The ‘Big Bang’ Rocks London : Deregulation of Financial Markets Ends Clubby Era

After seven years and several billion dollars of preparation, London financial markets today enter their long-anticipated era of deregulation--the so-called Big Bang or City Revolution.

Collectively, the changes are the most sweeping ever undertaken by any major financial center, and the markets involved are huge. The Big Bang, which is to break down old trading barriers, open markets to international players and introduce computerized trading, will transform London into the world’s most open and flexible global trading center.

While deregulation affects mainly British domestic equity and government bond markets, which have a combined annual volume of about $750 billion, it is likely also to enhance London’s attractiveness as the recognized center of a $2.2-trillion-a-year Eurobond market and the world’s biggest foreign-exchange market, with transactions averaging $90 billion a day.

For those working in the square mile of London’s financial district, the City, the changes constitute as much a sociological revolution as a financial one. They usher in an era of six-figure salaries, working breakfasts, frayed nerves and cutthroat competition unthinkable in the more gentlemanly days of leisurely lunches and fixed-rate commissions.

“We’re swapping a life style,” said Michael Marks, managing director of international operations for the British securities house, Smith New Court. “But I’m not sure what we’re swapping it for.” For the major financial institutions, including big American banks and brokerage houses, the new free-wheeling London markets allow them to offer an unprecedented array of services.

“We can deal in equities, in gilts (British government bonds), act as a full broker and a banker,” said Lord Redesdale, spokesman for Chase Manhattan here. “You can do some of that in New York, some of it in Tokyo, but all of it only in London.”

In preparation for today’s deregulation, several changes have already been implemented. Constraints were lifted last March that once blocked foreign banks and securities houses from joining the London Stock Exchange. Last month, the stock exchange merged with an organization mainly representing foreign-owned banks and securities houses to bring trading and the regulation of domestic and international securities under a single roof.

But the real transformation occurs today with:

- The end of a 200-year-old division that separated brokers, who take orders from members of the public to buy or sell stock, and jobbers, who act as market-makers and make their money on the “spread” between buying and selling prices.

- Substitution of competitive pricing for the brokers’ traditionally guaranteed 1.65% commissions, which for years provided an easy, reliable income. (The move recalls the New York Stock Exchange’s famous “May Day” deregulation 11 years ago.)

- The start of computerized, off-the-floor trading--a move that enthusiasts predict will eventually make the stock exchange’s floor obsolete and that skeptics fear will bring technical snafus and chaos.

- Transformation of the high-risk $1.5-billion-a-day market for British government securities, from the cozy, near-exclusive preserve of two British jobbing firms into a free-for-all available to 27 commercial banks, investment banks and securities houses.

To police the newly deregulated markets, London’s first-ever statutory regulatory body, the Securities Investment Board, has been established. Parliamentary approval of the body’s legal powers is expected shortly. Although the new board will have the ultimate power to revoke a firm’s trading license as well as the weapon of a public reprimand, it lacks the investigative and prosecuting powers of the U.S. Securities and Exchange Commission, which monitors American markets.

There is some concern that the Securities Investment Board may prove too weak.

Life Style Changed

For all the City’s changes, however, probably the most traumatic is transformation of a life style in a financial community once famed for its leisurely pace, fixed loyalties and clubby ways. The 10 a.m.-to-4 p.m. workday, punctuated by a two-hour lunch, has become as rare as the bowler hat that used to be part of the “uniform” of those working in the City.

Competitive pressures from other markets and a growing international community have made their presence felt. “The pace has quickened over the last 15 years,” said stock exchange spokesman Luke Glass, but the Big Bang, he added, “is likely to make it change gear altogether.”

Last spring, the stock exchange pushed forward its opening time by half an hour, to 9 a.m. Many institutions begin work earlier to clear up business generated in Tokyo and to take preopening orders for the London markets. Those with interests in North American markets rarely quit before Wall Street closes at 10 p.m. London time.

“Five years ago, I’d come in at 9:15 and the place was half empty,” recalled Marks of Smith New Court. “Now I come in at 7:30, and everyone is here.”

In a development that would have horrified an earlier generation, a City restaurant popular with younger brokers has begun serving breakfast, offering the American Cable News Network as a draw. “People said we’d never make it go, but we’re steady at around 45 breakfasts a morning now,” Ian Shaw, manager of Coates Cafe, said last week, adding that he expects that number to “jump over 100” this week.

Fueling this new energy is, of course, the quest for money.

