35 years on from the big bang

Sam Slator 21/10/21 in Strategy

On Monday 27 October 1986, the London stock market was deregulated. In a matter of hours, a once crowded trading floor became deserted, as traditional face-to-face share dealing move to electronic trading and the City of London became a financial capital that could rival New York.

The London Stock Exchange was revolutionised overnight. Minimum fixed commissions on trades were abolished allowing for more competition, foreign firms could own UK brokers and, with the magic of electronic trading, the volume of trades almost doubled in just one week from $4.5bn to $7.4bn.

“I am old enough to have been working in the City before Big Bang in October 1986,” commented Rosemary Banyard, manager of VT Downing Unique Opportunities fund.

“It was a time of partnerships, which were almost exclusively male as women weren’t admitted as members of the LSE until 1973. There was a physical stock exchange, and high fixed commissions for dealing.” 

“Back in the ‘70s and early ‘80s stock market investing was time-consuming and expensive and, as a result, institutional investors and stock-broking firms used to reign supreme,” added Richard Hallett, manager of Marlborough Multi-Cap Growth fund.

“The ‘big bang’ helped to change that, as have advances in technology and the availability of market information, which have transformed things, opening up equity markets to a much broader range of investors.”

35 years on – investing becomes a game

35 years on and trading is now possible for anyone, completely free of charge and at the touch of a button – as was evidenced brilliantly by the Reddit crowd over the past year. 

Armed with extra savings and nothing much to spend them on, retail investors got more involved than usual in the stock markets and users of the social media site pushed up the price of a number of shares.

Morgan Housel, the author of The Psychology of Money, and Mick Dillon, manager of the Brown Advisory Global Leaders fund discussed this in a recent podcast.

“Robinhood and the other brokerages, have intentionally tried to gamify investing and they’re not trying to push long-term investing in the slightest,” said Morgan. “Their whole thing is they make money by selling your trades, and therefore they have every incentive in the world to get you to keep hitting the button: buy, sell, buy, sell. There are 19-year-olds, some of whom were trading 5,000 times a month from their Robinhood account.” 

“Just to put this in context,” replied Mick, “myself and Bertie Thomson, who runs Global Leaders with me, probably trade once a fortnight at best, so we’re the other end of the scale.” 

Finding an investment edge

The way we research investments has changed dramatically over the years. Warren Buffet, one of the most famous professional investors, tells stories from his hedge fund days in the ‘50s and ‘60s when, if he wanted to analyse a company, he had to make an appointment at the local library and then go down in the bowels of the basement to find the annual report – that was probably a year outdated anyway. 

Today, anyone with a phone – which is everybody – can pull up that information. As technology improves, the fight for an analytical edge just gets harder. So, what do the professional investors now focus on?

“We have, as an industry, by and large solved investing,” said Mick. “We’ve figured out the data that’s relevant and we figured out the dissemination of that data. We have computers that are constantly scraping annual reports and SEC filings to manipulate that data and figure out what is what’s worth paying attention to. 

“But the behavioural side has not been solved in the slightest. I don’t think it’ll ever be solved, which is why there’s still opportunity in the market to get ahead and do well and earn a good return over time.” 

Anthony Cross, co-manager of Liontrust Special Situations, added: “Technology has driven huge changes to the way we invest and the types of companies we can invest in. A lot of the changes have served to level the playing field between investors; for example, face-to-face company and analyst meetings used to be a valuable privilege enjoyed by the larger investors but now everyone can access the same information digitally and instantaneously.

“For businesses, technology has often lowered the start-up costs for new market entrants. One of the key tenets of our investment process is the possession of barriers to competition stemming from intangible strengths, and this has become even more valuable in the modern, digital economy.”

Chris Garsten, co-manager of Waverton European Capital Growth said: “Valuations are also still driven by the same investor polarising forces of ‘greed versus fear’.  Humans are highly intelligent but find it difficult to leave a good party, even if they know it is dangerous to stay.   The late 1990s dot com boom led to some amazing valuations, and we are seeing the same again.  Then, buying the unloved – that is the stocks that hadn’t been invited to the party – was, over time, a winning strategy.  We believe the same will happen again.”

Do we need a bigger bang?

“Trading is a lot more competitive, and much cheaper for any buy side investor,” said Mike Riddell, manager of Allianz Strategic Bond fund. “However, sometimes the giant fixed income markets feel like they need a bigger bang.  Liquidity has a tendency to evaporate, and at times of stress, even markets such as US Treasuries have seized up.  And higher risk corporate bonds can be illiquid even in the good times.”

“35 years on, dealing commissions are now wafer thin, which has undoubtedly encouraged more trading,” concluded Rosemary. “Dealers worried that the move to electronic trading would destroy key relationships, but it didn’t. Partnerships have given way to large banks and listed broking firms, but there still aren’t as many women as there should be.”

 

 

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