On Friday 8th April the author interviewed a Fund Manager from the Name Omitted Bank of Commerce at their offices at the City of London.

The interview lasted just under two hours and included a tour of the company’s dealing room and general questions concerning their activities followed by a more formal discussion on the problems facing the company.

The stock brokers were acquired by the Bank in the middle of 1987. At the interview the respondent pointed out that he was unable to talk about specific costs for his firm and preferred to speak in general terms.

The following results were obtained at the interview co0cerning the preparing for Big Bang and the training of staff in new technology:

Staff training involved familiarisation with the quotation system and took place on one Saturday. Support staff had more extensive training. Some of the firm’s dealers remained on the market floor after the Big Bang allowing a dual dealing system to operate.

The cost of the new technology was high and was met by the parent company; it requires a high turnover to keep it viable. The Big Bang itself did not affect turnover, it coincidentally occurred during a period of more frequent transactions and was followed by a number of government privatisations. The firm’s turnover remained very high until after the stock market crash.

Effect of the Big Bang on Commissions

The company’s minimum commission has risen from £20 to £40; private client commissions have remained unchanged except for very large bargains.

Institutional commissions are negotiable. An additional charge is made for Investment Management services. It was brought to the author’s attention that commissions are negotiable both up and down and that the abolition of fixed commissions has not necessarily meant that all commission rates have been lowered.

The abolition of fixed commissions has not lead to a great number of the company’s private clients ‘shopping around’ for better deals. Some clients had chosen to look elsewhere but were compensated by new investors being attracted to the company.

The present range of financial services offered

The firm now offers a complete range of financial services to its clients. The result is that customers can obtain all of their investment services from one company or “financial supermarket” as they are now referred to.

The range of services has expanded drastically since the takeover took place when the two firms offering different services to alternative markets were amalgamated.

Reasons for merger:

The company could have remained independent but they saw that in order to compete for institutional business they needed a large injection of capital and a merger or takeover was the most feasible of the possibilities open.

The respondent was unable to answer this question in pounds and pence but said the injection was fairly substantial. The company now has the third largest dealing room in Europe.

The main problems concerned the different cultures of stock broking and banking firms. Shortly after the merger a large scale reshaping took place in order to ensure that one fully integrated and co-ordinated structure emerged.

As stated above, the merger has greatly enhanced the firm’s competitive positioning and perhaps its chances of survival. From what the author was able to observe, the new offices and the equipment inside them enabled an efficient operation to take place, both in terms of comfortable surroundings and the necessary technology required to execute business.

The Stock Market Crash

The number of transactions has fallen whilst on a falling market commissions had to be reduced, in many cases earnings were not covering to costs of the transaction.

There have been cutbacks in auxiliary services such as the canteen services and on company entertaining. The author observed that approximately half the seats in the dealing room were unoccupied.

A second post Big Bang reorganisation was schedules to take place in order to reduce the company’s overheads. The main thrust was to cut staffing levels to a minimum and this included all those who did not make a direct financial contribution to the business.

Among these were analysts and economists who enjoyed large fixed salaries but who did not directly earn the company fees. It was not just these employees who were not covering their salary costs at a time when the market was inactive; the dealers are also not able to pay for themselves. Thus more cutbacks seem inevitable. It was noted that some employees were uncertain about their future with the company.

Chapter Summary

The investigation results followed the company’s progress from the period of the Big Bang to the present. It can be seen that three major events have changed the company’s operations and practices almost beyond recognition; these events are: the Big Bang, the takeover and the October stock market crash.

All of these events had taken place within a year. The company had chosen to compete with the other larger institutions for corporate clients but are finding that the revenue is insufficient to cover their large costs. These costs are shown to be important with demand and subsequently fees earned were falling.

Profitability seems distant as the reduction of costs and the increase in revenue required by the company in order to make it financially viable, are coupled with the inactive and ever-increasing competitive environment. The price of transactions is the most significant factor for many corporate investors.

The company is engaged in a restructuring program in order to trim its costs down to more economical levels which is resulting in feelings of insecurity detail giving the implications of these conditions on the company and employees.

A number of questions were raised from the literature study and several hypotheses generated as a result of searching for the true meaning within the data.

1. Were the alliances which were made formed too hastily? And if so, are the broking/jobbers and their parents wholly compatible?