Salary Explosion

The demand for quality performers in London’s deregulated markets has generated an explosion in salary levels undreamed of a few years ago. One team of three equity market-makers from the jobbing firm of Wedd Durlacher, now owned by Barclay’s Bank, were reportedly paid about $1.5 million to jump to the Kleinwort Benson investment-banking group, where first-year salaries could run above six figures.

Bidding wars for key people or entire teams continue to push income levels higher as institutions try to hold their talent with so-called golden handcuffs--guaranteed future raises.

“It’s like bidding for big football stars,” noted William Kay, a respected City observer and author of a recent book on ramifications of the Big Bang. “It’s very individual.”

Stephen Waterhouse, managing director of an executive recruitment and management consulting firm, Hanover Partners Ltd., likens the atmosphere to the bidding for talent in the high-growth years of Silicon Valley in California.

But six-figure salaries also bring pressure, with tiers of “whiz kids” eager to replace anyone who may falter. “We’re going the American way,” said Marks. “If you don’t perform, you’re out.”

None of the new London markets is expected to be more cutthroat than the British government bond market, where 27 institutions will now do battle where once only two held sway. Nearly half of the new entrants are American, eager to carve out their own piece of the market.

The governor of the Bank of England, Robin Leigh-Pemberton, recently warned participants to avoid excessive margin-shaving in the fight to establish a market presence, but his words are likely to have little impact.

Will Be a Snake Pit

“It’s going to be a snake pit,” predicted Kay. “The conventional wisdom is that it can sustain 10 to 15 participants at most. The real question is how vicious it’s going to get.”

The U.S. Treasury bond market--roughly 10 times the size of its British counterpart--supports 35 market-makers.

The Big Bang has entailed major investments in hardware. The stock exchange’s computerized information system represents a sizable part of the exchange’s $120-million investment in the program. The system, called SEAQ (for Stock Exchange Automatic Quotation), displays prices and competing quotes, and enables market-makers to enter new prices. But it does not offer direct dealing; that will have to be done by telephone.

“The absence of direct dealing was a factor of the short development time,” explained stock exchange spokesman Glass. “We hope to add that for small transactions (less than 1,000 shares) in the next 18 months.”

During a Saturday “dress rehearsal” of the new system on Oct. 18, delays of up to 20 minutes developed in screening new prices. Market-makers refused to pick up telephones because they did not want to deal in outdated prices, and brokers were frustrated at being unable to pin down transactions. Later in the day, however, updates were routinely appearing within two-thirds of a second.

There were also problems at several firms that had sunk substantial capital into their own computer systems so that they could be linked to the stock exchange system. Citicorp’s recently acquired brokerage, Scrimgeour Vickers, had a partial power failure for much of the morning.

Change in Ownership

Heavy investment in hardware and manpower has also transformed the pattern of institutional ownership in the City, a community where close-knit limited partnerships conducted business for established clients on a shoestring. All but one of the City’s 50-odd major brokerage houses and eight of the nine biggest stock-jobbing firms have been absorbed, either by large British banks or by foreign banks and investment houses.

Only the mysterious and powerful brokerage house of Cazenove & Co. and the securities house of Smith New Court have remained independent, but both have sharply increased their access to capital.

Britain’s two largest banks, National Westminster and Barclays, reportedly invested more than $450 million each in preparing for the Big Bang. American and Japanese institutions have also invested heavily.

But for some, the expansion has brought problems. Citicorp, for example, has lost several individuals, including a highly regarded team of electronics-industry analysts, while Chase has had trouble integrating the staffs of its local acquisitions and has also lost key people, including a 13-member Eurobond team and two senior economists.

“People from small partnerships are experiencing a lot of culture-shock adjusting to a corporation of 60,000 with its headquarters thousands of miles away,” noted Keith Brown, head of research at W. Greenwell, a broker owned by another of Britain’s largest banks, Midland.

Just who survives in the deregulated London market is a matter of both hot debate and considerable speculation. About the only certainty is that some will not.

The capital muscle of the big American and Japanese houses will enable them to survive any prolonged shakeout, if they believe that the markets show long-term promise. Their breadth of services is also an advantage, although smaller, so-called niche firms, dealing in a specialist areas are confident that they, too, can thrive.

“Research and information have always been strong in London,” Brown noted. “People can be macho about prices and commissions and invest a lot in computer hardware, but if you’re dealing in the wrong stock at the wrong time, it’s all not much help.

“Those who survive will be those who know their markets best.”