Big Bang

Big Bang: Definition

The “Big Bang” refers to the major transformation of the London Stock Exchange (LSE) on October 27, 1986. These changes were part of a broader deregulatory wave spearheaded by the UK government aimed at enhancing the competitiveness of London’s financial services industry. The essential changes included:

Abolition of the Fixed Commission Rates: Prior to the Big Bang, brokerage firms operated under fixed commission rates, limiting competition. These were abolished, allowing negotiations on commission fees.
Removal of the Distinction Between Jobbers and Brokers: Jobbers (market makers) and brokers had strictly separate roles, with jobbers buying and selling shares and brokers acting as intermediaries. This distinction was eliminated, creating a single class of traders.
Introduction of Electronic Trading: Modern technology and electronic trading systems were introduced, replacing traditional open outcry trading.
Foreign Ownership: Foreign firms were allowed ownership of British brokers, increasing market competition and fostering globalization.

The Big Bang aimed not only to deregulate but also to modernize and globalize the LSE, aligning it more closely with global financial markets.

Examples

Broker-Dealer Roles Integration: Before the Big Bang, there were strict rules separating brokers (advising clients and helping them buy and sell securities) and jobbers (acting as wholesalers for securities). Post-Big Bang, these roles were merged, leading to the creation of modern broker-dealer firms.
International Competition: Before the deregulations, UK-based brokerage services were costly due to fixed commission rates. After the Big Bang, international firms entered the market leading to competitive pricing and efficiency improvements.
Electronic Trading: The implementation of electronic trading systems allowed for more efficient, faster, and transparent trading processes, fundamentally changing the way trading was executed on the LSE.

Frequently Asked Questions (FAQ)

Q1: Why was the term ‘Big Bang’ used to describe the changes at the London Stock Exchange? A1: The term “Big Bang” was used to signify the magnitude and immediacy of the transformations that were introduced on a single day, drastically changing how the LSE operated.

Q2: How did the abolition of fixed commission rates impact the market? A2: The removal of fixed commission rates fostered competitive pricing, providing clients with more options and reducing transaction costs in the market.

Q3: What immediate effects did the Big Bang have on the LSE? A3: The immediate effects included streamlined operations, increased competition, reduced costs for investors, and significant technological advancements in trading practices.

Q4: Did the Big Bang have any global impact? A4: Yes, the Big Bang significantly boosted the globalization of financial markets, as it allowed foreign firms to participate more actively, thus integrating the LSE more closely with global financial markets.

Q5: Were there any negative consequences of the Big Bang? A5: Some critics argue that the increased competition and deregulation led to greater risk-taking and contributed to the financial excesses that characterized subsequent financial crises.

Broker-Dealer: Financial firms that act both as brokers (facilitating transactions for clients) and as dealers (trading on their own account).
Jobber: A market maker in securities, engaged in buying and selling on their own account (a role distinct from brokers prior to the Big Bang).
Stockbrokers: Professionals who buy and sell stocks and other securities for clients, often providing investment advice.
Globalization: The expansion of businesses, markets, and investments across international borders, integrating economies and markets globally.

Online References

Suggested Books for Further Studies

“Big Bang: The Godfathers of Finance.” by Raymond Francis
“The City: Inside the Great Expectation Machine.” by Tony Golding
“Global Capital Markets: Integration, Crisis, and Growth.” by Maurice Obstfeld

Big Bang Fundamentals Quiz

### What was one of the primary changes introduced during the Big Bang on the LSE? - [x] Abolition of fixed commission rates - [ ] Introduction of new company tax rates - [ ] Merger of banks and insurance companies - [ ] Initiation of centralized trading floors > **Explanation:** One of the key changes during the Big Bang was the abolition of fixed commission rates, allowing for negotiated pricing between brokers and their clients. ### Which distinction was removed as part of the Big Bang reforms? - [ ] Distinction between banks and hedge funds - [x] Distinction between jobbers and brokers - [ ] Distinction between primary and secondary markets - [ ] Distinction between local and international users > **Explanation:** The Big Bang removed the rigid distinction between jobbers (market makers) and brokers, allowing them to operate as a single class of entities. ### How did the Big Bang impact electronic trading? - [x] Introduced electronic trading - [ ] Restricted electronic trading - [ ] Eliminated the need for electronic trading - [ ] Had no impact on electronic trading > **Explanation:** The Big Bang introduced electronic trading systems, replacing the traditional open outcry method and increasing the efficiency and speed of transactions. ### What aspect of ownership did the Big Bang change in the LSE? - [ ] Nationalization of all broker firms - [x] Allowing foreign ownership of British brokers - [ ] Privatization of the LSE - [ ] Compulsory mergers among local firms > **Explanation:** The reforms included allowing foreign firms to own British brokers, thereby increasing competition and integrating the LSE into global markets. ### What was the overall goal of the Big Bang reforms? - [ ] Centralize market control - [x] Deregulate and modernize the LSE - [ ] Nationalize British financial institutions - [ ] Reduce global financial interactions > **Explanation:** The overall goal of the Big Bang reforms was to deregulate and modernize the LSE, making it more competitive and efficient. ### Why did the UK government agree to not prosecute LSE under the Restrictive Practices Act? - [x] In exchange for the reforms enacted on Big Bang day - [ ] Due to lack of jurisdiction - [ ] Because of an international trade agreement - [ ] To prevent a financial crisis > **Explanation:** The UK government agreed not to prosecute the LSE under the Restrictive Practices Act in return for the deregulatory measures introduced on Big Bang day. ### Which type of firm was significantly impacted by the Big Bang’s abolition of fixed commission rates? - [ ] Manufacturing firms - [ ] Real estate agencies - [x] Brokerage firms - [ ] Accounting firms > **Explanation:** Brokerage firms were significantly impacted by the abolition of fixed commission rates, as they now had to compete on pricing and service. ### How did the LSE enhance its technology following the Big Bang? - [ ] By developing in-house trading software - [ ] By acquiring a fintech startup - [x] By integrating electronic trading systems - [ ] By launching internet banking services > **Explanation:** Following the Big Bang, the LSE integrated electronic trading systems, greatly enhancing its operational technology and efficiency. ### Post-Big Bang, what became of the relationship between jobbers and brokers? - [ ] Their roles became more distinct - [x] The distinction between their roles was abolished - [ ] They were merged into a single regulatory body - [ ] Their roles were nationalized and controlled > **Explanation:** The distinction between jobbers and brokers was abolished, allowing for more flexible and integrated financial service operations. ### What was a key benefit of allowing foreign firms to enter the British brokerage market? - [ ] Reduced tax obligations for UK firms - [ ] Increased government control - [x] Higher competition and innovation - [ ] Creation of dual-nationality financial products > **Explanation:** Allowing foreign firms to enter the market resulted in higher competition, which spurred innovation and improved market efficiency.

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