ECON0051: Economics of Regulation Group Project Report
The Big Bang
A Critical Review of Financial Market
Deregulation in the UK in the 1980s
Word Count: 4,698 (including in-text citations)
Page Count: 11
Candidates: FSQL9, GHJK7, DMHS9, KCPS4, DJXS6
Abstract
The 1986 Big Bang deregulation of the London Stock Exchange (LSE) was a pivotal event that
liberalised the Exchange internationally, marking a significant turning point in the UK’s financial
sector. Emerging from a period characterised by stagflation and economic downturn, this move had
two effects: i) catalysing the growth of the UK’s financial growth model, and ii) setting the stage for
future financial vulnerabilities. This paper aims to explore the transformative Big Bang reforms that
took place in October 1986, which liberalised the LSE and abolished its restrictive practices, by
focusing particularly on the impact of removing fixed commission rates and opening up the Exchange
to foreign firms. Our analysis seeks to explore an adapted Monte-Klein model to show the impact of
the deregulation on the LSE marketplace.
Picture source: Robertson (2016)
, ECON0051: Economics of Regulation Group Project Report
Introduction
The Context
The Big Bang of the UK financial markets refers to a set of regulatory changes imposed on financial
markets in the UK in 1986 under Prime Minister Margaret Thatcher. This signified the start of a
deregulatory phase in the UK and opened it up to foreign players and foreign capital. It implemented a
number of regulatory changes including abolition of restrictive practices, such as fixed minimum
commission rates for brokers, separation of the roles of brokers and jobbers, and exclusion of foreign
players from membership in the London Stock Exchange (Kenton, 2023).
The London Stock Exchange (LSE) is a stock exchange, providing a marketplace for companies to
raise capital and for investors to buy and sell securities (stocks) (Chen, 2023). It is the primary stock
exchange in the UK and one of the largest in the world, having been formed as a result of the merging
of regional exchanges in 1973 (originally named the ‘Stock Exchange of Great Britain’) (Chen, 2023).
Barrett (2024) mentions that “the market was socially constructed”, meaning that it consisted of
member firms of the stock exchange (mainly referred to as ‘the market’) and jobbers (known as the
‘market makers’). Other agents in the market included merchant bankers, institutional fund managers
and others, together forming a “centre of commercial capital”(Barrett, 2024).
Prior to the Big Bang, the LSE was exclusively accessible only to member firms and controlled strict
membership rules that acted as a barrier to entry for aspiring entrants (Barrett, 2024).
The Problem
The issues that prompted the Big Bang are widely debated by Economists and Political Historians.
However, there were two key issues with the incumbent market structure in the 1980s:
1. Competitive Pressures & Political Outlook
Baker (1999) and other political economists argue that the Big Bang was primarily driven by
competitive pressure from other financial markets, in particular, by New York.
Schenk (2020) states that the globalisation of financial markets, and so the foundations for the Big
Bang, were set in the 1960s. A key event that contributed to this was the end of the Bretton Woods era
(Schenk, 2020); the collapse of the pegged exchange rate system when the GBP became a
free-floating currency in 1973 led to new market and operational risks for corporates that demanded
treasury products and services. These new risks were a result of fluctuating exchange and interest
rates.
Dutta (2017) illustrates that liberalisation of the financial system was part of the broader
transformation of the British political outlook, which was becoming more ‘pro-competition’. This led
to the state leading changes in the regulatory structure of various industries and in particular a
pursuing of ‘liberalisation’ of the restrictive rules that had previously governed the securities market
(Green, 2016; Helleiner, 1995).
2. Sovereign Debt Issuances
Dutta (2017) however, argues that the Big Bang was designed to be centred around domestic concerns
of sovereign debt management and the impact that this had on broader monetary policy rather than
global competitive pressures. This is because the Big Bang greatly expanded the size and liquidity of
the market for sovereign debt in the UK, allowing the British state to improve its ability to conduct
monetary policy and raise finance on better terms.
