange promised to dismantle its minimum commission rules in stages, finishing by the end of 1986. Once fixed commissions were going, single capacity could not survive, and the exchange decided to end it at the same time. The changes were brought together on one date, which the press dubbed the Big Bang.

From 27 October 1986, commissions became negotiable and the old divide gave way to dual capacity. Firms could act both as brokers for clients and as market makers quoting their own prices. Quotations moved onto a screen system called SEAQ (Stock Exchange Automated Quotations), and within months the trading floor was almost empty, as dealers found it easier to trade by telephone from their own offices.

In the run-up to the day, many British broking and jobbing firms were bought by large banks from the UK, the United States, Europe and Japan, creating integrated securities houses. The same year Parliament passed the Financial Services Act 1986, which set up a system of self-regulatory organizations overseen by the Securities and Investments Board. That structure was later replaced by the Financial Services Authority and, from 2013, by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority.

Dealing costs for institutional investors fell, trading volumes rose and London won a large share of international business in shares, bonds and currencies. The arrival of global banks brought new money, larger dealing rooms and pressure for more office space, helping drive the development of Canary Wharf to the east of the City. Screen trading laid the foundations for later algorithmic trading and, eventually, high-frequency trading on electronic exchanges.

The reforms also changed the culture of the Square Mile. The old partnership model, in which partners risked their own capital, gave way to large employers paying high bonuses, and the separation between advising clients and trading against them disappeared. Critics have argued that this mix of conflicts of interest and risk-taking contributed to later scandals and to the 2008 financial crisis; defenders reply that the crisis had many causes and that London would have lost its position without reform. The City of London Corporation and other City bodies still cite Big Bang as the moment the modern financial district was born, alongside older institutions such as Lloyd's of London that were reshaped in the decade that followed.

• London Stock Exchange
• Financial Services Act 1986