Tag Archives: London Stock Exchange

Episode 6. The decade when greed became good.



We can’t make sense of contemporary stock exchanges without understanding the huge changes that swept through finance in the 1980s. This episode explores those upheavals at the level of states and markets, and the of lived reality of Britain’s markets: the collapse of Bretton Woods, the Iron Lady’s reforms, striking miners and a new kind of investor called Sid. This really was the decade when greed became good.

Transcript

Under the great dome of the Old House, close to the edge of the floor: here you would have found the post-war boom in the shares of dog-tracks, and here you would have found a remarkably tall man, one Sidney Jenkins, sometimes known as ‘King of the Dogs’, reputable dealer in all shares leisure-related. On 1 April, 1960 – April’s Fools day – Sidney Jenkins and his son Anthony formed S Jenkins & Son Ltd. Sidney’s son John started work as junior in the early 1960s.  It was, says Anthony, ‘a family firm and everybody knew one another.  We knew when people had families and passed their driving tests, and they were good days.’

The firm specialized in leisure stocks, dog tracks and the holiday camps – Butlins and Pontins – that boomed in the days before cheap air travel opened up the Costas. This was often described as the ‘spivvy’ end of the market, but it lacked the defining characteristic of spivviness – financial sharp practice. Sidney Jenkins may have been ‘King of the Dogs’ but his firm was conservatively run. It had a good reputation and deep personal connections to the directors of the businesses whose stocks they traded. Jenkins had a horror of overtrading and the ‘hammerings’, when gavels wielded by the Exchange’s top hatted waiters sounded the end of a firm and the confiscation of a partner’s assets. Jenkins eschewed excessive risk wherever possible. The firm never borrowed money or stock: ‘Father’s attitude was “I like to sleep at night,”’ says Anthony. ‘We earned a good living out of the business and the staff all did well, and Father’s attitude was “Why should I over-trade?” That was something that he was always frightened of.  You’ve got to remember also father saw a lot of hammerings, a lot firms went broke in his time.’

People remember the Jenkins family for two things: for being tall, and for being decent. One former broker’s boy remembers going down to the floor on his first day unaccompanied – an unusual occurrence – and looking helplessly at the crowd: ‘I was sort of wandering around, a little bit lost, and a very tall man bent down and said, ‘Your first day, sonny?’ and I said, ‘Yes sir’. He said, ‘How can I help?’ and I told him, and I showed him the list of prices I’d been obliged to collect. That man was Sid Jenkins.’

The family were generous to a fault: ‘If you had a charity that you wanted to raise something for’, said another broker, ‘they’d often put a bucket in the middle of the floor on a Friday afternoon and fill it up, or make people fill it up.’ In all, they had a good name, and on the floor of the old Stock Exchange that mattered.[1]

I tell you this anecdote for two reasons. First, John Jenkins is a name we will hear again in coming episodes, because he actually did build a stock exchange. And second, it just captures the state of finance at the onset of the nineteen eighties – a bit threadbare, small-time, parochial. Careful – the kind of world that tidied the books every night and slept soundly on the takings, however meagre. Sid Jenkins died in 1981, and Anthony briefly became senior partner. A year later John became senior partner. That’s in 1982, when S Jenkins & Son was still the smallest firm of jobbers on the Exchange. In 1984 this same firm made a million pounds in a few minutes of trading. In 1986 it sold out to investment bank Guinness Mahon and thence to Japanese Giant Nomura. In 1987, the firm – now a trading desk in a global bank – lost £10 million in a day’s trading and clawed most of it back over the following few.

Something, it seems, has changed…

Hello, and welcome to How to Build a Stock Exchange. My name is Philip Roscoe, and I teach and research at the University of St Andrews in Scotland. I am a sociologist interested in the world of finance and I want to build a stock exchange. Why? Because, when it comes to finance, what we have just isn’t good enough. To build something – to make something better – you need to understand how it works. Sometimes that means taking it to pieces, and that’s exactly what we’ll be doing in this podcast. I’ll be asking: what makes financial markets work? What is in a price, and why does it matter? How did finance become so important? And who invented unicorns? You know, at some point I’m going to have to answer that question – thank you Dr Cheded for reminding me…

So far, I have set out four key themes for understanding financial markets. I have sought to show you how the finance that dominates our world is the result of colliding factors: social, political, material-technological, and organizational. I’m telling you the story of our exchanges as a lens on finance, because we can’t understand how markets are without knowing how they came to be like that – markets have histories and path dependencies, like any other organization or even person.

And I don’t think that it’s possible to understand contemporary markets – let alone think about building new ones to make the world a better place – without taking stock of the colossal changes that struck the markets in the 1980s. In Britain, change centres on 27 October, 1986, the day named ‘Big Bang’. But that day, though it turned the world upside down for those who lived and worked in the London markets, is only a pivot in a process of change that spans three decades, from the 1970s onwards. I want to try and tell that story at the grand, theoretical level of states and capital and politics; and at the local level, what it felt like on the ground. There are other stories, too, the massive digitization and automations of exchanges, moving bodies from trading floors to desks, changing the shape of markets altogether, and the evolution of increasingly complex financial transactions that shift the power relations between finance and business forever. I will be dealing with these over the next couple of episodes. Let’s start here with states and capital, and a two minute tour of post-war political economy…

—-Timer sound—-[2]

The period from the late 1940s to the end of the 1960s saw sustained gains in productivity and quality-of-life on both sides of the Iron Curtain. These came from an expansion of industrial employment as agrarian workers moved to the cities and took up jobs in factories. An economist would call this extensive growth, adding new factors of production, rather than intensive growth, getting more out of the same resources. In the liberal West a political-economic settlement centring on the Bretton Woods agreement of 1944 secured America’s global economic leadership, with the dollar exchange rate pegged to gold and other currencies pinned to the dollar. New institutions such as the International Monetary Fund and the World Bank came into being as international banks that facilitated this global – or at least semi-global – structure. Weaker economies could hold dollars in their reserves as a source of financial stability. Fixed exchange rates and a strong dollar meant relative luxury for the United States, particularly in the form of cheap, imported oil, partly guaranteed by exploitative political pressure on the producers in the Middle East. International currency flows led to a growth in global financial markets, and by the 1970s US regulators had become increasingly inclined to laissez-faire regulation. If you want to go looking for a time when America was great – and you don’t mind overlooking its foreign-policy adventures under Kennedy and Johnson and the constant threat of nuclear annihilation – this was probably it. Of course, it couldn’t last. These international and now ungovernable financial markets pressured the overinflated dollar. In 1971, America abandoned the gold standard and tried instead to devalue the dollar to improve prospects for its exports.

