A few weeks ago Scyllogis and Sterling Commerce held a breakfast seminar to stimulate discussion around the New York Insurance Exchange (NYIE) and whether this was a threat to London: if so, could technology be used in London to mitigate this threat? In my opening remarks I stated that I thought that our market is reluctant to embrace change and that in such situations it usually takes some watershed event to catalyse change. Could the establishment of the NYIE be that catalyst?

This will clearly depend on how much competition is introduced by the NYIE and whether the NYIE adopts the same operating model as London, or whether it implements electronic trading from the outset. If it is sensible enough to do the later, then it does have the potential to stir things up in London by creating a market in which it is easy and cost effective to do business. About 50% of Lloyd’s business emanates from North America and certainly the objective for the NYIE will be to keep that business within the US. There is however the potential for the reverse, it would also potentially act as a point of access for foreign insurers looking for an entry point into the huge insurance market of the American hinterland beyond New York.

One attendee at the seminar made a good point in that it shouldn’t matter whether it is the NY Exchange or the Qatar Exchange or indeed the Beijing Exchange; location could be irrelevant. In addition to the security rating of the carriers and the backing of the market in terms of a fund similar to the Central Fund in Lloyd’s, what matters is how easy is it to do business in that market? This got me to thinking of parallels between where the London Insurance Market is now and where the London Stock Exchange was pre Big Bank in 1986.

Prior to these reforms, the once-dominant financial institutions of the City of London were failing to compete with foreign banking. While London was still a global centre of finance, it had been surpassed by New York, and was in danger of falling still further behind. Thatcher's government claimed that the two problems behind the decline of London banking were overregulation and the dominance of elitist old boys' networks, and that the solution lay in the free market doctrines of unfettered competition and meritocracy.

In 1986 the situation in the LSE was that the market was working on fixed commissions on selling shares, restrictive practices operated in that only registered brokers and jobbers could deal in the market and there was no foreign ownership of market participants; it was truly an ‘old boys club’. All trading was face-to-face on the trading floor; there were limited trading hours and little use of technology.

Then, on the 27th October 1986 came the day of ‘Big Bang’: Fixed commissions were abolished and rates dropped from an average of 2% to as little as 0.2%. The separation of brokers and jobbers was abolished too and that led to a complete re-structuring of the market and heralded the arrival of ‘market makers’. The ban on foreign ownership was lifted and as a result US and European investment and commercial banks acquired almost all of the British merchant banks, stockbrokers and stockjobbers; the workforce was truly global and diverse.

One of the most significant changes and one that relates to technology (and so is the one that interests me the most) is that the ‘open outcry’ method of trading on the floor of the Exchange was replaced by screen based trading; it now no longer mattered where you were based! Sound familiar yet? In 1997 the SETS Electronic trading System was introduced and a Central Counterparty facility for clearing and settlement in 2001.

Unsurprisingly, the attitude of the market prior to ‘Big bang’ was that “our market is too complicated”…. “it will never work”…. “there is nothing wrong with the way it is now”. Does that sound familiar too? Well, it did happen and the result certainly proved the critics wrong: 20 years on transactions were cheaper and quicker, share trading volumes were up 15 times, foreign exchange turnover up 25 times and
Exchange traded derivatives up by more than 50 times! The City overtook New York to become world’s money capital, UK exports of financial services were £2 billion in 1986 and £23 billion in 2005.

So, what are the lessons of ‘Big Bang’? I would say that: protectionism does not pay,
trade and the national economy thrive where barriers to competition are dismantled and that the  ownership and location of capital does not matter; efficiency of the market does. In the case of ‘Big Bang’ it was a case of the Government acting to re-establish London compared to NY (ironically against the wishes of the market): in our case, if the NYIE does establish itself as significant competition to London, then no doubt that will be the catalyst to drag the London Market into reform. We have an opportunity to act proactively now rather than reactively, but given that in the past the market has not reformed until it was ‘staring into the abyss’ I don’t hold out much hope.