The original meaning of the "Big Bang" is derived from the astrological term, The Big Bang Theory, which theorizes that the universe originated from a gigantic explosion. Taken from this, the reforms centering on the stock exchange that were put into effect in England in 1986, came to be commonly referred to as the "Big Bang."
The following items can be stated as being part of the background
of the essential reforms that took place in the securities market
in England at that time.
(1) The relative decline of the status of the British securities market
In 1985, before the implementation of the "Big Bang," the London stock exchange's turnover was only 1/13th of the then world's No. 1 ranked, New York, and it was found to be only 1/5th of the No. 2 ranked, Tokyo.
(2) The development of internationalization and the delayed response of English stock broker.
Not able to properly deal with the intervention of foreign traders, the majority from the U.S., and their strategy toward internationalization, British traders experienced a decline in position in the financial market.
(3) Technological development and the expansion of transactions outside of the stock exchange
With the advancements in the processing technology of investment and client information and the growth of investment firms made possible with developments in computers and communication technology, there has been an occurrence of a shift towards foreign and over-the-counter block transactions, shaking the foundations of the very existence of the stock exchange.
In order to deal with this situation the following reforms were
put into place in October of 1986.
(1) The liberalization of commissions
Since the late 1970's stock exchange regulations, including the fixed commission rule, which was regarded as restricting competition by the FTC, had been disputed. An agreement was reached in 1983, which decided that minimum commission was to be abolished by the end of 1986. With the "Big Bang," stock exchange regulations were revised which put this agreement into effect.
(2) Abolishment of the Independent Certification System
The Independent Certification System is an old traditional British system where it is forbidden for members of the stock exchange to perform transactions based on their own accounts and to perform as jobbers as brokers acting as an intermediary between jobbers and clients. However, facing the trend of internationalization of information and transactions and the progression of mechanization, which became very difficult to cope with both capital power and risks, under the current system of the Independent Certification System, domestic trade were placed in a disadvantageous position in competing with their foreign business opponents. In order to break through this state of affairs, the stock exchange regulation was changed, which abolished the Independent Certification System lifted the regulation forbidding performing as both a broker and as a jobber, resulting in improvement of the abilities of stock exchange members.
Taking this into consideration, in the following year of 1987 the stock exchange's trading floor system was abolished in favor of "screen" transactions.
(3) The abolishment of the restriction over non-stock exchange members' investment to stock exchange members
Before the "Big Bang" only members of the stock exchange were allowed to make investment in stock members companies. However, in the midst of the advancement of block transactions with global institutionalization stock exchange regulations were changed to make possible the introduction of external capital (the capital of non-members and banking institutions, etc.) in order to expand the capital base of the stock exchange member's companies.
This series of reforms made possible the following achievements:
(1) Effects in the market
The market expanded quite smoothly. For example, while the ratio that the financial sector occupies in England's GDP is 13.6% in 1985, before the "Big Bang", the ratio had risen to 17.2% in 1990, after the "Big Bang.
Although there are ups and downs inherent, a relatively smooth expansion could be seen in capital provided by stocks. Particularly, there was a great increase in the cross border stock transaction. On the other hand, the problem remained that there was no great expansion in the number of stock holders and investors.
(2) Transition of commissions, etc.
Through the "Big Bang," the level of commission in accordance with costs and service was reached. Speaking concretely, commissions for block trading became lower than before, while small block trading experienced a slight rise. Commission ratios on the whole achieved a standard that was relatively low by the international standard.
(3) Influences on the security world
Capital of securities firms was strengthened in general. Further, with an introduction of the advanced transaction know-how and innovation such as derivatives, London became the center of European investment banking.
As for jobbers and brokers, acquisition by English merchant banks and American businesses progressed, however, it is also true that merchant banks which represent England itself were bought out robbing the London market of it's national flag.
The 'Union Flag' has been disappearing.
[About the financial system reformation (The Japanese version of the Big Bang)]