Big Bang (financial markets)

The Big Bang was the result of an agreement in 1983 by the Thatcher government and the London Stock Exchange to settle a wide-ranging antitrust case that had been initiated during the previous government by the Office of Fair Trading against the London Stock Exchange under the Restrictive Trade Practices Act 1956. These restrictive practices included the London Stock Exchange's rules establishing fixed minimum commissions, the "single capacity" rule (which enforced a separation between brokers acting as agents for their clients on commission and jobbers who made the markets and theoretically provided liquidity by holding lines of stocks and shares on their books), the requirement that both brokers and jobbers should be independent and not part of any wider financial group, and the stock exchange's exclusion of all foreigners from stock exchange membership.{{cite web |url=http://www.cps.org.uk/files/reports/original/111028101637-20061019EconomyBigBang20YearsOn.pdf |publisher=Centre for Policy Studies |access-date=14 June 2015 |date=October 2006 |title=Big Bang 20 years on |archive-date=15 October 2021 |archive-url=https://web.archive.org/web/20211015091533/https://www.cps.org.uk/files/reports/original/111028101637-20061019EconomyBigBang20YearsOn.pdf |url-status=dead }}

The day the London Stock Exchange's rules changed on 27 October 1986 was dubbed "Big Bang" because of the increase in market activity expected from an aggregation of measures designed to alter the structure of the financial market.

The effect of Big Bang led to significant changes to the structure of the financial markets in London. The changes saw many of the old firms being taken over by large banks both foreign and domestic and would lead in the following years to further changes to the regulatory environment that would eventually lead to the creation of the Financial Services Authority.{{cite news | title = In Depth – Big Bang | work = Financial Times | date= 29 October 2006 | url = http://www.ft.com/indepth/bigbang | access-date = 29 October 2006 | archive-url= https://web.archive.org/web/20061115010307/http://www.ft.com/indepth/bigbang| archive-date= 15 November 2006 | url-status= live}}

The effects of Big Bang were dramatic, with London's place as a financial capital decisively strengthened, to the point where in 2006 it was arguably the world's most important financial centre.{{cite news |url=https://www.independent.co.uk/news/business/analysis-and-features/the-day-big-bang-blasted-the-old-boys-into-oblivion-422005.html |title=The day Big Bang blasted the old boys into oblivion |work=The Independent |date=26 October 2006 |first=Danny |last=Fortson}}{{cite news | last = Treanor | first = Jill | title = Revolution hailed but City warned of a looming fight for supremacy | work = The Guardian |date= 27 October 2006 | url = https://www.theguardian.com/business/2006/oct/27/politics.economicpolicy| access-date = 29 October 2006 | archive-url= https://web.archive.org/web/20061104075645/http://business.guardian.co.uk/story/0%2C%2C1932560%2C00.html| archive-date= 4 November 2006 | url-status= live}} The boom resulted in the relocation of institutions into new developments in the nearby Isle of Dogs area, particularly that of Canary Wharf.

Although the "Big Bang" eased stock market transactions there is a debate in the UK about how far it affected the 2008 financial crisis.

In 2010, Nigel Lawson, Margaret Thatcher's Chancellor of the Exchequer at the time of Big Bang, appeared on the BBC Radio Four programme Analysis to discuss the banking reform.{{cite web |title=Glass-Steagall: A Price Worth Paying? (from 6m12s) |url=https://www.bbc.co.uk/sounds/play/b00qbxwj |website=BBC Sounds |language=En |date=1 February 2010}} During the programme, Lawson is reported as having "converted to the Glass-Steagall cause" of separating retail banking from investment banking, due to concerns that it was a moral hazard ("[banks] are not going to be as careful and as cautious and as prudent as they should be") and that banks which were "too big to fail" would do so at taxpayers' expense, as seen during the 2008 financial crisis.{{cite web |title=Glass-Steagall: A Price Worth Paying? (from 12m48s) |url=https://www.bbc.co.uk/sounds/play/b00qbxwj |website=BBC Sounds |language=En |date=1 February 2010}} During the programme, the presenter, Edward Stourton, said, "Lord Lawson isn't alone in his admission that [through the 'Big Bang'] we walked into the new banking world without really understanding the risks involved" in ending the separation of high street banks and merchant banks.{{cite web |title=Glass-Steagall: A Price Worth Paying? (from 9m30s) |url=https://www.bbc.co.uk/sounds/play/b00qbxwj |website=BBC Sounds |language=En |date=1 February 2010}} Lawson mused, "I didn't give it a great deal of thought at that time. I'd taken for granted that separation, as by custom and practice we'd had that all those years (we'd always had it), but it was a completely unforeseen consequence of the stock exchange reforms".{{cite web |title=Glass-Steagall: A Price Worth Paying? (from 8m8s) |url=https://www.bbc.co.uk/sounds/play/b00qbxwj |website=BBC Sounds |language=En |date=1 February 2010}}