This, in turn, caused massive collateral damage to those developing world countries holding dollars in their central reserves, and since many of them produced oil, they clubbed together and put the prices up. The Shah of Iran remarked that ‘the industrial world will have to realize that the era of their terrific progress and even more terrific income based on cheap oil is finished.’ (This comes from historian Daniel Sargent’s work, as does much of my potted history – and as always, full references are provided in the transcript on the podcast website.) Multiple economic shocks followed across the West, with Britain one of many countries struggling through a toxic combination of recession and inflation – from January to March 1974 the country even endured a three day week as coalminers, whose wages had been eaten away by inflation, went on strike and coal-fired power stations ran short on fuel. We should add to this a slow decline in the influence and popularity of post-war Keynesian economics, which now seemed unable to cope with these kinds of crisis, and in its place a growing vogue for free-market, monetarist policies of the kind advocated by Friedrich Hayek and Milton Friedman. The free marketers were radical and organised, seekers of individualist utopia inspired by the writing of Ayn Rand. Their ideas spread.  In 1979, the federal reserve under Paul Volker adopted an explicitly monetarist – anti-Keynesian – policy that forced dollar interest rates upwards, leading to a rush of capital back home to the US and a stinging recession everywhere else.

There was something else at work, too. With ever less value to be had from industrial production, so capital begins to circulate elsewhere, through the financial economy. It becomes increasingly self-referential: rather than investing in productive assets, it invests in debts, derivatives and other kinds of financial instrument. It dislikes financial assets sitting quietly on balance sheets, and seeks to parcel them up and move them around. Such assets become an end in their own right, and commercial arrangements are reshaped to produce them. Wall Street discovered new concepts – like securitisation and financial engineering, a phrase that subtly places financial models and debt securities in the same category as railways, bridges, factories and other sturdy trappings of industrial production. This is financialization, and in the mid-1980s it looked like the beginning of a new world, at least for those on the right side of the fence.

There is a just so story that Margaret Thatcher’s Conservative government tore down sacred cows and hacked through red tape to turn London into a global financial powerhouse. In truth, if the government’s policies transformed London, they did so accidentally. Historians argue that the government displayed a remarkable timidity in terms of targeting the financial sector for reform during its first term, through to 1983.

It did not want to be seen as pandering to its friends in the City, nor did it want to upset its friends in the City. But the wheels were already in motion, and the reforms of London’s exchange were in many ways an inevitable consequence of one of the earliest reforms the new government had made.[3]

In 1979 the Conservative government scrapped legislation that restricted the flow of capital in and out of the country. These ‘exchange controls’ were designed to preserve the stability of Sterling and were part of the post-war financial settlement, which had revolved around Bretton Woods and the gold standard. Now that settlement was collapsing, and in 1979 the government struck down legislation that had limited the flow of capital in and out of Britain so severely that tourists’ holiday money was restricted. Wikipedia notes an approving comment by Sir Nicholas Goodison, then chairman of the London Stock Exchange, to the effect that exchange controls had done great harm to Britain as a financial centre.[4] This is ironic, because the great beneficiary had been the Exchange itself. Currency controls had made it impossible for overseas investors to trade in the shares of British companies and protected the jobbers with their comfortable, fixed commissions.

This trade was a lucrative business, with big orders and low costs, so brokers in New York and elsewhere began dealing the shares of British companies as soon as exchange controls were cancelled. They were already in town: during the 1970s many international businesses had opened up shop in London, lured by the growing international securities and ‘Eurobonds’ market. They could cherry-pick the large orders and deliver them cheaply, undercutting the London jobbers who were bound by the fixed commission regime. The London market was now in trouble, losing its lucrative trade to foreign competition and still bound to offer competitive prices on smaller, less cost-effective deals. Without cross-subsidy the jobbers were left in the worst possible world, and they pressured the Exchange to reform its rules. The Exchange was willing, but the main obstacle to progress was the Conservative government. In 1979 the Government’s Office of Fair Trading had taken the Exchange to court over its restrictive practices. Goodison tried to open up negotiations but the Government, fearful of what the tabloids might say, declined. As the Exchange defended itself against the OFT, it became ever more entrenched in the systems of single capacity and fixed commissions, exactly what the Government hoped it would reform.

In 1983, however, the Conservatives won a second election victory. Thatcher exploited the jingoism of the Falklands War and the Iron Lady, as she was now known, had a mandate for more confrontational policy.

The newly appointed Secretary of State for Trade and Industry, Cecil Parkinson, was amenable to a negotiations with the Exchange and a deal – the Goodison Parkinson Agreement – was agreed. Minimum commissions would be abandoned. Single capacity would have to follow soon afterwards because the ability to negotiate commissions would swiftly cut out the middleman – the jobber – as brokers simply did deals between each other. The deadline for these reforms was set three years into the future, for 1986. Monday 27 October was the day singled out for London’s Big Bang.

The London Stock Exchange, you will remember, had run in a peculiar way. Its ‘single capacity’ prevented brokers from trading on their own account or settling deals in their own office away from the Exchange floor. Jobbers could settle deals for brokers but never met clients. The system, which had evolved alongside the Exchange itself over the course of two centuries, elegantly prevented profiteering, as brokers never had the opportunity to offer their clients anything other than the prices available from jobbers, while these latter were forced to offer good prices as they competed for business. In other words, single capacity and fixed commissions were part of a package that allowed the Exchange to act as a regulator, maintaining standards of dealing with ordinary investors, as well as a trading institution. The downside was that dealing was expensive for customers and that the market could only be accessed by brokers offering advisory services, whose own rules and costs ruled out participation by the everyday punter. It was, says Andrew Beeson, then a small company stockbroker and more recently chairman of investment bank Schroders, a ‘cartel’. In 1985, the prospect of life outside such a cartel may have seemed unappealing, even terrifying. Again, hindsight helps us see things in a different light: when I meet Beeson the city grandee – tall, elegantly tailored and immaculately spoken – in the executive suite of the bank, with its discreet lighting, Chesterfields and old masters, it seems that those fears had been unnecessary.

