The Birth Of Regulation – Part 2

So, following on, what happened next? My days on the London Stock Exchange floor were quickly going to come to an end. Things that were called “computers” were beginning to take over. Just as we witnessed the strikes that seemed to go on forever, the picket lines of car manufacturers and certain well known newspapers, so were the days of me running around on the “floor” numbered (And that wasn’t just the 250 stuck on the back of my jacket).

The London Stock Exchange started life in the coffee houses of 17th century London, where it quickly grew to become the City’s most important financial institution. Over the centuries following, the LSE led the way in developing a strong, well-regulated stock market and today its motto of “Dictum Meum Pactum” roughly translated (My Word is My Bond) still stands under its Coat of Arms. That motto – was picked, because literally that is what it used to be like trading – or dealing with other “jobbers” or “Market Makers” – you weren’t always sure that the trade you had just verbally executed would actually go on to be “settled” you just had to take the chaps “word for it” that he would “deliver” the stock, shares, gilts, or bonds, and that would settle.

Talking of “settlement” that takes us on to a whole new chapter – one we can save for another day – but suffice to say the two departments of the “Front Office (or Dealers) and the Back Office (Or Settlements) didn’t always agree or see eye to eye.

So, how did it all come together and work? How was a trade (or Bargain) dealt and so on?

Simply put – this is the approximate chain of events. Anytime from 7am – 8.30am outside the London Stock Exchange you would often see lots of bright jackets, and young ladies and inexperienced boys holding polystyrene cups of coffee and tea, and older people puffing smoke out of their nostrils quicker than the Flying Scotsman. Then all of a sudden they would disappear off into a door and a stillness and certain sense of anticipation would be cast over that part of Throgmorton Street. However, the stillness and quietness was anything BUT that inside those doors.

The Stock Exchange normally opened its front doors at around 7.30am, and as I touched upon earlier, I was tasked with the tea, coffee and cigarettes “run”. Once inside the doors of the LSE, there were a number of hexagonal “trading desks” made up of Jobbers, (Market Makers) Stockbrokers and “Blue Buttons” (juniors or runners) if you like, that would be talking to (or shouting at normally) one another.

First thing in the morning, (before the official opening time of the LSE) the Jobbers would be discussing with one another the events around the world, the events during the evening just gone, and the probable events of the day about to start. This would be the “mood” (for want of a better word) that the Market would be in.

Then a bell would ring – and that was it! YOU WERE OFF!

The pre-market discussions had been held, we knew roughly what was likely to happen and the jobbers would be often frantically shouting out prices of individual stocks and shares at brokers on the “floor” who had orders from their office to buy and sell.

So, during the fixed trading hours of 8.30am – 4.30pm the Jobbers (or Market Makers) would be shouting out their “prices” of the shares in which they were “trading” with (ideally) a two way price of one to buy (the higher) and one to sell (the lower). For example:-

  • Tesco 36p – 40p
  • The 36p is the selling price
  • The 40p is the buying price

The difference between that (what is known as the “spread” – as in spread of distance between the two) is what the Market Maker uses as his “margin” or “profit”.

The speed of the transactions or trades during the day was dependent on a variety of things, such as “market rumours and news” and the demand. So there we were on the old Stock Exchange floor and the Market Makers (or Jobbers) were only allowed to deal with each other, and the “brokers” who would be shouting the orders to them were the only ones who could act as “agents” if you like and talk to the public who were “their” clients. The Brokers in turn charged the public a “commission” for this service – for dealing with the jobbers.

However, this little set-up of commissions and costs was all soon to change as well. In effect, the old Stock Exchange had an imposed scale of basically “fixed” commissions for the brokers, and because the cost of the Market Makers service was to all intense and purposes being met by the investor, the Government decided that things had to change. These methods were inefficient, restrictive, outdated (even then!) and expensive.

Now herein lies the first (for a long time) if you like – intervention – by the Government to change things. Remember earlier, we spoke about the “motto” of the London Stock Exchange – “My word is my bond” – that literally was the way trades were transacted and settled. So, with much annoyance and (no longer) ‘open outcry’ things began to change.

The Government decided that things needed to be “regulated” and modernised. The Stock Exchange floor quickly demised to just a handful of “Traded Options” brokers, and all of the Market Makers, Jobbers, Stockbrokers, Runners (Blue Buttons) and support staff took up their new positions in gleaming offices, behind screens, with telephones on their desk, no longer shouting down the phone or screaming across the floor – no longer wearing brightly coloured jackets with numbers on their backs… No longer… Well, no longer doing a lot of what was – and still is a very BIG part in their lives.

Like everything though – change is inevitable. My days were numbered there, and as quickly as I had joined a “stockbroker” I was now working for a Bank! A Bank? How had this happened? With a lot of the changes in Rules and Regulations in the 80’s came what was known as “Big Bang” and this is where the Banks get involved.

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