Sometimes being out of touch is not such a bad thing. I 'd been aware for quite a while that a film was doing the rounds that dealt with a financial markets period, starting in 1987. Having a worked in those markets myself I was thought that maybe I could kill two birds with one stone....make a rare trip to the cinema and possibly review a film I might show my economics class. Ah well one out of two is not bad.....I think my initial post film remark was 'a modern take on Caligula!'.
A red button then a blue button
Personally I'd started work up in the City of London as a 17 year old from 1972. Berger & Gosschalk, was what was known at the time as a 'jobber'.....a business taking principal positions on the London Exchange in Threadneedle Street EC2. Our office was just a stones throw the market floor and like all youngsters at the time I was required to start at the very bottom of the hierarchy 'down with the messengers'. For those who are unfamiliar with the old City of London it was a basic square mile of dense commercial activity. As well as Stockbroker's and Stockjobber's, there were countless Insurance and Shipping based businesses.
The Stock Exchange building
What these businesses all shared in common was a capacity to generate mountains of paperwork for the settlement of financial transactions. This work was generally dealt with away from the market by the 'back office'. The best way to deal with this was to employ thousands of messengers to take the letters, receipts and bills by hand, business to business. This hand delivery system saved both time and money. Interestingly, even though we were just a medium sized business we had our own computer which occupied three large room's and required fifteen 'punch card' girls to enter the daily transactions. One of the tasks that also had to be done daily was that of 'checking off' the bargains in a big hall up near Moorgate...representative checkers from each firm went there ...checkers wore a red badge / button with their firms name on it. Buyers and sellers would call over the business of the previous and make any adjustments.
Face to face dealing
In the early seventies the stock exchange was still very much a physical, face to face market. Participants were restricted to 'members' of the London Stock Exchange. Country brokers needed a London agent while Foreign financial institutions had little or no access to the market. To me as a teenager, the market was the place to be and within a couple of years I took my chance to work on the 'floor' by becoming a blue button. This meant that I would be the eyes and ears of the firm as the main connection with the outside world was our telephone on the market wall. The London Stock Exchange was an exciting if somewhat stuffy place to work. Hundreds of Jobbers occupying the walls/boards while Brokers weaved their way across the floor.
nearly come a cropper a few times. One time my boss Peter Titmus had left me alone on the market with just one stock to keep an eye on. It was one of those slow days with nothing happening so I decided to extend to take a slightly longer lunch break. When I returned the market was still dead. I had a quick general look and saw that the market was generally up with prices predominantly written up in blue ink.
Inside information
Contrast with this was the reality that the market operated largely on what would be considered today to be insider information. That was how things were in the 70's. Someone would get information, good or bad regarding a quoted company. They would deal and then through the day inform 'close associates' of the news. Eventually the quoted firm would release the information through the Stock Exchange and the public would become privy through the press. No internet...no mobile phones or personal computers. Information generally trickled down. I remember actually influencing the oil market myself one morning. By chance I saw bad news coming through of a terrorist attack at Tel Aviv airport, on a Reuters ticker tape machine. Knowing that it was a significant event I rushed back onto the market floor and told Smith Brothers Oil Jobbers the news. Instantly the market boards were marked down with red ink and the place went crazy as Brokers tried to cover positions.Dealing face to face was a skill. Some of the old Jobbers were convinced that they could 'read' a Broker just by watching them walk towards them. Uncannily they could tell not only if they were a buyer or seller but also whether the order was large or small. The market floor always had crazy / interesting characters roaming on it....be they people doing card tricks...dealers playing 'spoof' with 50p pieces or mobile bookies who would lay bets on anything you could name. Eventually in the mid-seventies everything was to change when a new market opened with it's hexagon Jobber 'pitches replacing the old boards. By the time I left for the first time mid-seventies the level of trade had fallen dramatically and the FT index had fallen to just 500. The oil crisis of 73' seeing most world economies in recession and London on energy rationing and a three day week.
Big Bang and all that.....
