The “Big Bang” (London Stock Exchange Deregulation)

October 27, 1986: The Explosion That Remade the City of London

On October 27, 1986, the London Stock Exchange (LSE) underwent a radical, single-day deregulation event so profound it was dubbed the “Big Bang.” This was not a market crash, but a deliberate, government-mandated explosion of the old, clubby rules that had governed British finance for centuries. Driven by the free-market ideology of Prime Minister Margaret Thatcher’s government and the pressure of global competition, the Big Bang abolished fixed minimum commissions on stock trades, ended the centuries-old separation between stockbrokers (who acted as agents for clients) and stockjobbers (who acted as market makers, dealing as principals), and allowed foreign ownership of member firms. It also moved trading from the noisy, face-to-face “open outcry” floor of the exchange to computer screens and telephone lines. Overnight, the cozy, gentlemanly world of the City of London—where deals were sealed with a word and a handshake, and where entry was restricted by social class and old school ties—was thrust into a brutal, global, technologically-driven competition. The Big Bang was designed to reassert London’s position as a world financial center, which had been losing ground to New York. It succeeded spectacularly, transforming the City into a dynamic, international powerhouse, but it also replaced a culture of relationship-based stewardship with one of transactional, high-velocity capitalism, with profound consequences for British society and the global financial system.

The Old Order: The Single Capacity System and Fixed Commissions

To understand the Big Bang, one must understand the archaic system it destroyed. The London Stock Exchange operated under a “single capacity” system. Brokers acted as agents for investors, buying and selling shares on their behalf for a fixed, non-negotiable commission. They were prohibited from dealing on their own account. Jobbers were wholesalers who held inventories of shares and made markets, quoting two prices: a lower “bid” price at which they would buy, and a higher “offer” price at which they would sell. Brokers would negotiate with jobbers on behalf of clients. This separation was meant to prevent conflicts of interest and ensure brokers got the best possible price for clients. Furthermore, ownership of member firms was restricted to partnerships; outside capital, especially from foreign banks, was forbidden. This system ensured stability and mutual trust but was inefficient, opaque, and expensive. Fixed commissions meant high costs for investors, and the lack of capital limited the scale of British firms. As international capital flows increased in the 1970s and 80s, this parochial model was unsustainable. American investment banks, with their vast capital, integrated operations, and aggressive tactics, were circling, and London was at risk of becoming a backwater.

The Changes: A Quintet of Liberalisations

The Big Bang introduced a package of five simultaneous reforms on October 27, 1986: 1. Abolition of Fixed Commissions: Brokerage commissions became negotiable, leading to an immediate price war and a drastic reduction in trading costs. 2. Abolition of the Single Capacity Rule: Firms could now act as both broker and jobber, creating integrated “broker-dealers.” This allowed for risk-taking proprietary trading and the bundling of services. 3. Allowance of Outside Ownership: The exchange’s rule prohibiting external ownership was lifted. This triggered a frantic takeover wave as American, European, and Japanese banks rushed to buy up venerable British firms (e.g., Morgan Grenfell, Kleinwort Benson, Rowe & Pitman) to gain a seat on the LSE. The City was swiftly internationalized. 4. Introduction of Screen-Based Trading: The physical trading floor became obsolete almost overnight as the Market Automated Quote System (SEAQ) went live. Trading moved to telephones and computer terminals. 5. Relaxation of Membership Rules: New types of financial institutions could now become members. The effect was instantaneous and transformative. The culture changed from one of relationships to one of transactions. Salaries and bonuses skyrocketed as American pay scales were imported. The traditional long lunch was replaced by the desk-bound sandwich.

The Aftermath: Boom, Bust, and the Rise of a Global Hub

The immediate aftermath of the Big Bang was a boom. Trading volumes soared, new financial products proliferated, and employment in the City ballooned. London successfully re-established itself as Europe’s premier financial center and a rival to New York, particularly in areas like international bonds (Eurobonds) and foreign exchange trading. However, the sudden injection of capital and competition also led to excesses. The newly capitalized firms engaged in risky proprietary trading and aggressive expansion. The culture of caution was gone. This contributed to the stock market crash of October 1987 (Black Monday), just a year after the Big Bang, as program trading and leveraged positions amplified the fall. The late 80s also saw scandals like the collapse of the bank Johnson Matthey and the Blue Arrow affair. Yet, the structural change was permanent. The Big Bang laid the foundation for London’s dominance in global finance for the next three decades, attracting talent and capital from around the world. It was a key component of the UK’s shift from a manufacturing to a service-based economy, cementing finance as a central pillar of national output but also exacerbating regional inequality between London and the rest of the country.

Legacy: The Template for Financial Modernization

The legacy of the Big Bang is the modern, globalized, and technologically-driven financial marketplace. It proved that deregulation could unleash immense competitive energy and innovation, but also volatility and new forms of systemic risk. It served as a template for financial market reforms worldwide. The integration of broking and market-making became standard, as did screen-based trading. The influx of foreign capital and talent turned London into a truly cosmopolitan city. However, the social contract was rewritten. The “my word is my bond” ethos of the old City gave way to a more mercenary, short-term culture. The astronomical wealth generated in the Square Mile widened Britain’s wealth gap and contributed to the perception of a disconnected financial elite—a sentiment that fueled political reactions like the 2008 crisis backlash and the Brexit vote in 2016, where many voted against the “London elite.” The Big Bang was a decisive moment where finance ceased to be a national profession and became a global industry. It demonstrated that a government, through a single, bold act of deregulation, could reshape an entire sector and, by extension, the economy and character of a nation. The echoes of that day in October 1986 are still heard in every trade, bonus, and headline emanating from the City, a permanent monument to the power of policy to unleash—for better and for worse—the forces of creative destruction.