Bang-Up Time in London

By Gordon M. Henry

In the mile-square City of London, Britain's once staid financial heart, events are exploding in most ungentlemanly fashion. Venerable brokerage houses that have dozed along contentedly almost since Edwardian times are merging or being snapped up by marauding U.S., Japanese or French financial institutions. Pinstripe City men who have known each other since Oxford or Cambridge days are rubbing shoulders with rough-and-tumble stock traders who sport little of the old-school polish but plenty of the street savvy that has suddenly become worth unheard-of six-figure salaries. Unable to contain the activity, the City is bursting at the seams, as rapidly expanding investment houses sprawl farther along the Thames into London's formerly dreary docklands.

All the pandemonium is due to what the British are calling Big Bang, a code name for what amounts to a revolution that is sweeping local financial and capital markets. Formally, Big Bang refers to the deregulation of Britain's domestic securities markets, when the 218-member London Stock Exchange will abandon a system of fixed commissions for brokers. The Exchange will also drop a traditional separation between the brokers, who execute stock and bond trades for their clients, and the so-called jobbers, who handle the brokers' orders as well as manage their own hefty accounts. This upheaval, roughly akin to Wall Street's May 1, 1975 plunge into a newly competitive environment, is scheduled to occur on Oct. 27.

In one sense, however, Big Bang is already under way. As a warm-up to deregulation, the London Exchange on March 1 inaugurated Little Bang by inviting foreign firms and British banks onto its trading floors for the first time. The move spurred a wave of foreign invaders seeking to join the action. Tokyo-based Nomura Securities, the world's largest investment firm, and New York City's Merrill Lynch, the biggest U.S. broker, have already become Exchange members. Some 30 others plan to do the same.

Little Bang has also made London a special attraction for commercial banks. Britain has no equivalent of the U.S.'s Glass-Steagall Act, which prohibits % commercial banks from underwriting stocks and bonds as investment bankers do. Thus such institutions as Citicorp, the Union Bank of Switzerland and the Hongkong and Shanghai Bank have flocked to London seeking brokerage partners. In all, 64 of the Exchange's 200 brokers and jobbers have now been acquired by larger foreign or domestic firms, or have merged in self-defense.

Almost since the London Exchange was founded in 1801, the City's bowler- hatted business culture has flourished in a cozy world of old-line brokerage and investment houses that enjoyed both fixed commissions and an oligopolistic grip on various financial functions. Until Big Bang occurs, for example, only six firms are allowed to act as jobbers in British Treasury bonds, known locally as gilts. This comfortable arrangement, however, did not sit well with British Prime Minister Margaret Thatcher, who feared that London was losing ground to low-cost, high-volume centers like Wall Street. In 1983 her aides negotiated the ground rules for deregulation in the hope of turning the Exchange into a magnet for international investment. That goal fits handily with the increasingly round-the-clock nature of stock trading, in which international securities firms hand portfolios back and forth unceasingly between New York City, London and Tokyo.

The surge in foreign interest in the City has put the best local brokerage talent at a premium. According to local headhunters, the chief of sales and trading at a major investment bank now earns an average of $300,000 annually. Poaching is rife: last month City wine bars were abuzz with the news that Peregrine Moncreiffe, former head of gilt trading at London's Shearson-Lehman International, had jumped to E.F. Hutton for a salary of about $1.5 million. The newly rich brokerage crowd is helping to push up real estate prices in such flossy London neighborhoods as Kensington and Chelsea, where housing costs have climbed 20% to 30% in the past year.

London's boom has also put a premium on office space. Rents are currently spiraling upward at a rate of 11% a year. Last spring the planning authority for the City of London authorized the construction of 20 million sq. ft. in new office space, nearly one-third of the existing total. Just outside the City, one of the largest new financial projects is planned for Canary Wharf, a $4 billion development on the once desolate patch of Thames dockland known as the Isle of Dogs.

Amid the hubbub, some British financiers fret that Big Bang will eventually become a big bust for purely local firms. British investment houses, they note, are badly undercapitalized compared with their American and Japanese rivals. Britain's largest merchant bank, Morgan Grenfell, has a market capitalization of only $988 million, in contrast to Nomura's ($34 billion) or Salomon Brothers' ($6.6 billion). The worry is that unbridled competition will force many more old-line British houses to merge or go out of business. Says Ian Kerr, a British executive with Kidder, Peabody International: "The City of London has handed itself to foreigners on a plate." Whether that statement is true or not seems hardly to matter to much of London's bustling investment community as it revels in exciting times.

With reporting by Steven Holmes/London