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Lessons from history: how a sharedealing revolution happened

From 10 days to 10 seconds – 1999 was a watershed year for UK private investors
Lessons from history: how a sharedealing revolution happened
  • A boom in private investor numbers in the 1980s paved the way towards better stock broking services for the masses
  • As the platform market continues to evolve we can learn from the past

It’s really not that long ago that two-week-long dealing periods, paper share certificates, cheques, high dealing costs and poor price visibility were the norm for private investors. In fact, the whole system of trading in the late 1980s had barely changed for centuries as far as private investors were concerned.

Just how unchanged can be glimpsed in an anecdote by Philip Augar in his book on the City, The Death of Gentlemanly Capitalism, which tells of how a merchant banker at a staff Christmas party, on hearing that one of his typists lived on an estate in Romford, replied: “How splendid. Do you keep horses there?”

But a decade of change was coming. The grip of full-service stockbrokers on the private investor market began to loosen in the mid 1980s as privatisations of state-owned businesses got under way, including the hugely popular BT and British Gas offers. This greatly expanded the number of private investors and at the same time enticed new arrivals and competition into the market. The privatisations coincided with the mammoth overhaul of the City known as Big Bang, opening it up to competition from home and abroad, and the London Stock Exchange's dumping of open outcry for full automation.

New broking firms were born – such as Killik & Co in 1989 – while others such as Hargreaves Lansdown (which had originally set up shop in 1981 as a unit trust and tax specialist) were transformed by the huge volumes of business from private investors flooding through in 1986 and 1987.

The market was ripe for speedy and cheap execution-only trading services and they soon came. To begin with they were telephone-based (cheques and certificates still had to be sent to the broker), but dealing prices were massively discounted and investors flocked to these providers. One of the first was ShareLink, launched by BT in 1987, and many others followed, including The Share Centre in 1991. But British brokers couldn’t relax for long – by the early 1990s online sharedealing was becoming well established across the Atlantic and US providers were eyeing up the UK market. Worried British brokers began launching their own online offerings, even if they were little more than a dressed-up email service.

In 1993 Charles Schwab, a brokerage that had pioneered discount broking in the US (where it is still one of the top 4 retail brokers), arrived on these shores. It snapped up ShareLink and in 1998 it became one of the UK’s first online sharedealing providers, bulldozing across other fledgling online services such as StockTrade from Brewin Dolphin and Xest from Charles Stanley. Barclays Stockbrokers was Schwab’s biggest rival and launched its online platform in early 1999. Hargreaves Lansdown launched its online service later that year, and in August 1999, another big US broker, E*Trade, began its UK real-time online dealing service. By late 1999, The Share Centre had added an online platform and TD Waterhouse, a Canadian export, also joined the fray (and survived as a broker until it was bought by interactive investor in 2017). AJ Bell, which had set up shop in 1995, focusing on admin services for the Sipp market, rolled out its online Sipp platform in 2000.

By now many millions of homes in the UK had linked to the internet; the dot-com boom was well under way and business was booming.

Fund supermarkets (today’s platforms forerunners) were another new hugely popular phenomenon as were providers such as interactive investor, which had launched in 1995 offering research and discussion boards to private investors before adding online trading facilities through another US recent arrival DLJ Direct in 1999.

By the end of 1999 the number of brokers offering online dealing had multiplied from a handful to around 25, although not all the services were real-time, site crashes were frequent and many lacked tools and access to data. Investors’ Chronicle reported regularly on this changing market and how the providers compared. Not only was the increase in competition and lower overheads driving down dealing costs, but several providers offered access to real-time and historical information. One IC reader told us: “It’s like pulling off a blindfold – I no longer feel as if I am operating in the dark.”

Many of the sites also enabled trading in US shares. The IC urged readers to take full advantage: “To ignore the US is to ignore the world’s dominant economy… the canny investor will take an interest in foreign stocks because of the sheer quality of some of the companies.” 

But while the dot-com boom provided enough business to keep all the new providers in business, the crash when it came (starting in March 2000) meant trading volumes fell off a cliff. This was a disaster for brokers operating in the UK’s crowded market. Charles Schwab astonished the market when it threw in the towel in early 2003, selling the bulk of its UK and Europe retail dealing business to Barclays.

Yet, for all the madness of the dot-com boom and the unprecedented levels of trading by private investors in the UK, dealing volumes soon recovered and even exceeded the earlier excesses, leading to a bright new chapter for UK retail brokers. But that’s a whole other story.