In fact, this should alert us to another vital aspect of the sociology of markets: those that have carved out profitable positions try hard to hold onto them. If they do, they soon become part of the furniture. Their advantages ‘congeal’ into the organization of markets, so that, as the sociologist Greta Krippner so neatly puts it, ‘congealed into every market exchange is a history of struggle and contestation… In this sense, the state, culture, and politics are contained in every market act’.[5] At the time, however, things looked less comfortable: the Exchange found itself open to foreign competition, with firms forced to cut their commissions to keep business.

In order to survive in this newly deregulated financial jungle firms needed to be bigger, wealthier, and able to integrate a much wider range of services. The reforms to single capacity trading and commissions were, therefore, accompanied by a third ruling, allowing Stock Exchange members to be owned by foreign firms. But what had these firms – some tiny enterprises like S Jenkins and Son – to offer that could possibly interest global investment banks?

—— Report from the ‘Battle of Orgreave’, 1984—[6]

Those growing up in the 1980s will remember the violence of industrial unrest, miners hurling rocks and bottles while police charged on horses, raining truncheon blows down on the heads of protesters. Margaret Thatcher’s reforms gutted industrial Scotland, the coal mining north-east of Britain, coal mining and engineering Yorkshire, the steelworks of the Black Country and the potteries of Stoke, in fact most of the British regions. This was class war, but class war between working classes in centres of industrial production and the newly propertied class of shopkeepers and small-time entrepreneurs that she had bought into being across the nation. It was internecine strife, and underlying it was a broader project to shift political power away from workers and to those who owned assets – from labour to capital.

The destruction of the unions through confrontation – the armed repression of the miners’ strike and the print unions’ ‘Siege of Wapping’ – was only one weapon at Thatcher’s disposal. The other, much more effective in the long run, was to greatly enlarge those on the moral side of capital, the property-owning classes, and this she did. Her political followers were exemplified by ‘Sierra Man’, worker turned property owner, polishing his car on the drive of his recently purchased council home.[7] Sierra, by the way, refers to the Ford Sierra, the archetypal affordable, mid-range family vehicle of the time. So the post-war social contract of solidarity and mutual protection came to an end alongside the economic institutions that accompanied it. New thinking scoffed at collective action – there is no such thing as society, said Thatcher, parroting the free-market economist Milton Friedman – and worshipped instead individuality and family values. Its disdain for the state, again  inherited from Friedman, saw national ownership of assets – be they council houses, infrastructure, heavy industries or utilities – as wasteful and undemocratic. The government needed to rid itself of the state-owned industries that it had inherited, inefficient, bureaucratic behemoths needing nothing less than a good dose of private enterprise and market discipline to knock them into shape.

Through a series of huge privatisations the government sold shares in these institutions – now corporations – to members of the public, often at knockdown prices that guaranteed a quick profit. No one seemed to be unduly bothered by the fact that, as citizens, they had already owned the assets that had just been sold back to them, nor that by abolishing the principle of cross-subsidy through a nationalised industry they would make it possible for private enterprises to scoop up lucrative, cheap parts of the infrastructure while abandoning the rest, a recipe for long term exclusion and unfairness. Nor indeed, by the fact that in the longer term private enterprise would be unwilling and unable to compete with cheaper foreign labour and that many of these corporations would simply close, leaving a wasteland of post-industrial despair over much of Britain.

—‘If you see Sid’[8]

Quite the reverse. The privatisations were seen as manna from heaven, pound notes raining from the sky, and generated a huge popular interest in the stock market. A new category of investor was born: Sierra Man could add a few British Gas shares to his ever-growing collection of assets. This new investor even had a name: Sid. The government commissioned an series of ingenious television adverts for the new share issues. Sid is the protagonist. We never meet him, but simply hear a series of strangers passing the news of the latest offer with the catchphrase, ‘If you see Sid, tell him’. The messengers are postmen, milkmen, men in country pubs, old ladies out shopping, all pillars of the emerging, Tory-voting, economic majority. Regional accents abound. As these everymen and women pass the message to the ever absent Sid, it becomes quite clear that it is intended for you, the viewer, whoever you may be. Economic times, they were a-changing – though perhaps not as much as all that, because the advert’s final voice-over, advising a call to NM Rothschild &Sons, is in a cut glass, upper-class accent and the established order holds firm.

—-Voiceover—

For those on the floor of the Exchange, these deals really were manna from heaven. The first big issue was the British Telecom flotation, offered for sale in November 1984. While lucky investors made a few hundred pounds, the jobbers made a killing. Though many of the jobbing firms were still really quite tiny, the government broker scattered riches without discrimination. S Jenkins & Son, smallest of all, received almost the same allocation as the larger firms, despite its complete lack of experience in the telecoms sector.

‘The boys heard about this BT issue coming up,’ says John Jenkins, ‘and they went up and saw the shop broker and said “We want to have a go at this”.  We had no track record at all in British Telecom, nothing, or any electronic business, nothing at all.  They went and saw the shop broker and all of the market makers were issued with the same amount of stock…900,000 shares in British Telecom, which we sold first thing on the morning of the float and we took nearly one million profit.’

‘We actually finished up with something like 950,000 shares,’ says John’s brother Antony, ‘and when you think that Akroyd and Wedd all the large people got 1.4 million, for a little tiny firm of our size to get 950,000 was absolutely amazing because we got all these profits. But at the same time I wasn’t entirely happy with this because whatever bargain you’ve got you are still at risk.’

Jobbers who signed up to the issue had to pay for the stock the next day, whether they sold it or not. ‘If anything happens to Maggie Thatcher,’ thought Anthony, ‘or if another war breaks out then its pay and be paid with this sort of stock’. But it is hard to find much sympathy with Anthony’s predicament, or to believe, in view of the tectonic shifts in British politics and the sudden explosion of enthusiasm for the market, that these jobbing firms took any real risk at all. The British Telecom issue was the most profitable bargain that anyone in the Exchange could remember. Ever.

