Big Bang

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Written By
Contributor Image
Written By
Dan Buckley
Dan Buckley is an US-based trader, consultant, and part-time writer with a background in macroeconomics and mathematical finance. He trades and writes about a variety of asset classes, including equities, fixed income, commodities, currencies, and interest rates. As a writer, his goal is to explain trading and finance concepts in levels of detail that could appeal to a range of audiences, from novice traders to those with more experienced backgrounds.

The Big Bang refers to the deregulation of the London Stock Exchange (LSE), which took place on 27 October 1986.

After this event the LSE became a private limited company and regulations were curtailed in response to London losing its stature as the world’s top financial hub to other cities, such as New York. At the time of the event, the New York Stock Exchange (NYSE) was doing 13x the volume of the LSE due to the lack of electronic-based modernization. Prior to the Big Bang, London-based banks were having problems competing with foreign firms due to matters stemming from overregulation and inhibitions of meritocracy.

Big Bang Trading Volume Surge

The reforms were characterized by the distinction of stockbrokers (regulated professional individuals who buy and sell securities for retail and institutional clients) from stockjobbers (market makers and liquidity providers), elimination of fixed commission charges, and change from open-outcry to electronic-based trading.

The event became known as the Big Bang due to the surge in trading volume and volatility that occurred after it was effected. Investment banks took over smaller, established brokers and integrated them within their own operations.

Critics of the Big Bang argue that the deregulatory reforms placed too much power in the hands of large investment banks. Via a trickle-through effect, it is contended by some that this contributed to the “too big to fail” conundrum, where a failure by a large bank could work to drag down an economy by effectively freezing large amounts of capital.

The measures, along with a generally strong economy, helped set off a 38% rally in the Dow Jones Industrial Average from October 1986 to October 1987 before a major one-day crash of 25% ended the momentum.

big bang drop

Implications for Day Traders

If there’s anything to learn from such events, it’s that matters relating to regulation can have a large impact on the market. While the financial community generally cheers the rollback of regulation, as it eases the ability to do business, it can also make markets more volatile and also cause some firms to benefit at the expense of others. Markets that become too frothy, plus a potential tightening of monetary policy, can set up an environment where risk builds and risk/reward asymmetry becomes skewed to the downside.