Roughly ten years later I got the opportunity to return to the London Stock Exchange. In 1986 a momentous change had taken place in world Financial markets which was commonly called 'Big Bang'. Here we had seen financial deregulation that would changes markets forever. American and Japanese Banks were given unprecedented access to the Stock Exchange as principals and in response British institutions organised themselves into 'one stop' Investment Banks. Thus, National Westminster acquired brokers 'Wood Mackenzie' and 'Hill Samuel' and a Merchant Bank 'County'. Barclays also did a similar thing when it took over massive Stockjobber, 'Wedd Durlacher'. http://www.independent.co.uk/news/business/analysis-and-features/the-day-big-bang-blasted-the-old-boys-into-oblivion-422005.html Big bang article
For me as someone returning to the market after a decade things had changed immensely. The Stock Exchange had a new dealing system. The old jobbers were given a new status as 'Market makers' who would gain tax / stamp duty exemption in exchange for providing two way, deep, liquid and transparent two way stock quotes to the market for shares. More importantly this market was to be based 'on screen', electronic and accessible by phone or computer. The old face to face physical market was phased out and replaced by the first virtual market...this was in 1985.
Electronic screen based trading...wearing a yellow button
Such changes had many implications the biggest being the old market floor became defunct firms retreating to their offices. Working for County Nat West we were based in the Drapers Gardens Tower block in Throgmorten Avenue. The other big change involved the granting of access to foreign firms....which meant that even the dealing etiquette of the London market had to change. Americans were not willing to go with much of the archaic verbal complexity which had prevailed previously.
Personally as a 30 year old I felt I had been given a second chance. To many the market was the same as ever buy sell, buy sell. I sensed that opening the market up to global business things would have to change...a more professional approach being necessary. Immediately I took the Industry standard TSA examinations...Registered Trader to be a licensed Market Maker dealing with professional counterparties then Registered Representative which enabled one to give advice to clients. Many I worked with saw no merit in this but it was clear that the whole Financial Markets Industry would have to become 'more professional' in it's approach. Jobs were easy to come by at the time with County NatWest ...I remember a computer technician used to sometime answer the dealing phones when we were busy. Eventually he became so good at it the boss of the unit asked him if actually wanted a dealing job and he joined the team!
The long liquid lunch
In 85-86' two hour lunches were common and drinking during the work day seen as normal. Some of our dealers ran up massive expense accounts at local city eating establishments during the day time...talking to clients over a liquid lunch the justification. What was probably worse was the reality that there were firms willing to take our whole dealing teams out on the town every night on expense accounts. One such firm was Tullet of Tokyo. They were what was called an IDB...someone willing to show anonymous buy /sell orders on their computer screens posted by Market Makers wishing to deal anonymously. Tullet would receive a commission for each multi million pound deal completed. Thus, the various dealing teams were 'treated' after work to encourage business being placed with them. Personally, I went to several massive Boxing fights that they paid for Bugner v Bruno at White Hart Lane 100 pound per ringside seat and Herol Graham v Mike Macullum for the World Middleweight title at the Royal Albert Hall. As a married man I had little interest interest in going out in the city after work but the majority of young dealers did and followed their 'leaders' to party through the night.
Chinese Walls
Moving to a screen based virtual dealing system was not without it's problems. The massive Investment banks that been established for Big Bang needed to be very careful with information. The old trickle down culture had been changed to one dependent on 'transparency' and the maintenance of 'fair and open markets'. Quoted companies were required to report 'significant events' to the Stock Exchange, with continual exception analysis being run by the compliance body to try to recognise wrong doing. 'Chinese Walls' were established within Investment Banks to ensure that no clash of interest would take place. Thus, such a bank might be the retail bank to one business while at the same time being a takeover advisor to a takeover rival. A sure clash of interest unless you could guarantee that the various departments of the bank were isolated through virtual 'Chinese Walls'.Unfortunately this did not always work out in practice as my firm County NatWest found out to their cost!
Insider trading or not?