More flotations followed, and the profits poured in. Of course, this could not go on for ever so now would be an ideal time to sell your business at a vastly inflated price to someone wealthy and foolish, someone who did not understand the social upheavals besetting Britain. Such a shame that foreign banks were not allowed to own members of the London Stock Exchange. Oh, wait a minute, that rule had just been abandoned as well…

Suddenly, the treasure chest that was nineteen eighties London lay open to all. It offered a bridgehead for American firms looking eastward and European or Australasian firms looking west. Here was an opportunity to gain entry to the august London Stock Exchange, a closed shop for two hundred years. The easiest way to get a seat on the Exchange was to buy a firm that already owned a membership, and bidders circled: there was a deal-making frenzy. Foreign buyers found the jobbers fattened by the profits of these public issues, and snapped them up at inflated prices. S Jenkins & Son was sold to Guinness Mahon, which was soon bought by the Japanese bank Nomura. Beeson’s firm was bought by Grindlays Bank in 1984, and the whole was almost at once consumed by ANZ. The sums at play were extraordinary by the standards of the time.

‘1980 was a very difficult period…’ says Beeson, ‘Four years later, suddenly someone was going to pay us £11 million. You know, [pay] all the partners for this business and we thought that Christmas had come.’

Among other deals, US bank Security Pacific paid £8.1 million for a 29.9% stake in Hoare, Govett; Barclays swallowed the jobbers Wedd, Durlacher and the brokers de Zoete & Bevan, making eighties stalwart BZW. Citicorp grabbed three brokers, Vickers da Costa, Scrimgeour [Scrimjer] Kemp Gee, and J. & E. Davy, while Chase Manhattan, writes Michie, who has catalogued the deals, ‘contented itself with two, namely Laurie Milbank and Simon & Coates. Even the chairman’s own firm, Quilter Goodison, sold a 100 per cent stake to the French bank, Paribas, in 1986.’[9]

Note Beeson’s phrasing: ‘pay the partners’. Not the staff or the shareholders, but those who happened to be standing at the top of the escalator in October 1986. Big Bang, then, did more than dismantle a system that had been in place for two hundred years. It completely destroyed the social infrastructure of the City. The old firms had run on the partnership model. Jobbers traded with the bosses’ money; they had to ‘mind their fucking eye’ and wince inwardly as the partners ran their careful fingers down each day’s tally. Apprentices earned little but could work up the ladder to a seat on the Exchange and a place in the partnership where they would be comfortable, secure and one day even wealthy. Everyone’s interests were focused on the long-term: if the firm went broke, everyone lost.

Big Bang tore this apart. The partners, almost overnight, became richer than Croesus and took with them the spoils that might have gone to future partners.  The era of time-served jobbers was over. Youngsters, often with university educations, ruled the roost. They traded long hours at screens before dashing to exclusive wine bars or the BMW dealership; less middle-age than Mercedes and more accessible than Porsche, the BMW had become the young city slicker’s car of choice. Firms that did well were those that catered to their new tastes, often fronted by flamboyant entrepreneurs: Richard Branson’s Virgin, Anita Roddick’s The Body Shop, Terence Conran’s Habitat, and Paul Smith’s expensive-but-fashionable suit shops all flourished in the centres of global capital.[10] These youngsters were tasked with making as much money as they possibly could, seemingly irrespective of the risk. The bonus culture replaced the partnership culture. But who cared? It was boom time, and the money rolled in.

This really was the decade when greed became good.

To keep on rising, stock markets need a steady stream of money. Much of that money came from private investors, these newly minted Sierra men and women, taking their life savings from under the mattress  – or at least out of the building society –  and hurling them into the ever rising stock market.

That it stopped rising barely a year later came as a great shock to many – not just private investors but also a new generation of freshly wealthy, young financial professionals who did not have the life experience to know that investments can go down as well as up. But the really big money – enormous sums – came from another source. Throughout the 1980s corporate raiders, epitomized for ever in the tanned and slicked Gordon Gekko, dreamed up new mechanisms for making money, and in doing so forever reshaped the relationship between finance and business. Their greed was of monstrous proportions – and as Oliver Stone makes clear, wasn’t good at all. I’ll be looking at what they did, and why it matters for all of us in the next episode.

I’m Philip Roscoe, and you’ve been listening to How to Build a Stock Exchange. If you’ve enjoyed this episode, please share it. If you’d like to get in touch and join the conversation, you can find me on Twitter @philip_roscoe or email me on philiproscoe@outlook.com. Thank you for listening, and see you next time.

[1] Quotations are from Bernard Attard’s interview with Anthony Jenkins, and my own oral histories, see

https://research-repository.st-andrews.ac.uk/handle/10023/11688

[2] Sound recording from ‘Ancorapazzo’ via freesound.org, under an attribution creative commons licence from https://freesound.org/people/ancorapazzo/sounds/181630/

[3] For detailed accounts of the Big Bang see, among others, Michie, The London Stock Exchange: A History.ch.12; Clemons and Weber, “London’s Big Bang: A Case Study of Information Technology, Competitive Impact, and Organizational Change.”; Norman S.  Poser, “Big Bang and the Financial Services Act Seen through American Eyes,” Brooklyn Journal of International Law 14, no. 2 (1988).

[4] https://en.wikipedia.org/wiki/Exchange_Controls_in_the_United_Kingdom [14.05.19]

[5] GR Krippner, “The Elusive Market: Embeddedness and the Paradigm of Economic Sociology,” Theory and Society 30, no. 6 (2001): 785.

[6] https://www.youtube.com/watch?v=d2jH53e6_jQ

[7] For further commentary on the development of the housing market under Thatcher see chapter two in Philip Roscoe, I Spend Therefore I Am (London: Penguin Viking, 2014).

[8] https://www.youtube.com/watch?v=n5aOO7Aem4M

[9] Michie, The London Stock Exchange: A History, 555.

[10] I’m following Bryan Appleyard’s characterization here, drawn in three very prescient columns, ‘A Year after the Big Bang’, published in the Times 19-21 October, 1986.


Episode 5. ‘Mind your eye!’ Rules and rituals in the markets



Social interactions – rules and rituals, norms and codes of practice – are the glue that holds a stock market together. This was especially so in the open outcry markets of the twentieth century. The episode looks at the strange societies of Chicago’s pits and London’s ‘Old House’. What did it feel like to cram into a trading pit or inch your way up the Exchange’s social ladder, where cockney sparrows rubbed shoulders with the old elite? A meritocracy of sorts, so long as you were a man. This episode contains some strong language.

