This fall, probably the most drastic financial revolution in British history will take place when the final stage in the deregulation of this country's financial markets is completed.
On Oct. 27, what the London financial community calls "The Big Bang" will wipe out minimum commissions on stock market trades and abolish the restrictions on mergers between different kinds of financial businesses.
The deregulation of London's securities markets began in 1983, when Britain Prime Minister Margaret Thatcher's Conservative government came to an out-of-court settlement in a lawsuit with Sir Nicholas Goodison, chairman of the London Stock Exchange. Goodison promised to abolish the centuries of restrictions that had made the exchange more of a private club than a free market.
Both Goodison and Conservative Trade Secretary Cecil Parkinson recognized that, in the face of the internationalization of the world's securities markets, deregulation was essential. Their first objective was to strengthen London as Europe's leading financial center, to assure that London would reign alongside New York and Tokyo in a "tripolar" financial world. Their second goal was to strengthen British firms to enable them to compete with the enormous financial conglomerates that increasingly dominate finance in the United States, Japan and elsewhere.
"This deregulation was done at the 11th hour," said Charles McVeigh, managing director of Salomon Brothers' London operation. "If they had waited another two or three years, then I think it's fair to say that it would have been too late for the British financial institutions to remain competitive."
The abolition of fixed commissions -- which happened on the New York Stock Exchange 11 years ago -- is really the least drastic of the changes. Because the London markets are dominated by large institutional investors, such as pension funds buying and selling large blocks of stock, commission levels here always have been much lower than they were on Wall Street under fixed commissions.
Far more important is the upcoming end to all the restrictions that compartmentalize financial activities in the City of London, as the financial district is known. On Big Bang Day, it will be legal for the first time for a firm to engage in both "jobbing," as the British call making a market in stocks, and "broking," or selling stocks to investors.
This change has set off a wave of mergers in the financial world. Virtually every broker already has acquired a market-making operation, even though these operations cannot begin until October. Until then, most are dealing in foreign securities.
Simultaneously, London brokers are moving to a fully computerized stock trading system. Known as SEAQ, it is modeled after the Nasdaq automated quotation system that was created by the National Association of Securities Dealers to trade over-the-counter stocks.
"What we are aiming for is a fully automatic system of markets," said John Brew, chief executive of the brokerage firm of Kleinwort Grieveson. "On the New York exchange, they still have specialists on the floor of the exchange. In a fully 'upstairs' market, we're doing away with that central point." Brokers will trade stocks by checking the price of other brokers on their computer screens and typing in orders to buy or sell, which are communicated instantly to the other traders.
Just as important as the technological revolution is the revolution in the structure of financial companies. The stock exchange recently abolished all restrictions on membership. The result has been a wave of mergers and acquisitions. Banks and investment banks have acquired stockbrokers, bond brokers, fund management firms, money brokers and more, creating financial conglomerates.
In part, this is necessary because brokers need larger capital bases to act as market-makers. But it is also because of a perception that the future belongs to gigantic financial conglomerates.
"On a 10-year time horizon, we think the world will be dominated by a handful of international merchant banks offering one-stop financial shopping in all financial services in all international markets," said Paul Neild, head of Institutional Equities at Philips and Drew. Philips and Drew recently became a wholly owned subsidiary of the Union Bank of Switzerland.
Allied to this movement is a revolution in internationalization. London's hundreds of foreign banks, which have been engaged for the past 300 years in moving money around the world, always have been prohibited from operating in Britain's domestic securities markets. That changed recently when Merrill Lynch and the Japanese Nomura Securities became the first foreigners to join the London Stock Exchange. Other American giants such as Goldman Sachs and Salomon Brothers plan to join before Big Bang Day. Many foreign banks, including Citicorp, Chase Manhattan Corp., Security Pacific National Bank and Credit Suisse, have bought controlling interests in British brokerage houses.
"Last year, corporate America raised about half as much money in the Euromarkets as it did in the domestic U.S.," said Salomon Brothers' McVeigh. "We have been forced to posture ourselves internationally to accommodate borrowers and lenders virtually anywhere in the world."
The internationalization -- and, in particular, the Americanization -- of the City of London already is evident. It can be seen in the salaries. Top financial executives today can realistically hope for six-figure or even seven-figure annual "renumeration packages," something unheard of only a couple of years ago.
London is even starting to look more like New York. One can stand in front of a recently opened skyscraper on Finsbury Avenue, a street that four years ago was not even listed on some maps, and watch two new glass skyscrapers going up, one of them for American Express Bank.
The influx of foreign firms is putting tremendous pressure on the British institutions. They readily admit they will be hard pressed not to lose substantial market share to the foreigners.
Some British firms have begun to try to build themselves up into all-purpose financial conglomerates along U.S. or Japanese lines. Farthest down that road is Mercury Securities. Mercury includes the merchant bank SG Warburg, brokers Rowe and Pitman, market makers Ackroyd and Smithers and government bond traders Mullins. With only 2,500 employes, and a capital base of only $500 million (compared with Merrill Lynch's approximately $3 billion), it is not yet in the biggest league.
The Kleinwort Benson-Grieveson Grant group also is considered a serious contender for international status. Brew, chief executive of the securities division, believes the foreign firms will not capture a very large market share of the British business.
"We know the clients better, and the securities better," he said. "We have much deeper contacts with the companies than they're likely to [have] for at least five years."
Brew foresees a "consolidation" taking place, at the expense of the smaller British firms, that will leave major British brokers with at least as large a market share as before, despite the foreign invasion.