2. If it was the case that the British merchant banks were forced to acquire their own stock market subsidiary in order to curb the American, and later on the Japanese invasion, what steps have been taken in fully amalgamating the stock broking subsidiaries to the rest of the operation?

3. Was the move by the independent merchant banks and their stock broking subsidiaries to avoid the main competitive areas of an underestimation of customer loyalty and their longstanding expertise and reputations?

4. Could they not have adopted some American policies such as ‘brought deals’ and use their longstanding relationship to gain an advantage over foreign competitors?

5. Could incentives have been given by the parent companies to their newly owned broker dealer subsidiaries to ensure that competitive motivation remained among the employees?

6. Were the prices paid in acquiring some Stock Exchange members too high and did this represent an unnecessary risk to the parent companies?

7. Did the partnership between brokers/jobbers and their parent companies represent a conflict of interests?

8. Who benefited from the substantial increases in turnover after Big Bang and to what extent did their commission rates decrease in order to gain this volume of business?

9. Will the revenue gained in this new competitive environment be sufficient to provide an adequate return on investment?

10. Will deals earning no commission become the norm for institutional business, and if so, will private client commission be enough to sustain broking revenues?

Hypotheses generated from the Literature Review

1. The stock broking and jobbing sections of the financial services industry are no longer separate entities. They, (that is the majority of London firms) have forged strong links with other institutions in the other market sections of banking, insurance and other financial institutions.

2. Competition in the industry is fierce, profit objects have been superseded by those of market share, primarily in the corporate client sector. Individual clients are, however, being fought for as a means of sustaining present broking revenues.

3. The aftermath resulting from the intense competition will leave the larger financial corporations with the majority of corporate clients with the others struggling to retain their individual clients.

4. Those British firms who chose to remain and compete with the foreign institutions may find the battle long and expensive to the point where revenues are over-whelmed by trading overheads.
5. The entry of parent companies may have been interpreted by some broker dealers as a ‘soft cushion’ or as a bottomless pit of funds and thus complacency may lead to a slackening of firm strategies and goals at the workplace.

6. The inflated prices paid for broking and jobbing firms may be placing undue pressure on them to make profits at a time where market share at the expense of revenue is a necessity for survival.

7. The substantial increases in Stock Exchange turnover have been largely offset by reduced commission rates. Deals of a quarter million pounds or more account for 60% of all business-commission gained from these transactions is low and a proportion represents institutional business where net commission deals are becoming frequent.

Although the Big Bang was targeted for the autumn of 1986, it was in fact spread over several years either side of this date. For stock market firms, the fireworks began in 1984 when most of the top brokers and jobbers sold 29 per cent stakes in themselves to banks and investment houses.

Nearer the date, the Americans and others began taking steps to ensure that the old customer loyalties were loosened in their favour. Selling the stock market to the private investor will only happen when the new city operations are running smoothly and it is forecasted that this period will be some time yet as more acquisitions take place during 1988 (potential bidders have deliberately held out on the assumption that stock market members will become cheaper later on).

The Japanese securities giants have been reluctant to acquire whole firms because of the culture problems they fear as a consequence, and they have an uphill struggle to recruit people of quality they need (bar the October crash where labour is now at an abundance).

The three main targets for business will be the corporate investors, existing private investors, and new or novice investors. The last two categories of investor will play an important part in the prosperity of most medium and small firms, but will be profitable only if overheads can be kept down and if the smaller investor can be persuaded to engage in some form of regular savings plan.

The Personal Equity Plan launched in the 1986 Budget may help to ensure a steady flow of business if it can be marketed in the right way.

The fear of many working in the Stock Market is that the Big Bang will be followed by an end to the long, record-breaking bull market; bring about a lethal combination of tougher competition falling demand, as business tails off when share prices look as if they are in for a steady and continuous fall. That would accentuate the gap between the smaller independent firms and the large financial conglomerates.

While the global companies will turn elsewhere in these circumstances, some of the firms locked in to the domestic market may not be able to draw sufficient reserves to weather the storm.

Investors would then be doubly on their guard against increasingly generous savings offers from institutions desperate to hold on to what business they can. This would not be good news for the institution trying to survive in a ‘bear’ market at a time when competition is like never before.