Transcript

Let’s step back to a different time. Imagine an enormous room, capped by a vast dome measuring 100 feet high and 70 feet in diameter, said to be on a par with those of the cathedrals of St Peter in Rome and St Paul in London. This was the great trading room of the London Stock Exchange, known as the Old House. A mottled marble faced its walls and pillars and the wags called it ‘Gorgonzola Hall’ after the blue cheese. There was not much furniture, just ramshackle chalkboards covered in figures. Each firm of traders – or jobbers – occupied a particular spot on the Exchange floor, where the chalkboards marked their ‘pitch’, while the brokers spent market hours in their ‘boxes’ at the edge of the floor. Business stayed in the family, and these pitches and boxes were often passed from father to son. During trading hours as many as 3000 people jostled under the dome, manning these pitches or circulating through the crowds.  The room was jammed with bodies, all male; women were not allowed even to set foot on the floor.

There were games. One etching shows young jobbers, wearing proto-hipster beards and frock coats, competing to throw a roll of ticker tape over a bar fixed high up in the dome. And there were pranks. Ehatever the weather, every self-respecting member of the Exchange would come to work with bowler hat and rolled umbrella. On a rainy day it was entertaining to unfurl a brolly, fill it with a confetti of shredded paper and roll it back up again. There were nicknames as sophisticated as the japes: one man was named the Chicken, another the Lighthouse because he was ‘always moving his head around and it reminded people of the light flashing on the top of a lighthouse’. Then there was ‘the Tortoise…he was a little bit round-shouldered, he always wore a bowler hat, brown suit, carried his umbrella and his nose would remind anybody that he was a tortoise. And he used to walk very slowly through the market.’ One short, very ugly man in the mining market was affectionately named Don’t Tread in It. When business was slow, on a Friday afternoon, songs would burst out: the jobbers would sing the Marseillaise to a supposedly French colleague and slam their desk lids – the clerks had old fashioned schoolroom desks – as cannon. A thousand male voices raised in song together, echoing under the dome: noise, camaraderie and the dreaded ‘banter’. A bygone age, a different world.[1]

And when was this? Oh, not so long ago: the Old House closed in 1966, the same year that England won the football World Cup and still very much living memory for some.

Hello, and welcome to How to Build a Stock Exchange. My name is Philip Roscoe, and I teach and research at the University of St Andrews in Scotland. I am a sociologist interested in the world of finance and I want to build a stock exchange. Why? Because, when it comes to finance, what we have just isn’t good enough. To build something – to make something better – you need to understand how it works. Sometimes that means taking it to pieces, and that’s exactly what we’ll be doing in this podcast. I’ll be asking: what makes financial markets work? What is in a price, and why does it matter? How did finance become so important? And who invented unicorns?

Let’s take stock for a moment. In the last episode I poked fun at charmless Sixtus as we explored how equity can finance all kinds of new venture. We looked at the Ponzi scheme of valuation that underpins the Silicon Valley model and more prosaic efforts nearer to home, seeking to use novel subscription methods to develop new, worthwhile and socially productive kinds of venture. That is beginning to look like a worthwhile ambition for our project of building a stock exchange, and we recognised that exchanges can come in all shapes and sizes: Sixtus’ magazine was just one end of the spectrum that stretches all the way to the global, blue-chip providers of exchange services that we know today. We recognised, though, that stock exchanges all have something in common – at least as we know them now. They are all businesses. In the second episode we explored the birth of the Chicago Board of Trade, seeing how agricultural markets and a confluence of railways, telegraphs and civic ambition led to the formation of early derivatives markets. From the beginning, these were economic entities driven by commercial concerns; it is only later, when Justice Holmes opines that speculation ‘by competent men is the self-adjustment of society to the probable’, that such matters achieve a moral mandate too. In London, as the early market coalesced from the disorganised trading in the coffee shops of Exchange Alley, the exchange took a physical form as more prominent stockjobbers purchased a space and began to charge for entry. London’s market, like that of Chicago, flourished at the intersection of commercial and political concerns. Where the Chicago Board of Trade was linked to the city’s prominence, the London exchange gathered momentum as a vehicle through which the new national debt could be bought and sold, often churned through the shareholdings of the new joint-stock companies: the Bank of England and the East India company in particular. London’s traders became the point of passage between the nation’s Exchequer, greedy for funds to fight foreign wars, and the bulging pockets of merchants looking for a reliable and safe return on their capital.

We have, in other words, begun to sketch out the material, political, and historical entanglements that go into the making of a stock exchange, and of which we must be cognisant when we seek to build our own. In this episode I will pick up a final important aspect of the function and organisation of stock exchanges: the role of the social.

——Trading pit and bell—-[2]

Exchanges, it is clear, depend upon social interactions, habits, relationships and customs. They are, or have been until very recently, filled with bodies. You remember how I described the trading pit as a human powered computer, taking the information that flowed into the exchange as buy and sell orders and turning it into prices. This computer works quite literally by the power of voice. Every bid or offer – every attempt to buy or sell – had by law to be shouted out into the pit. In the din the accompanying hand signals did most of the work. A trader buying would turn his palms to his body, while palms out signalled a sale. Fingers could denote the final unit of the price – as everybody knew the rest of the number there was no need to count it out each time.

The anthropologist Caitlin Zaloom records these details. She visited the Chicago pits in the final years of their operation, during the late 1990s. Zaloom notes the sheer size of some of these men, some big enough to be American football players, others with built up soles to give them extra height. Traders talked about learning to control their voices, sharp enough to carry across the pit yet not sharp enough to show panic, and coordinate their shouts with jumps and looks. ‘The body,’ she writes, ‘is a key interpretive instrument for the pit trader’. The rhythms of the pit signify rising prices or falling ones, and the ambient noise shows the depth of trade. Trading must be immediate, intuitive: ‘In training their bodies as instruments of both reception and delivery of the underlying information of market numbers, the first step is learning not to calculate.’[3] Such essential connectedness with the rhythms of the markets had always been the sine qua non of the pit trader, captured by Frank Norris’s turn-of-the-century novel, where one protagonist would

‘feel—almost at his very finger tips—how this market moved, how it strengthened, how it weakened. He knew just when to nurse it, to humor it, to let it settle, and when to crowd it, when to hustle it, when it would stand rough handling’.[4]

Of course, such primal, embodied trading demands a personality to match and Zaloom found the traders constructing for themselves hyper-masculine, profane, even debauched behaviours. She notes the ubiquity of the Sun tabloid newspaper which at the time carried topless photographs on page 3; I too can remember the traders’ myth that the gradient between the model’s nipples was a sure indicator of the direction of travel for that day’s market.