One quiet day in our dealing room two of our Market Makers were sitting contemplating who would go to lunch first...they had a particular poor position in one of the stocks 'Acme Ltd' in which they made prices...basically being short of about six million shares in a stock that was going up. As fate would have it, a female analyst from upstairs had just attended an outside briefing on that very company Acme Ltd and the news was unusually good. Thus, when she by chance cut through our dealing room on the way back to her office she was privy to the 'good news' on Acme. It was also fateful that as she walked though, a telephone call was announced for her which she picked up near our Market Makers for that stock. Being within ear shot of her conversation, the two dealers heard that the Acme company results were very good and that the news would be announced to the market within ten minutes. This Chinese Wall had failed a major test! Our dealers, who took principal positions for the bank, made an immediate decision to try to limit their exposure to Acme which sure to go up in price with the impending announcement. They quickly enlisted a dozen other dealers to come and man the phones in what was to be a co-ordinated attack on the other Market Makers who made prices in the Acme stock. Rules of the Exchange determined that such firms were required to be good for a minimum size of 500,000 shares in the Acme stock. Within just five minutes we had 'taken the market out' and bought back Six million shares leaving the position at zero. Perhaps our Market makers should have just stopped there:) Unfortunately, the 'news' was still five minutes from being announced and they decided to around and take the market out again! This effectively reversed the banks position of minus six million Acme shares to one of being 'long' of six million.As one can imagine the banks 'market competitors' were not impressed with County front running an announcement such that on Acme. Next morning with the Stock Exchange demanding answers County suspended the two main Market Makers concerned. Interestingly, they did so because complaints of insider trading had been levelled at County. Little known to us dealers it was revealed that not only were our phone calls always recorded but the whole dealing room area was 'live' and all conversations on tape phone or otherwise!
Trying to do the right thing County had taken a knee jerk approach. A year went by before the dealers concerned were actually found to be innocent in court of 'insider trading' ......the reason being that they had not dealt for personal gain. Count paid a massive compensation package to both the dealers although neither were not re-instated with jobs.
Blue Arrow the deal that almost broke Nat West Bank
County Nat West also had another major corporate failing in this period. They had been the 'lead broker' for a massive company takeover whereby a medium sized British business 'Blue Arrow', had bid for larger American employment business 'Manpower'. Times were good and the bull market was flying. Blue Arrow were financing the takeover with a large new issue of shares being sold in the market. Unfortunately, in the time between the prospectus being issued and shares subscribed for the Stock Market lost some momentum. County Nat West as lead broker were responsible for announcing the 'success' of the issue. They duly did this with a press release claiming that the issue was over subscribed and this signal meant the market would push up the price of the new Blue Arrow shares. In truth only 50% of the shares had actually been purchased by the public and County had been left with the rest! They effectively were in possession of half the Blue Arrow company. If this were not bad enough the top management of County Natwest took the illegal decision to hide the shares around various areas of the bank in client accounts.Inevitably this action was discovered by the Stock Exchange and The Securities Association. County Natwest received massive fines and many in top management lost their jobs. More importantly this was probably the start of the decline of Britain's biggest bank Nat West. Loss of public confidence in financial institutions is usually terminal and in this case it was true.
http://www.stephenbloomfield.co.uk/page25/page18/styled/index.htm Blue Arrow article
Share ownership for the masses: Privatisation
The bull market between 1985 and October 1987 saw all manner of new people involve themselves in share ownership. Public issues of privatised companies such as BT helped democratise what had once been the preserve of a limited clique. Penny shares were publicised through weekly tip sheets. In good times, the main 'tip' in these papers delivered to punters on a Monday morning, usually flew up in price. One funny story that went the rounds about one such tip sheet. Printed in Manchester on a Wednesday, it was clear that some opportunistic people would have earlier access to the main 'tip' than others. Masonic connections apparently passed the tip on to others who then shared the information with friends who all front ran the market buying in before the rest of the tip sheet world.The story goes that sharing of this early tip information became a bit of an issue and certain employees actually bugged their managers telephone when he stopped sharing with them. Nobody was killed and this was clearly a first world problem.
