Time for a bigger bang?
As Sergeant Pepper’s band famously sang – “It was 20 years ago today…” and on the 26th October 1986 we did have a very significant change in the operation of the City – the Big Bang, which heralded in some of the most crucial changes in the operation of the stock market for generations. Following on from “Baby Bang” about eighteen months earlier, when outside banks and companies could start to buy into stock exchange firms (both jobbers and brokers), Big Bang finally sealed the full control of such purchases as the banks stormed in to take full control and ownership of many of the old investment names and houses. Great names of the past like Messels, Wedd Durlacher and James Capel were all to disappear in time to be replaced by those more familiar, if somewhat bland, international corporate brands.
It was also an astonishing sight to see so much money being thrown at a business concept which mostly ended in huge losses and for many, significant operational chaos. The key structural change at Big Bang related to the method of trading through market makers rather than jobbers and the new electronic dealing rooms that were to replace the old trading floor of the Exchange. In fact the floor continued on for some time and proved rather useful when the systems went down from time to time, but within two years it had withered away. It was interesting to note at that time that the somewhat pompous NYSE was even questioning whether London could be regarded as a stock exchange any longer as it was going to close its trading floor! What cheek – especially when you see the relatively paltry volumes now traded on the NYSE floor as opposed to their electronic systems – mind you it still makes good theatre for the television news (and much better than 732 odd plastic balls going up and down in the new LSE building in Paternoster Square– oops, I probably shouldn’t be so rude about it.)
The electronic trading systems actually worked on the whole quite well, but it was the geriatric settlement mechanism that was to fail. Paper based account settlement was not designed for volume and faster electronic trading just piled up the paper even faster, and even specialist settlement houses such as Broker Services Ltd and Pershing Securities found it difficult to take the strain. It took many years to resolve that issue after the failed TAURUS project of the Exchange and eventually this lead to the Bank of England being instrumental in ensuring that the CREST settlement system was developed and introduced (which they said very definitely was not an acronym and did not stand for “Can’t Remember Ever Settling a Transaction” – we got told off for that one). It took some time and the benefits have been huge but it took the third party discipline of the Bank of England to force it through all the bickering parties in the markets.
However, Big Bang did lay the foundations for modern trading in the UK well ahead of the NYSE and certainly far superior to the very introspective local European bourses. Trading was faster; price formation was more efficient and spreads narrowed, certainly a significant improvement on before. There was greater transparency and competitive commissions – as opposed to fixed commissions – thereby providing greater value for investors. The only thing that wasn’t fixed was regulation – we had self regulation – which seemed sometimes as though we made it up as we went along – Meum Pactum Dictum (My word is my bond).
There were also the remaining regional exchanges which continued for a short while (down from their original 45 in 1945) but it was only Glasgow that had any reasonable volume, with its own market makers and active trading floor, but even it finally passed on not long after its 150th birthday.
However, after 20 years maybe it is time for Big Bang 2? Not, this time, in the stock market where the cosy old world had been broken up, but this time in the world of funds and their managers where “traditional” ways of operating seem to continue on the basis that “this is the way we have always done it”. Some questions which could be answered by such a Big Bang should include - why is there no trading system for all funds in the UK operating as a trading market and efficient price formation, like a stock market? Why is there no standard and timely settlement process? Why is there paper still being used? Why are spreads often so wide? Why are annual management charges so high? Why do we have “other deductions”? What actually is “creation plus a quarter”? And why are fund charges often cheaper elsewhere? This could improve client service, market efficiency and be an improvement to the industry – so where is the downside?
Has the UK economy finally begun to show some reality? Lower retail sales and flat growth for the quarter gives an indication, but the inflationary pressures (not included within the CPI) still point to further rate rises and the potential for a bout of stagflation in the UK next year. With the unemployment trend continuing to rise and government expenditure above targets, has our “lucky” Chancellor finally begun to see his luck run out? Well he has an amazing habit of producing rabbits but nonetheless it would be quite a feat to effect such a change as the world economy continues to slow. If that is the case then the arguments over rate rises (inflation vs. falling growth) will become more visceral.
One piece of disreputable news last week was the failure of the hamper company Farepak, owned by European Home Retail. Thousands of savers, often from the poorer end of society, had been saving for Christmas vouchers, presents and hampers only to see all their monies lost in the company’s failure. Some serious questions need to be answered here. Why did the business appear to shut when the monies coming in were at a peak? Why despite concerns from the company earlier in the year, had the directors seemingly not taken any action? Why did the industry not gather round to support the “reputation” of this trade?
The sickening thing is that these people were doing the “right thing” by saving for Christmas and not borrowing - and of course even more galling was that if they had purchased goods on a credit card, they would have had some form of cover and compensation. These companies are not hamper companies – they are savings companies – just piggy banks with cellophane on – and as such must be properly registered, regulated and licensed as any other deposit taker. Another reason as to why we both need regulation and an example of the failure of effective regulation in my view. Perhaps vouchers from Tesco, Sainsbury, Marks & Spencers and some of the other supermarkets might care to win some kudos and good will by helping out those pensioners who have lost out “by doing the right thing”?
And finally…….an alternative career for us all. For those who are of an artistic bent, the attraction of a career in Birmingham may have become appealing. Apparently road painters in that fine city can now, with bonuses, earn up to £53,000 per annum. Somewhere in the Midlands there must be a budding motorway Monet – that’s not just a yellow line – that’s art.
Have a good weekend and Happy Diwali.
Justin A. Urquhart Stewart
Seven Investment Management
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