Stockjobber

3 key takeaways

• Stockjobbers acted as intermediaries, buying and selling securities to provide liquidity.
• They were crucial to the functioning of the London Stock Exchange until the mid-1980s.
• The role of stockjobbers was eliminated following regulatory changes known as the “Big Bang” in 1986.

What is a stockjobber?

A stockjobber was a type of market maker on the London Stock Exchange (LSE) who played a pivotal role in the trading of securities. Unlike brokers, who acted on behalf of clients, stockjobbers traded securities for their own accounts. They bought and sold shares from brokers, thereby providing liquidity and ensuring that trades could be executed smoothly.

Stockjobbers made profits through the bid-ask spread—the difference between the price at which they bought securities and the price at which they sold them. This role was essential in maintaining an orderly market, as it ensured that there were always buyers and sellers available for securities.

Role and function of stockjobbers

Stockjobbers performed several critical functions on the London Stock Exchange:

• Providing liquidity: By constantly buying and selling securities, stockjobbers ensured that there was sufficient liquidity in the market. This made it easier for brokers to execute trades on behalf of their clients.
• Setting prices: Stockjobbers played a key role in price discovery. Their willingness to buy and sell at certain prices helped establish the market prices for securities.
• Risk management: By taking positions in various securities, stockjobbers assumed market risk. They used their expertise to manage this risk and ensure profitability.

Historical significance

The role of the stockjobber dates back to the early days of the London Stock Exchange. Stockjobbers were integral to the functioning of the LSE for many decades. However, their role evolved over time as the financial markets and trading practices developed.

The end of stockjobbers

The role of stockjobbers was fundamentally changed by the “Big Bang” reforms of 1986. These regulatory changes aimed to modernize the London Stock Exchange and make it more competitive globally. Key changes included:

• Deregulation: The Big Bang ended the separation between brokers and jobbers, allowing firms to act as both.
• Automation: The introduction of electronic trading systems reduced the need for human market makers.
• Increased competition: Deregulation led to increased competition among financial firms, changing the structure of the market.

These reforms eliminated the traditional role of stockjobbers, as the functions they performed were increasingly handled by integrated investment firms and electronic trading platforms.

Legacy of stockjobbers

While the specific role of stockjobbers no longer exists, their legacy remains in the form of modern market makers and liquidity providers who perform similar functions in today’s financial markets. The transition from human market makers to automated systems reflects the broader evolution of financial markets towards greater efficiency and technological integration.

Stockjobbers were a foundational component of the London Stock Exchange, providing liquidity and facilitating smooth trading for many decades. Their role, though obsolete now, laid the groundwork for the modern mechanisms that ensure efficient market operations today.

The evolution from stockjobbers to automated market makers highlights the continual advancement and adaptation of financial markets in response to changing technologies and regulatory environments.