Zaloom records arguments and even physical fights, as does the sociologist Donald MacKenzie, who visited Chicago’s pits in 2000. One trader showed MacKenzie his spectacles, covered with flecks of spittle after the close of trading; another recalled that he could lift his feet off the ground and be suspended between the bodies of those pressed against him. Traders may not have been friends, but they worked together day after day, year after year, and got to know each other’s habits and tactics. ‘In the pits, social information is founded in deep knowledge of the local environment. Traders organise trading strategies with the situations and motivations of their particular competitors and compatriots in mind.’[5] (That’s Zaloom again, and as always full references are provided in the transcript on the podcast website.) Both Zaloom and MacKenzie caution us not to romanticise the pits: ruined voices and worn out bodies, financial ruin and even tragic stories of suicide, all these form the background hum to the in-your-face noise of the pit itself. Moreover, it is not clear how cleanly the human computer worked. ‘The subtle webs of reciprocity and trust needed to keep open outcry trading flowing smoothly,’ writes MacKenzie, ‘could turn into informal cartels that operated to the disadvantage of other pit traders or external customers.’ Social relationships, the very things that kept the market running, might all too easily lead it away from the longed for – though never achieved – goal of efficient market function. [6]

——

That was Chicago. London’s trading, though every bit as ruthless, had a more gentlemanly exterior. In Chicago those trading for speculative profit were known as scalpers. In London, they were jobbers, an occupation that had evolved alongside the exchange itself – as we saw in episode three – and whose name dates back to the seventeenth century stockjobbers of Exchange Alley, those low wretches so despised by Dr Johnson. Where the Chicago men crammed into a stepped pit and yelled orders at each other, London’s jobbers strolled across the floor of the house and chatted to their counterparts, eye to eye as they squeezed their rivals into the toughest bargains possible. Specialisation was tied, not to individual pits, but to areas on the floor which serviced different sectors. There was the Government broker, trading gilts in the smartest part of the house, or the mining market, and the now-offensively-named Kaffir market, trading the stocks of Southern Africa. Jobbers stood at pitches comprising little more than notice boards. Larger firms might carve out an established pitch by a wall or a pillar, furnishing it with makeshift shelves and even a seat; smaller firms simply had to stand among the crowds.

The boards listed the stocks traded, names engraved onto magnetic strips, an attempt to give some sense of permanence to the otherwise ramshackle stalls.  A junior trader, a blue-button, would be in charge of marking up prices in red or blue crayon, next to the opening price, lettered in black. The boards themselves might be put to strategic use, updated a little more slowly than prices moved, obscuring market action and helping jobbers take a turn.

Communications on the floor were rudimentary, to say the least. The Exchange retained a staff of top-hatted ‘waiters’ whose function was to ensure the smooth running of trading. One of the many problems was keeping track of people in this great crowd, especially the brokers who stalked the floor in search of the best price for their clients. Waiters used speaking tubes like the ones found on old ships to speak to brokers, blowing through them first of all to make a whistle that summoned someone to the other end. If a broker could not be found a number would be illuminated, and it was up to the individual to spot their number and raise their hand. A waiter would point them to the telephone room or the meeting room where they were required: telephone booths were located around the outside of the hall and had a movable floor that sunk down when the user stepped in, flicking out a marker to show that the booth was occupied. Waiters managed the circulation of bodies around the room, preserving the rules of conduct in the seeming chaos. They even conducted the dreaded hammerings, when firms that could not meet their obligations were shut down by the blow of two gavels and the partners’ assets turned over to the administrators.

Business was conducted buying and selling according to a complicated verbal etiquette set out at length in the Stock Exchange’s Code of Dealing. Here’s an example, from the sociologist Juan Pablo Pardo Guerra’s study:

‘What are XYZ?’ Answer: ‘125.8’

Broker: ‘I am limited I’m ½p out in 250’

Jobber: ‘I could deal one way’

Broker [hoping for the one which will suit him]: ‘Very well, you may open me’

Jobber: ‘Give you ½p’

Broker: ‘Sorry, I’m a buyer at 127½’ [7]

It’s unintelligible to us, but perfectly clear to the jobber. No agreement has been reached, and no deal done. Traders had to use a particular form of language to avoid being snared in an accidental bargain: one might say ‘I’m only quoting’ to make this clear, just as a lawyer might raise a point ‘without prejudice’.

Jargon apart, both London and Chicago worked on the principle of the spoken deal. The entire social infrastructure served to reinforce the primacy of this bargain, epitomised in the London Stock Exchange’s motto, my word is my bond. Prices were continually in flux. Written reports flowed long behind the deals made by jobbers, spilling first onto the boards and then the settlement clerks located beneath the trading floor. Throughout the day, Exchange officers came to the pitches and collected prices, which hardened overnight into the print of the Stock Exchange’s Daily Official List and the Financial Times; by the time these printed records were made the verbal transactions of market itself had left them far behind. The slowness of any record keeping made ‘my word is my bond’ of paramount importance, for the market could only function if spoken agreements were honoured, even if the deal caused one counterparty considerable financial pain. Sanctions were informal and effective, and anyone who defaulted on a bargain would have great difficulty making another. Everyone knew one another. Like the traders in the pits, jobbers did not need to know the prospects for a company or the long-term economic forecasts for the nation. They simply needed to know who wanted to buy, and who wanted to sell. All the information was ‘on the floor,’ says one jobber, ‘eye contact, sweat, movement. You could always tell from the eyes of the junior trader whether his boss was long or short, and how badly they wanted to get out of their position’.[8]

——— Market traders——[9]

The Exchange was strangely meritocratic, with an apprentice-based career system that welcomed cockney sparrows as well as the dim-witted younger sons of the old elite. Although it preserved in microcosm the nuances of the British class system, it had an egalitarian demeanour where boys from the East End rubbed shoulders with graduates of august Oxbridge colleges: ‘I like talking to you,’ an old jobber told one young Balliol graduate, ‘‘cos you’re the only bloke in the market, wot I talk to, wot talks proper.’[10] The old Etonians drifted towards the posher firms, the gilt-edged brokers, while the lads from Hackney and Islington sought out opportunities in the less grand stretches of the market. That meritocracy did not extend to women though, and Ranald Michie, historian, records the details of the struggle to secure equality of access to the institution.[11] In 1966 – the same year that the Old House was closed – a Miss Muriel Bailey, highly commended brokers clerk, sought membership of the Exchange, in order to apply for position as partner in her firm.

