Big Bang

DEFINITION of 'Big Bang'

The Big Bang refers to the day of deregulation for the securities market in London on Oct. 27, 1986, in which the London Stock Exchange (LSE) became a private limited company. The event revitalized the LSE because outside corporations were allowed to enter its member firms, and automated price quotation was established.

BREAKING DOWN 'Big Bang'

Before the Big Bang, the LSE was trailing the other major exchanges in the world. At the time, the New York Stock Exchange (NYSE) was the biggest market worldwide, determined by turnover rate. London was only able to turn over 1/13 of the volume transacted by the NYSE. The electronic trading system helped improve London's turnover because orders were now accepted by telephone and computer.

The Big Bang witnessed many changes in the financial markets, including the removal of fixed commission charges, the distinction between stockbrokers and stockjobbers, and the switch from open-outcry to electronic trading. It was dubbed as such because of the expected rise in market volatility and activity on the day when changes in the structure of the financial market were made.

Financial Service Authority

The changes created in the Big Bang led to even more significant changes in the financial markets throughout London. It was a time when large banks took over old firms. The changes created in the regulatory environment eventually led to the building of the Financial Services Authority (FSA), the quasi-judicial body that regulated the financial services industry in the United Kingdom from 2001 to 2013.

Policy

Prior to the Big Bang, the financial institutions that once dominated the city could not compete with foreign banking. Though still a global finance center, it had already been beaten by New York.

The Big Bang was one of the vital points of the U.K. government’s reform program. The reform program focused on the elimination of the city’s major problems: overregulation and the widespread practice of old boy networks. The solution the government found in the Big Bang provided the doctrines of free market competition and meritocracy.

Consequences

Though the Big Bang may have triggered some revolutionary changes, it also had some negative effects. Due to the deregulation of the markets, the concentration of power was focused on the big companies that took over long-standing firms. This same change created by the Big Bang trickled throughout the financial systems around the world. Now, companies that are “too big to fail” dominate financial cities. This characteristic has turned financial centers fragile as seen in 2008 during the Great Recession.