1.2.5 Technological change
The third major development was the impact of technological change on the conduct of business within the industry. The arrival of the internet has radically changed the way in which people shop for financial products, and the scope this provides for making efficient choices and for dealing directly with financial services providers.
But even ahead of the now very widespread use of the internet by households in the UK, electronic communication was changing the way that the institutions in the industry undertook their business. For example, until Big Bang, transactions in the Stock Exchange were conducted on a face-to-face basis on the trading floor. The manner by which business was conducted gave rise to a number of phrases – for example those working in the Stock Exchange would describe their job as working on – rather than in – the Stock Exchange because business was executed on the trading floor of the exchange through a process known as open outcry. Another phrase associated with the Stock Exchange then was ‘my word is my bond’, where trust between parties to transactions on the floor was underpinned by the acceptance of the professional integrity of the participants. Technology changed this pattern of doing business and, in the view of many who remember the old days of the Stock Exchange, made business less colourful and more sterile in nature. Business in the Stock Exchange and elsewhere in the City of London became conducted via computers and telephones from separate dealing rooms.
The simultaneous development of dealing information systems – such as the services provided by Reuters, Telerate and Bloomberg – also ensured that traders and investors had greater immediacy and transparency about market information (e.g. the prevailing prices of securities and the market rates of interest) and about factors that would influence such market prices (e.g. changes in the rates of price inflation).
Further technological developments have improved the speed and efficiency with which transactions are settled between parties – i.e. the payment of cash from one party to another in exchange for securities acquired. They have also reduced the cost of transactions. The year 1997 saw the introduction of the Stock Exchange Trading System (SETS) for trading, initially in the top 100 share issues. This was subsequently extended to the top 250 shares, with less commonly transacted shares being traded on the alternative SETSmm system.
Electronic multilateral trading facilities (MTFs) have now emerged. These are electronic exchanges run by investment firms that provide alternatives to traditional exchanges, such as the London Stock Exchange, to buy and sell securities. The development of MTFs has been facilitated by the European Union’s ‘Markets in Financial Instruments Directive’ (MiFID). This directive allows investment firms to provide services across the European Union and also harmonises the protection provided to personal investors.
So technology has changed the very nature by which business is undertaken both between firms and between customers and firms in the financial services industry. However, this move is not without its potential for unfortunate glitches and human errors that result in financial calamities.
In one example, clumsy typing cost a Japanese bank at least £128 million and staff their Christmas bonuses after a trader sold 600,000 more shares than he should have. A trader at Mizuho Securities fell foul of what is known in financial circles as ‘fat-fingered syndrome’, where a dealer types incorrect details into his computer. He wanted to sell one share in a new telecoms company called J Com for ¥600,000 (about £3,000). Unfortunately, the order went through as a sale of 600,000 shares at ¥1 each. The result was a huge financial loss for his firm. As if the trader was not unpopular enough, the firm cancelled its end-of-year party (The Times Online, 2005).