One of the first women on the trading floor, 1973

To be a partner, one had to be a member, and to be a member one had to be a man. Miss Bailey, who had run her broker’s office throughout the war and in the intervening years had built a substantial client list, naturally felt that obstacles were being unnecessarily placed in her way. The Council of the Stock Exchange agreed to support her application so long as she promised not to set her profanely female foot upon the sacred mancave of the trading floor, but the membership resoundingly rejected this proposal. That was in 1967. At least the membership proved to be consistent in its bigotry, in 1969 rejecting the membership of foreigners, defined as those not born in Britain, and voting against the admittance of women again in 1971. Nor should the Exchange itself be entirely exempt from scrutiny: in 1962 it had refused to accept a listing application from automotive firm FIAT, presumably on the grounds of being too Italian.[12] Only in January 1973 did the membership consent to allowing female clerks to become members, and even then it took until the summer of that year before rules banning them from the trading floor were abandoned. Miss Bailey, by now Mrs Wood, was elected to the membership in January 1973, aged 66.

To become a member, even if you were a man, you had to serve a lengthy apprenticeship, joining as a youngster and working through clerical and junior status until eventually you became a dealer, then partner. Brian Winterflood – a central character in our story – was one such lad. Now in his eighties, he is a short, jovial man, still full of energy. He is known for his anecdotes, as well as his opinions – he is an outspoken supporter of Brexit – and is unerringly generous to the press. They treat him well in return, filling diary columns with stories about his long career. Sometimes these verge on the shameless, like Winterflood passing off a recent finger amputation as frostbite sustained on an arctic cruise. Despite his pleas, the paper reported, the ship’s doctor refused to operate and Winterflood had to be treated on terra firma. I noticed that Winterflood doesn’t eat dessert and suspect another later-life explanation. Luxury arctic cruises would be much less popular if one paid in digits as well as dollars, but it makes for good copy all the same.[13]

My lunch with Winterflood was a spontaneous affair. We were supposed to be meeting in the office, but he didn’t show up. Instead Stacey, from the front of house, appeared. But Brian had called: he couldn’t find a parking place near the office, so he was going to pick me up instead. The lads on the trading desks – gender roles are still very much alive in the city, as you see – joked about the gaffer keeping a picnic hamper in the back of his Rolls, but neither materialised.

Instead Winterflood took me to a favourite spot – a stripped down Italian restaurant in Southwark – where he could chat to the staff like an old friend, sip a blend of angostura bitters and ginger beer he called ‘Gunner’, and park his modest executive runabout on the disabled-badge space right outside. On a second meeting he recounted a recent encounter with an unknown item on a cruise ship menu – poivron. He can read most French menus, he told me, but was stumped by that – still, he didn’t believe the Philippine waiter who claimed ‘Poivron’ was a region of France. The secret ingredient turned out to be leeks. Brian Winterflood, arch-Brexiter, is a most amusing man.

Winterflood is  a legendary figure in the smaller-company market world. His career has tracked the markets’ ups and down more closely than anyone; in fact, his name is almost synonymous with small company trading. Growing up in a suburban household in Uxbridge, West London, his arrival in the City was the gift of a generous school teacher, who asked him what he intended to do for a living.

‘I said I don’t want to drive a bus – because my father was a tram driver,’ he recalls, ‘what I would like to do is to make some money.’

‘Well,’ replied the schoolmaster, ‘if you want to make money you should go to where money is made. I have a friend who is a partner in a stockbroking firm and I wonder if you would want to go up the City.’

‘Yes, I would’, replied Winterflood, without thinking more. And so one of the most influential men in the small company world began his career as a messenger at the very bottom of the heap.

‘Thank God I did start there,’ says Winterflood, ‘running round the City, getting to know the City, getting to know the people. It was magical, absolutely magical.’

Would-be jobbers like the young Winterflood served a lengthy apprenticeship, first as messengers, then ‘red buttons’ and ‘blue buttons’, each colour of badge denoting an increased level of seniority and certain powers and responsibilities. Established jobbers wore no buttons and junior employees would have to remember who was who, lest they disgraced themselves by speaking out of turn to a senior member. Blue buttons ran messages between jobbers and brokers, as well as marking up prices on the boards. They asked questions and learned from their employers who doubled as tutors and mentors, sponsoring the careers of juniors and preserving the future of the Exchange.

Eventually, after several years of long hours and low pay, checking bargains with longhand arithmetic and slide rules, balancing the books, and learning the etiquette of the House, the lucky ones were promoted to ‘dealer’, able to trade for the first time.

The moment of appointment was a theatrical Stock Exchange ritual, the young dealer sent up from the floor to the partners’ office to be given a badge. Another East End blue button, Tommy, whose memoires were captured by historian Bernard Attard, recalls his transition to ‘authorised clerk’ with awe:

‘I was called into the partner’s room and they said, ‘How would you like to become a dealer?’ I said, ‘I don’t know’.  I was absolutely dumbfounded. Where I come from I couldn’t have anticipated anything like this. So ‘I said I’d love to, I’d love to have a try.’ So I was authorised, and I’ll never forget the first morning…’[14]

Winterflood’s first day was quite different; not for him the stately induction in the upstairs office:

‘I had a particularly nasty senior partner,’ he remembers. ‘He was a moody so-and-so and he used to gamble everyday on the horses, his life was terrible, he ran off with another woman. The day that I got authorised to go on to the floor of the Exchange, he puts his hand in his pocket…and he says, ‘All right Winterflood, now you are authorised’, and he took his hand out like that and he gave it to me, it was my badge, my authorised badge. And he said, ‘Mind your fucking eye.’

