THE LONDON STOCK EXCHANGE

The London Stock Exchange currently comprises two separate markets: the main market (which accounts for the bulk of London Stock Exchange activity, in terms of both the number of securities listed for trading and in terms of turnover), and a ‘junior’ market, termed the Alternative Investment Market where the securities of some much smaller companies are traded.

Structure prior to October 1986. Prior to 27 October 1986 (‘Big Bang’), the London Stock Exchange operated a single-capacity trading system. This system meant that the membership of the London Stock Exchange was split into two groups, brokers and jobbers, each with sharply distinct functions.

Brokers (stockbrokers) were those members of the London Stock Exchange whose principal task was to execute orders for clients, whether private individuals or institutions Brokers were not permitted to deal with each other but were only permitted to buy securities from or sell securities to jobbers. Brokers charged a commission on all the deals they executed, with these commissions being subject to a minimum scale set by the London Stock Exchange, although many brokers supplemented their income by managing portfolios of securities, by selling investment advice and research findings, and other financial services.

Jobbers were those members of the London Stock Exchange who bought and sold securities on their own account (that is, as principals). Jobbers were permitted only to sell securities to and buy securities from the brokers: London Stock Exchange rules did not permit them to deal with securities directly with the general public.

The purpose of the sharp distinction between the roles of jobber and broker was to promote a competitive market in securities and to ensure that investors would not be subject to the conflicts of interest likely to surface under a dual capacity system (that is, one where a single firm both executes deals for investors and deals in securities on its own account). Under the single capacity system, the broker had no reason for

wanting to do anything but obtain the best deal for the client, since the securities that the client wished to trade could only he sold to or bought I'rom a jobber. Furthermore, the system of minimum commissions guaranteed the broker a stable source of income and reduced the incentive to undertake deals that did not make use of a jobber. A system of dual capacity was, it was argued, likely to lead to conflicts of interest since it would be difficult to ensure that a client received the best prices and the best advice about which securities to buy and sell, if the broking firm was also holding quantities of securities on its own account.