Black Monday October 87' - The first 'Electronic Market Crash'
Significantly 'bubble markets' are also a first world problem and by October 1987 the London Market had run up massively to what turned out to be an unstainable level. Markets had crashed before but the difference here with the 'Black Monday Crash' was the fact that this was the first 'screen / computer' based market melt down. With the twenty four nature of world markets the 'crash' actually rolled on around the various world markets hitting Hong Kong, Tokyo, Sydney and eventually New York before coming around to London once more. Awful weather in Britain drew out the effects even more as many interested parties could either not get home or back in to work in the following days.Personally, as someone living within walking distance of the City I was there from start to finish. It was terrifying if only because the market was all one way...predominantly down. As Market Makers we had an obligation to deal in a certain size bargain regardless. Life long broker friends were phoning to get that bit extra for clients as prices went down as if in an elevator. The FT 100 electronic board was all a sea of red for all to see. Flurries of brief blue recoveries were all too short lived as prices continued to motor down.
Two massive reasons the 87' crash was made worse were as follows. First, information was for the first time transparent and available to all. Good or Bad news was openly accessible unlike in times past when it would trickle down slowly. A second structural change was the existence of large powerful computer systems under the control of some broking houses. These computers were used to generate 'what if' programs which respond to volatile market activity. Thus in 87' much of the selling was generated by computers suggesting 'programed trades'....based on 'if the market falls 15 points in ten minutes automatic orders to sell such and such would be generated. Taking the human element out of dealing gave volatility a scary new threat.
This is the Bank of England. Why are you not answering your telephones?
In the 87' crash County NatWest were actually saved millions of pounds when their main computer system failed going down for several hours. In a screen based system this turned out to be a life saver on the day because if as a Market maker you don't know your financial positions in the stocks you are licensed to deal in you can't actually answer the telephone! In a scene reminiscent of Monty Python we sat there paralysed by technology. After a few hours of fortunate inactivity (we would only have been buying shares on the way down) the Bank of England sent someone around to knock on the door of our County NatWest offices to ask why we weren't answering our phones! They accepted our broken computer system explanation and quite soon we were back in the fray losing money like all the rest.It is probably true to say that 87' was the beginning of the end for the City of London as the primary dealing area in Britain. Eventually development at Bishopsgate and later Canary Wharf moved the focus away. Large salaries and bonuses were paid to the work force at the time and personally as an ordinary dealer my status was the equivalent to the pay of a retail Bank Manager. Many earned more. One upshot of the 87' crash was a consolidation of financial market participants. The 'one stop shop' idea of Investment Banks covering all market areas was reappraised. For the first time in a decade job losses were apparent. initially big ex gratia payouts were made to dealers but eventually the shame of retrenchment / redundancy became all too normal for banks who reduced pay offs considerably. Personally, I avoided two major rounds of retrenchment in 88 and 89'. One morning we lost 38 dealers in one fell swoop. When it was over. we the survivors, just sat in our seats numb...lights flashing and telephones remaining unanswered. You might believe that Britain's largest bank would have a proper plan when it laid off a quarter of its share dealing staff in a single day. Not so. As we sat there it was clear that some dealing desks had lost all their staff in one go! Embarrassingly we asked the bosses if they wanted anyone to 'move over' a while to take the calls and run the pitch. I went over for an hour and stayed there for the next three weeks:)
http://en.wikipedia.org/wiki/Black_Monday_(1987) Article 87' crash
Taking the good with the bad.....
I actually loved my time working in financial markets. The dealing room was by now increasingly becoming dependent on technology. Sometimes it was a godsend on other days, a curse. My best and worse days dealing both involved an element of being in the thrall of screen based technology. On one occasion I managed to bring together a massive buyer and even larger seller of what was then Robinsons Motor Group. A few fortunate phone calls......asking the right questions and there was a 'perfect storm' situation where good money was being made almost all day long. This fantastic run of putting the two clients together was only broken when an important government announcement came out to finish off any left business. Not that doing this personal research was typical Market Maker behaviour. Some seemed to have a type of pride in not actually knowing the company stocks they dealt in. To them the stocks were just like any other commodity buy sell, buy sell. Eventually the Stock Exchange was to become more professional. I took the Finance Industry Diploma, 'Compliance & Regulation and Interpreting Financial Statements' which were a good start in this modern environment. East end barrow boys or idiot sons of aristocrats found it harder to get a run and as the industry brought professionalised examinations / qualifications became the norm.