Mind your eye – an old expression meaning ‘take care’, often translated into comic dog Latin: mens tuum ego. Winterflood remembers the sudden responsibility of holding a trading book as an authorised dealer in a partnership, trading with the partners’ own money and, moreover, their unlimited liability. Partners took a keen interest in their own property and the menacing presence of the waiters’ gavels:

‘It was good looking over everybody’s shoulder when they were [trading], but when the senior partner says, ‘Mind your fucking eye’, I mean you are terrified…I remember when he came back from a bad day at the races, which was the bookie outside the Exchange, he would sit in the pitch and say, ‘What have you done?’ I would say, ‘Well not a lot Sir, but there are one or two things that you might like,’ and he goes across and looks at the page, I say ‘Have you noticed sir, so and so,’ and he said, ‘It only pays for the bad ones.’’

This process of apprenticeship served to reproduce the social structures that held the exchange together, years spent learning who was who and what was what before being allowed anywhere near the money. Eventually it was possible to buy a ‘nomination’, a seat on the Exchange, and become a member. You could then embark on your career proper, building a reputation in a particular sector or for a particular strategy: a specialist in Tanganyika concessions, a specialist in insurance, an expert in arbitrage, in contango, a bull or a bear, depending on one’s personality, skills and good fortune.

It was the process of apprenticeship, as well as the distributed structure of the London Stock Exchange’s membership, that made the institution so extraordinarily durable and yet simultaneously so conservative and resistant to change.

So that is one last thing to add to our mix of key ideas when we come to build our stock exchange. Social relationships, webs of reciprocity and trust, and bodies – up close and personal,  mostly male, I’m afraid  – are  just as much  part of the  structure and function of stock exchanges as their material architectures and political alliances. As I pointed out in the last episode, Aditya Chakrabortty identifies the alternative economic projects he has reported on as being ‘thickly neighboured’. That’s true of any exchange – even, as we shall see, those contemporary digital structures that seem to have banished bodies altogether – and will be something to which we must look if we are going to succeed. But, and as this episode has shown, stock exchanges are constitutive of community as well, forming engines through which people can be bought together in cooperative activity. Once again, we just have to choose the shape we wish that cooperation to take.

——

Times were hard for the London Stock Exchange during the 1960s and the depression of the early 1970s. Members held other jobs and scrabbled to make ends meet. Winterflood and his wife ran a small bric-a-brac shop named Fludds in Valance Road, at the end of Petticoat Lane. Others did worse: Winterflood recalls meeting a colleague selling carpet squares – ‘not even whole carpets, carpet squares!’ It is hard, now, to believe that finance could have been so impoverished a profession. Jobbers would talk about making their daily ‘two and six’, the cost of the train journey to work and home again.

In January 2017, just after his 80th birthday, Brian Winterflood rang the Stock Exchange bell to call time on his career. The man who ran a bric-a-brac shop to make ends meet is now a multi-millionaire, able to charter a private jet to his holiday home in Corsica or spend the winter in a Floridian holiday village where there is line dancing every evening. Winterflood Securities – Wins – the firm that he founded and sold in the early 1990s, but ran for many years after, is reported to have made £100m in 2000.[15] How did such a change in fortunes come about? How did these impoverished market-makers go from metaphorical rags to very real riches in the space of two decades? To answer those questions we must explore the extraordinary transformation in finance in the 1980s.

I’m Philip Roscoe, and you’ve been listening to How to Build a Stock Exchange. If you’ve enjoyed this episode, please share it. If you’d like to get in touch and join the conversation, you can find me on Twitter @philip_roscoe or email me on philiproscoe@outlook.com. Thank you for listening, and see you next time, when we get to grips with the decade of greed.

[1] The background detail in this chapter comes from varied sources, my own research into London’s markets, see https://research-repository.st-andrews.ac.uk/handle/10023/11688, and Ranald C. Michie, The London Stock Exchange: A History (Oxford: Oxford University Press, 2001). In 1990 Dr Bernard Attard of Leicester University conducted a series of oral history interviews with former jobbers, capturing the details of what was by then a vanished world. Transcripts and recordings can be found https://sas-space.sas.ac.uk/view/collections/lseoh.html

[2] Sound recording from ‘touchassembly’ via freesound.org, under a creative commons attribution licence https://freesound.org/people/touchassembly/sounds/146268/

[3] Caitlin Zaloom, “Ambiguous Numbers: Trading Technologies and Interpretation in Financial Markets,” American Ethnologist 30, no. 2 (2003): 264.

[4] Norris, p.90, quoted in Christian Borch, Kristian Bondo Hansen, and Ann-Christina Lange, “Markets, Bodies, and Rhythms: A Rhythmanalysis of Financial Markets from Open-Outcry Trading to High-Frequency Trading,” Environment and Planning D: Society and Space 33, no. 6 (2015).

[5] Donald MacKenzie, “Mechanizing the Merc: The Chicago Mercantile Exchange and the Rise of High-Frequency Trading,” Technology and culture 56, no. 3 (2015). Zaloom, “Ambiguous Numbers: Trading Technologies and Interpretation in Financial Markets,” 261.

[6] MacKenzie, “Mechanizing the Merc: The Chicago Mercantile Exchange and the Rise of High-Frequency Trading.”

[7] Juan Pablo Pardo-Guerra, “Creating Flows of Interpersonal Bits: The Automation of the London Stock Exchange, C. 1955–90,” Economy and Society 39, no. 1 (2010): 90.

[8] Eric K. Clemons and Bruce W. Weber, “London’s Big Bang: A Case Study of Information Technology, Competitive Impact, and Organizational Change,” Journal of Management Information Systems 6, no. 4 (1990): 50.

[9] From www.freesound .org under a creative commons licence. https://freesound.org/people/deleted_user_1116756/sounds/74460/

[10] From my own interview notes.

[11] Michie, The London Stock Exchange: A History, 453f.

[12] To be precise, the application was rejected on the basis that the firm’s accounts did not meet UK standards. Ibid., 477.

[13] http://www.cityam.com/226688/how-the-winterflood-founder-went-from-freemason-to-gangster [accessed April 2017]

[14] Bernard Attard, “The Jobbers of the London Stock Exchange an Oral History,” Oral History 22, no. 1 (1994): 45.

[15] Financial Times, 30 April 2017, ‘Winterflood’, by Chloe Cornish. https://www.ft.com/content/42764c22-29c6-11e7-9ec8-168383da43b7?mhq5j=e3