John Reed, a former Citigroup banker, says that “we were simply ignorant of the risks that we were getting into” from the repeal of Glass-Steagall in 1999. He attributes its repeal in the United States to his customers (“big international institutions”) wanting to issue commercial paper, instead of borrowing directly from banks,{{cite web |title=Glass-Steagall: A Price Worth Paying? (from 9m40)|url=https://www.bbc.co.uk/sounds/play/b00qbxwj |website=BBC Sounds |language=En |date=1 February 2010}} as well as to the Big Bang, after which “globalised markets” and “inter-connected capital markets” made it difficult to sustain one regime in London and a different one in New York.{{cite web |title=Glass-Steagall: A Price Worth Paying? (from 10m35s)|url=https://www.bbc.co.uk/sounds/play/b00qbxwj |website=BBC Sounds |language=En |date=1 February 2010}}

In 2011 former British Prime Minister Gordon Brown expressed regret at not implementing tougher regulations during his tenure as chancellor between 1997 and 2007, responding to "relentless pressure" from the City not to over-regulate.

{{cquote|We know in retrospect what we missed. We set up the Financial Services Authority (FSA) believing that the problem would come from the failure of an individual institution, so we created a monitoring system which was looking at individual institutions. That was the big mistake.

We didn't understand how risk was spread across the system, we didn't understand the entanglements of different institutions with the other and we didn't understand even though we talked about it just how global things were, including a shadow banking system as well as a banking system.

That was our mistake, but I'm afraid it was a mistake made by just about everybody who was in the regulatory business.

| source = Gordon Brown{{Cite news|url=https://www.bbc.com/news/business-13032013|title=Brown admits 'mistake' on banks|date=2011-04-11|access-date=2019-06-22}}

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On May 1, 1975, the United States Securities and Exchange Commission (SEC) eliminated fixed rate brokerage commissions on stock trades. This deregulation got rid of the fixed commission schedule set by the New York Stock Exchange (NYSE), which all member firms were required to follow. Before deregulation, firms charged the same minimum fee (1%–2% of the trade's value) depending on the size of the trade, ever since the 1792 Buttonwood Agreement.{{Cite journal |last=Jarrell |first=Gregg A. |date=1984 |title=Change at the Exchange: The Causes and Effects of Deregulation |url=https://www.jstor.org/stable/725577 |journal=The Journal of Law & Economics |volume=27 |issue=2 |pages=273–312 |jstor=725577}} Because of this, the typical fee incurred on U.S. stock trades is currently ~0.25%, with some platforms taking no commisssion on online trades.{{Cite web |title=Commissions, Margin Rates, and Fees |url=https://www.fidelity.com/trading/commissions-margin-rates |url-status=live |access-date=May 13, 2025 |website=Fidelity}}

On October 1, 1994, Japan’s Ministry of Finance implemented the first phase of securities commission deregulation. This reform was part of a broader financial liberation agenda known as the "Japanese Big Bang."{{Cite web |title=Japan's Landmark Financial Deregulation: What It Means for the United States |url=https://www.everycrsreport.com/files/20000615_RS20335_0d532c15d3fd376d203041b94a5f6ae9bb39f7d6.pdf |url-status=live |access-date=May 14, 2025 |website=Congressional Research Service}} The overall goal was to modernize Japan's financial system and increase global competitiveness. For decades prior, firms in Japan operated under a uniform commission structure that was enforced by the Japanese Securities Dealers Association (JSDA), which set minimum fees for both institutional and retail trades on the Tokyo Stock Exchange (TSE). The fixed rate system in Japan had long been criticized for inflating transaction costs and protecting brokers from competition. The deregulation was completed in April 1999 and sucessfully increased competition between brokers, and lowered trading fees across the board.{{Cite web |title=History {{!}} Japan Securities Dealers Association |url=https://www.jsda.or.jp/en/about/history/ |access-date=2025-05-14 |website=www.jsda.or.jp}}

• Wimbledon Effect

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Category:1986 in economic history

Category:1986 in the United Kingdom

Category:Economy of London

Category:Economic liberalization

Category:Economics of regulation

Category:Financial markets

Category:London Stock Exchange

Category:Separation of investment and retail banking