Johnny Hill
There were exceptions. My cousin Johnny Hill had worked in the City since he was 15. He never really finished school and would openly profess to having no real understanding of economics, charts and the like. However, Johnny was widely recognised as being one of the greatest jobber/ market makers to work in London in his 45 year career. Any new issue would see Johnny up the front dealing as the stock traded for the first frenzied moments. Mathematically he kept his positions in his head and although there would always be a paper or electronic record of what he had done....he was always spot on.
The pain in the back of the neck.....
People often ask me what was the pressure like in Equity markets. It was true that coffee and adrenalin kept people going but I can only remember once feeling nailed to the floor. In this particular case the boss had asked me to move across to another 'pitch' to take someone's place while they were on holiday. Not really a problem ....just looking after about twenty second line Engineering stocks. Only when I sat down did I realise that on the 'books' we had a long position of 6 or 7 million shares of a company for which County NatWest were the company broker. What made things a bit more delicate was the fact that the market was not very good and had been tracking south for a while There I sat with this position in front of me. I'd taken no part in it's creation but I would be responsible for how it went over the next few weeks. My first inkling of trouble came when I was summoned to the bosses office to tell him just what I was doing with 'ABC'! They had fallen 5p in the morning so this was reflected 'live' in the system as a write down loss of several hundred thousand dollars. I told him that I had not bought one additional share on the day but several other Market Makers kept marking the price down. Over the next few days things only got worse and the regular flashing red position on the bosses office screen became an unwelcome feature. In an otherwise quiet time my 'position' became an object of attention and other dealers would stand behind me, on my shoulder just taking a voyeurs view of what was a slow motion car crash. In no time we were looking at a million pound paper loss....the position had hardly changed but with the price falling it's value was being written down. The pressure at the back of my neck was intense. The crowds of onlookers grew larger. I could picture taking these shares down to much lower levels. Then out of the blue I had an idea. Get our sales traders to offer a large lump of the stock out at the bid price. Thus if the price spread was 490-495 I would sell 3 million at the bid price of 490. Of course I had to clear it with the bosses but fortunately my cold logic of 'what else do you think we should do' seemed to win them over. So there we were offering to sell at the bid price. A risky strategy if other market makers got wind of it because they might front-run us and mark 'ABC' down even further before we could trade. After days of stress and helplessness finally something went right ...we sold 3 million @490 effectively cutting our position in half. Fortunately my time on second line engineers came to an end when that markets dealer returned from holiday but I had been proven right to cut our position because they continued to fall in the coming weeks.
Steve can you follow me over here please.....
Eventually in January 1990 my number was also up. A tap on the shoulder at 8.15 am and a request to go across to a big holding room to sit with 89 other 'chosen ones'. We all got the same spiel. It is not you....County NatWest have had a change of strategic direction....we will provide outplacement advise to help you with your job-search...blah blah blah. The bottom line for me was a decent payout...help for a year with a low mortgage rate (4% when market rates were 12%) and the ego hitting reality of being unemployed. Before I could feel sorry for myself I was shocked back to reality by the manager telling me...."this is Brad the security guard, he will give a black plastic bin bag. Please follow him back to your dealing desk. You have ten minutes to clear your space...you must then give Brad your security pass and he will escort you from the building. As a result you will not be allowed back in again to the Drapers Gardens building. One particularly sad thing on the day was the spectacle of a 25 year Company manager being required to lay off so many staff and then realise that at the end of the day he was also retrenched like the rest!The one advantage I had on that day was the fact that I was the only one of the 90 staff sacked who had another job / profession to return to...I was an experienced Senior School Teacher while the rest had no fall back. By the following Monday morning, January 8th 1990 I was back teaching in a school in Stepney East London.
24 Hour Markets
Now 24 years later I teach Economics and Business to Year 12 Students in Sydney. In that time we have seen several market crashes including the Global Financial Crisis in 2007-8. Technology still seems to cause controversy across all sorts of markets. Be it through micro trades or high-frequency trading people still seek an edge through technology. Compliance is much more professional nowadays with computer programs continually scanning markets for exceptional market patterns of trade. We truly have 24 hour markets which never sleep.
