How Big Bang actually changed the rules — and what it meant for private investors

The Big Bang of October 1986 gets discussed as a moment of financial liberation. The reality was messier, more interesting, and considerably more consequential than the headline version suggests.

On 27 October 1986, three changes came into force simultaneously, and together they dismantled a way of doing business that had existed for three centuries. They were not abstract regulatory tweaks. Each one altered the structure of the City in ways that rippled outward to every private investor who has since bought or sold a share.

The first was the abolition of fixed commissions. Before Big Bang, every stockbroker charged the same rate for executing a trade. The price was set by the Stock Exchange, like a taxi tariff, and nobody competed on cost. A private investor paid what everyone else paid. The system protected the broking firms handsomely, and it kept out anyone who might have disrupted it. When fixed commissions were scrapped, brokerages had to compete in the open market for the first time. Prices fell sharply, particularly for large institutions, though private investors took longer to feel the benefit. The spread of online trading in the late 1990s eventually brought genuinely low-cost execution to ordinary investors, but Big Bang planted the seed.

The second change was the end of single capacity, replaced by dual capacity, and this one had the most far-reaching consequences. Under the old system, firms were either brokers, who acted for clients, or jobbers, who made markets in shares. You could not be both. The separation was not just regulatory tidiness; it was supposed to keep the interests of buyers and sellers apart from the interests of the professionals sitting between them. Dual capacity collapsed that wall. A single firm could now act as broker for a client while simultaneously acting as market maker in the same shares. The conflicts of interest this created did not disappear overnight, but they became considerably harder to spot.

The third change was the arrival of electronic trading. The Stock Exchange floor, where jobbers had stood at their pitches and dealers had negotiated face to face, closed. In its place came SEAQ, the Stock Exchange Automated Quotation system, a screen-based market where prices were quoted electronically and deals were done over the telephone. The old trading floor became a museum piece. The City professionals who had learned the market by watching faces and reading rooms found themselves sitting at screens, a way of working that suited the new entrants arriving from American investment banks with very different cultures and considerably higher salary expectations.

The City that emerged from Big Bang within a decade bore almost no resemblance to the City that preceded it. By the mid-1990s, most of the old-established British broking firms had been swallowed by larger institutions, mainly American and European banks. The names survived in some cases, but the businesses were unrecognisable. What had been partnerships of individuals with personal liability for their decisions became departments inside global corporations with shareholders on three continents. The culture shifted accordingly. Short-term performance mattered more than it ever had. The quarterly numbers became the measure of everything.

Ian Lyall, writing in The Street-Smart Trader, observed that this transformation created a City geared toward volume, velocity, and complexity in ways that served the institutions far better than they served private investors. The professionals who now operated the market were not inherently dishonest. They were working within incentive structures that pointed in a specific direction, and that direction was not necessarily aligned with the interests of someone placing a small order in a retail dealing account.

The crisis of 2007 to 2009 gave the world its clearest view of what deregulation and dual capacity, combined with thirty years of financial innovation, had produced. Banks had moved so far from their traditional role as intermediaries that their balance sheets were stuffed with instruments that almost nobody fully understood. The capital requirements that were supposed to constrain risk had been gamed systematically. When the structures unravelled, the damage spread across the global economy at a speed that the old City, with its fixed commissions and face-to-face jobbers, could never have matched. The same interconnectedness that made markets efficient made the collapse catastrophic.

More recent crises have reinforced the lesson rather than refuted it. The sharp market sell-off of March 2020, when the pandemic arrived, saw liquidity dry up across asset classes with a speed that surprised even experienced traders. The near-collapse of the UK gilt market in September 2022, triggered by the Truss government’s mini-budget and amplified by leveraged positions in liability-driven investment funds used by pension schemes, demonstrated that systemic risks continued to accumulate in corners of the market that regulators struggled to monitor. The instruments and structures change. The underlying dynamic, the tendency of deregulated markets to build up pressure in ways that are only visible in hindsight, does not.

For private investors, what Big Bang ultimately produced was a market that was simultaneously more accessible and more opaque than what came before. The cost of dealing fell. The range of instruments available to ordinary investors expanded enormously. But the professionals who made markets, advised on transactions, and structured products also had far more sophisticated tools for extracting value from the gap between what they knew and what their clients knew. The information asymmetry that has always existed in financial markets did not shrink after Big Bang. It was reorganised, sometimes hidden more effectively, and in some cases deliberately engineered.

The Street Smart series is rooted in the belief that understanding how the City actually works, not how it presents itself, is the only reliable starting point for an independent investor. The mechanics of 1986 are not ancient history. They are the foundation on which today’s market is built, and the fault lines they created have not closed.

This post is drawn from The Street-Smart Trader by Ian Lyall. Republished with permission.

Street Smart is a series drawn from first-hand experience of the City of London, updated as each new chapter arrives.

Disclaimer: The value of investments can go down as well as up, and you may get back less than you invest. This article is for informational and educational purposes only and does not constitute financial advice. Always do your own research and consider seeking independent advice before making any investment decision.

This article is for informational purposes only and does not constitute financial advice. Investment values can go down as well as up. Always do your own research before making any financial decisions.