Financial Deregulation

Market transformation
Global Financial Hub

BY Bhavya Shrestha
Introduction
The "Big Bang" financial deregulation in
the United Kingdom refers to a series of
changes implemented on October 27,
1986, aimed at revitalizing and
modernizing London's financial markets.
These reforms were part of a broader
trend of deregulation in the financial
sector that took place during the 1980s
in various parts of the world.
Context and Background
•Economic Environment: The early 1980s in the UK were marked by
significant economic challenges, including high inflation,
unemployment, and stagnant growth. The government, led by Prime
Minister Margaret Thatcher, sought to liberalize the economy
through deregulation, privatization, and reducing the role of the
state.

•Financial Market Conditions: The London Stock Exchange (LSE) was

seen as outdated and overly restrictive, with fixed commission
charges and a clear distinction between brokers and jobbers (market
makers). This limited competition and efficiency.
Deregulation of the LSE
IN 1983, the London Stock Exchange was embroiled in an antitrust
case brought forth under the previous government by the office of
Fair Trading.

At issue were rules on commissions the independence of jobbers

and brokers, and the lack of foreign membership on the exchange.

On October 27, 1986, Prime Minister Maragaret Thatcher and

finance minister Nigel Lawson implemented the Big Bang to bring
reform to the London markets. Before the big bang the LSE trailed
other exchanges. The New York Stock Exchange was the largest
market worldwide by turnover rate, while LSE turned over 1/13 of
the volume transacted by the NYSE.
Impacts and Outcomes
•Growth in Financial Services: London emerged as a global financial
hub, attracting numerous international banks and financial
institutions. The city's financial services sector grew significantly in
size and importance.

•Market Efficiency: The transition to electronic trading and the

integration of broking and jobbing roles improved market efficiency
and transparency.

•Consolidation and Mergers: The increased competition and new

opportunities led to a wave of mergers and acquisitions among
financial firms, resulting in fewer but larger and more robust
institutions.
Market Transformation
The Big Bang deregulation of 1986 profoundly transformed the UK financial
markets, leading to numerous changes in their structure, operation, and
global standing. Here’s a detailed look at the various aspects of market
transformation following the Big Bang:

Structural Changes
1.Electronic Trading: The shift from open outcry to electronic trading
systems revolutionized the way transactions were conducted. It
significantly increased the speed and accuracy of trades.

2.Integration of Brokerage and Market Making: The abolition of the

separation between brokers and jobbers allowed firms to offer both
services, enhancing liquidity and market efficiency. This integration led to
the creation of larger, more versatile financial firms.
Socio-Economic Implications

1.Job Creation and Economic Growth: The growth of the financial

sector created numerous high-paying jobs and contributed
significantly to the UK’s GDP. The financial industry became a
major driver of economic growth.

2.Income Inequality: The expansion of the financial sector and the

high compensation levels in the industry led to increased income
inequality. The benefits of the financial boom were not evenly
distributed across society.

3.Urban Transformation: London’s financial district, particularly

areas like Canary Wharf, underwent significant development, with
new infrastructure and buildings transforming the cityscape.
Legacy and Long-Term Impact

1.Foundation for Modern Financial Markets: The Big Bang laid the
foundation for modern financial markets, characterized by electronic
trading, integrated financial services, and global connectivity.

2.Ongoing Reforms: The need for ongoing regulatory reforms became

apparent, as markets continued to evolve and new risks emerged. The
Big Bang highlighted the importance of balancing deregulation with
effective oversight.

3.Cultural Shift: The reforms also brought about a cultural shift in

the financial industry, emphasizing innovation, competition, and a
global outlook.
Global Financial Hub
• The Big Bang deregulation of 1986 played a pivotal role in establishing
London as a leading global financial hub. Here’s how the Big Bang facilitated
this transformation and the various factors that contributed to London’s
emergence as a key player in the global financial landscape:

• Key Factors in London's Transformation

1.Increased Foreign Investment:

Liberalization of Ownership Rules: By allowing foreign firms to own UK
financial institutions, the Big Bang attracted a substantial influx of
international banks and financial services companies to London.
2.Technological Advancements:
•Innovation in Financial Products: The competitive environment
fostered by deregulation spurred innovation, with new financial
instruments and products emerging from the City.

3.Market Efficiency and Competitiveness:

•Removal of Fixed Commissions: Abolishing fixed commission rates
led to more competitive pricing, making London’s financial markets
more attractive to investors and traders globally.

•Integrated Financial Services: Allowing firms to combine broking

and market making roles increased operational efficiency and
market liquidity.
• Strategic Advantages

1.Geographical Location:
• Time Zone Advantage: London's time zone allows for overlap with
both Asian and American markets, facilitating continuous global
trading operations.

2.Legal and Regulatory Framework:

• Stable and Transparent Legal System: The UK’s legal system is
renowned for its stability and transparency, which are crucial
factors for international investors.

• Adaptive Regulation: Post-Big Bang, the UK has maintained a

regulatory framework that balances market freedom with
• Impact on Global Financial Markets

1.Enhanced Global Connectivity:

• Network of Global Banks: Many of the world's largest banks and
financial institutions have established significant operations in
London, making it a key node in the global financial network.
• Cross-Border Transactions: London's robust infrastructure and
regulatory environment facilitate a high volume of cross-border
financial transactions and investments.

2.Leading Financial Center:

• Diverse Financial Services: London offers a comprehensive range
of financial services, including banking, insurance, asset
management, and more, making it a one-stop shop for global
financial needs.
• Financial Innovation: The city's environment continues to foster
financial innovation, with a strong presence in fintech and other
emerging financial technologies.

• In summary, the Big Bang deregulation was instrumental in

transforming London into a global financial hub. By fostering a
competitive, innovative, and efficient market environment, it
attracted international investment, facilitated global connectivity,
and established London as a central player in global finance. This
status has been maintained through ongoing adaptations to new
challenges and opportunities in the global financial landscape.
THANK YOU