Investigation Results

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.