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* IFR talks to Nicholas Dennison, the architect of Big Bang,and others about the transformation of the City of London in1986
By Steve Slater
LONDON, Oct 21 (IFR) - Bang! It was the explosion infinancial markets heard across the world 30 years ago whichtransformed the City of London from a cosy network oflong-established firms into a cut-throat landscape dominated byforeign banks.
This week is the 30th anniversary of Big Bang, a package ofreforms across the securities industry that shaped the City thatexists today, putting London alongside New York as the world'stwo dominant financial centres.
This year's anniversary has extra significance.International firms that arrived on the back of Big Bang areconsidering whether to stick with London or move operations andjobs elsewhere following Britain's vote in June to leave theEuropean Union.
"It [Big Bang] put London on the map in a way it wasn'tbefore. All the international firms came to London or enlargedwhat they had," recalled Nicholas Goodison, who was thearchitect of the reforms as chairman of the London StockExchange at the time.
OVERNIGHT JOLT
Although the full impact of Big Bang evolved over years andthe reasons for the reforms went back more than a decade, thetransformation is associated with an overnight jolt - on October27 1986.
That was the brainchild of Goodison. He said a number of the necessary changes were inter-related so should all come at thesame time, with good warning, to ensure orderly change.
"We could have done it piecemeal but they were all tooclosely linked to each other," Goodison, now 82, told IFR in aninterview last week.
There were several parts to Big Bang: it abolished minimumfixed commissions on trades; it removed "single capacity", whichsince 1911 had separated the role of brokers, who acted asagents for clients, and jobbers, who made the market andprovided liquidity by holding stock on their books; and itallowed foreign ownership of UK brokers, to fix capitalshortfalls at many firms.
Big Bang also introduced electronic share trading, which didaway with the need for face-to-face share deals and made tradingfar quicker and more efficient.
The changes were brought in to head off an investigation bythe competition watchdog, which wanted to take the stockexchange to the Restrictive Practices Court, a move Goodisonsaid would have resulted in chaos.
In 1983 he proposed to Cecil Parkinson, trade and industrysecretary at the time, that he would eliminate fixed commissionswithin three years.
Parkinson agreed and, helped by Chancellor of the ExchequerNigel Lawson, persuaded Prime Minister Margaret Thatcher to backthe reforms. That was not easy because Thatcher "didn't likebeing friends with the City", Goodison recalled. He said shesubsequently took little interest in Big Bang, despite beingcredited as its driving force.
"The myth that Big Bang was part of Mrs Thatcher'srevolution is just wrong," Goodison said.
Goodison said the reforms were inevitable after the USabolished fixed commissions in 1974 and Britain scrappedexchange controls in 1979.
"The writing was on the wall and we knew that," he said.
"Anybody could forecast that the competitive pressures onfixed commission would increase because the biggest securitieshouses in the world were in America. It was obvious the thingwas creaking."
Goodison said Big Bang achieved its goal better than a courtruling would have done because it pushed through changessmoothly.
The biggest challenge was setting up the electronic tradingplatform. "It broke down in the first hour. It was difficult.But the reason it broke down was that it had a huge volume ofpeople trying to access it on the first morning and everybodypressed buttons at once."
It was sheer curiosity that caused it to break down, hesaid.
FOREIGN PREDATORS
Big Bang sparked profound changes across the City.
Brokers, jobbers and merchant banks started merging. Somewere bought by UK clearing banks, but many more were snapped upby big US, European and Asian banks.
Well-known firms such as James Capel, Schroders and Warburgkept some branding in bigger firms, but other old names such as Pinchin Denny and Scrimgeour Kemp Gee were easily swallowed.
That has led to criticism of the "Wimbledonisation" of theCity - that London hosts the activity but most of the topplayers are foreign. Barclays and HSBC are two of the top 10investment banks today, but the dominance of the City byoverseas firms, especially from the US, is a legacy of Big Bang.
"Under the previous system it was pretty much a closed shop,and suddenly they [foreign firms] were allowed to come in," saidPaul Mumford, a fund manager at Cavendish Asset Management.
"A lot of banks seized the opportunity and London became aglobal centre for markets. It could never have happened if wehadn't had this change," Mumford told IFR.
Just as London firms were swallowed or reinvented, manycareers changed, including Mumford's. He had been a broker andanalyst, but a year after Big Bang he moved into fundmanagement.
"It was a relatively painless process but it took a littlewhile for it to have its repercussions on certain areas,"Mumford said.
There were other less direct but still significant effectsof Big Bang, including making it easier for firms to raisecapital, contributing to the growth of hedge funds, and helpingthe rise of Canary Wharf as a new financial district in EastLondon as firms could trade further away from the City usingelectronic communications.
Culture also changed. Hours became longer, lunches shorterand pay rose. The business became more aggressive and lessclubby, according to people who worked in the City on both sidesof the changes.
Critics reckon many of the banking industry's misconductproblems of the past decade can be traced to Big Bang, as itgave rise to a bonus culture that undermined the City'slong-standing code of conduct and integrity.
Goodison, for his part, was not paid for his work for thestock exchange. He was its last unpaid chairman, from 1976 to1988, and held the role alongside his position as senior partnerat Quilter Goodison, a broker that went the way of many peers -it was bought by an overseas predator, France's Paribas.
Goodison said London was right to welcome internationalfirms and needs to continue to do so to stay in front, aided by the advantages of its time zone, language and legal system.
"If London wants to win it has to be open. You can't run aclosed shop and win. The essence of London's financial marketsis openness to the world," he said. (This story will appear in the October 22 issue of IFRMagazine; Reporting by Steve Slater)
