What Is Jobbing?
Jobbing refers to the historical practice carried out by specialized individuals or firms, known as stockjobbers, who operated as principals on the floor of the London Stock Exchange prior to the 1986 "Big Bang" reforms. Within the broader field of securities trading, jobbing was a distinct form of market making where jobbers held positions in various securities on their own account, facilitating trades by quoting prices at which they were willing to buy or sell to stockbrokers. Their primary objective was to profit from the bid-ask spread between these prices, thereby providing essential liquidity to the market.
History and Origin
The business of jobbing emerged in the 1690s during England's Financial Revolution, with early references to "stock-jobbers" appearing in the late 17th century. These individuals played a crucial role as intermediaries, even attracting critiques from figures like Daniel Defoe who denounced practices such as market manipulation8. For centuries, the London Stock Exchange operated under a "single capacity" system, which formally separated the roles of jobbers (principals, or market makers) and brokers (agents acting on behalf of clients). This distinction was largely based on custom until formalized in the Stock Exchange rules in 1909.7
Jobbers were central to the functioning of the London Stock Exchange's physical trading floor. They maintained inventories of stocks and were prepared to quote both a buying and selling price for a given security to any broker who approached them. This system, which had evolved into a recognizably modern form during the 19th century as the range of securities broadened, meant that every stock traded on the exchange typically passed through a jobber's book. The jobbing system ultimately came to an end with the "Big Bang" deregulation of October 1986, which abolished the single capacity rule and allowed firms to act as both brokers and dealers.6
Key Takeaways
- Jobbing was a historical system of market making predominantly used on the London Stock Exchange.
- Stockjobbers acted as principals, buying and selling securities from their own inventory to facilitate trades.
- Their income was primarily derived from the bid-ask spread.
- The practice ensured market liquidity and price continuity before electronic trading.
- Jobbing ended with the "Big Bang" reforms in 1986, which integrated brokering and dealing functions.
Interpreting the Jobbing System
Interpreting the jobbing system involves understanding its role in providing market depth and facilitating price discovery in a pre-electronic era. Unlike modern systems where orders are matched electronically, jobbing relied on direct negotiation and the jobber's willingness to commit capital. The jobber's quoted spread reflected their assessment of the security's risk management, demand, supply, and overall market conditions. A narrower spread typically indicated higher liquidity and less perceived risk, while a wider spread suggested the opposite. This physical interaction and the jobber's inherent expertise were central to how prices were formed and how efficiently transactions occurred in the capital markets.
Hypothetical Example
Imagine it's 1980 on the London Stock Exchange trading floor. A stockbroker representing a client wants to sell 1,000 shares of British Petroleum. The broker approaches a jobber specializing in oil and gas shares. The jobber, after assessing the market and their own inventory, might quote: "BP, 300 pence bid, 302 pence offer."
This means the jobber is willing to buy the shares from the broker at 300 pence per share (the bid price) and sell them at 302 pence per share (the offer price). The broker's client, wanting to sell, would sell their 1,000 shares to the jobber at 300 pence each, receiving £3,000. The jobber now holds these shares, aiming to sell them to another broker or client at 302 pence, profiting from the 2 pence per share spread. This interaction ensures the client can sell their shares immediately, providing liquidity to the market even without a direct counterparty at that exact moment.
Practical Applications
While the term "jobbing" is largely historical, its principles underpin the modern function of market makers in contemporary financial markets. Jobbing's practical application was primarily in maintaining continuous trading and liquidity on the London Stock Exchange. It ensured that investors could always buy or sell shares without waiting for a direct counterparty, thereby reducing transaction delays and facilitating active trading. This function was crucial for the efficient operation of the market, allowing for smooth capital formation and investment. Today, automated systems and specialized firms perform a similar role, reflecting the evolution of exchanges from physical trading floors to complex digital marketplaces.
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The transition from jobbing to electronic trading represents a significant shift in how markets operate globally. The "Big Bang" of 1986, which effectively ended jobbing, was a pivotal moment, allowing for greater competition and the integration of brokerage and dealing services. 3, 4This deregulation ultimately paved the way for the high-speed, order-driven markets we see today.
Limitations and Criticisms
The jobbing system, despite its benefits in providing liquidity, faced several limitations and criticisms. A significant drawback was its lack of transparency. Jobbers were known for keeping few records of their activities, making it challenging to scrutinize their operations or track the flow of trades. Critics in earlier centuries, such as Daniel Defoe, raised concerns about jobbers engaging in market manipulation and front-running, profiting without necessarily holding a long-term interest in the underlying securities.
Furthermore, the manual, floor-based nature of jobbing made it less scalable and potentially less efficient than modern electronic systems. The reliance on a limited number of jobbing firms by the eve of the "Big Bang" also highlighted a concentration of market-making power. 2The single capacity system, which strictly separated brokers and jobbers, while intended to prevent conflicts of interest, also limited competition and innovation compared to integrated financial services models emerging in other global markets. The "Big Bang" reforms directly addressed these limitations, aiming to modernize the London Stock Exchange and enhance its global competitiveness through increased regulation and automation.
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Jobbing vs. Market Maker
The terms "jobbing" and "market maker" are closely related, with jobbing being a specific historical form of market making.
Feature | Jobbing | Market Maker (Modern) |
---|---|---|
Context | Primarily historical, specific to the London Stock Exchange before 1986. | Contemporary, found across all major global exchanges (e.g., NYSE, Nasdaq, LSE today). |
Method | Manual, floor-based, oral negotiations with stockbrokers. | Predominantly electronic, automated algorithms, high-frequency trading. |
Structure | "Single capacity" system; jobbers were principals only. | Integrated; firms can act as both principals and agents (brokers and dealers). |
Transparency | Limited records, less transparency. | Highly regulated, greater transparency, electronic audit trails. |
Profit Source | Primarily bid-ask spread. | Bid-ask spread, but also increasingly sophisticated strategies like arbitrage. |
The confusion arises because a jobber was a market maker. However, the term "jobbing" refers to a distinct set of operational rules, a physical environment, and a regulatory framework that largely ceased to exist after the 1986 reforms. Modern market making, while serving the same fundamental purpose of providing liquidity, employs advanced technology and operates within a different regulatory and structural paradigm.
FAQs
What was the main purpose of jobbing?
The main purpose of jobbing was to provide continuous liquidity in the securities market by always being ready to buy or sell financial instruments, thereby facilitating immediate transactions for stockbrokers and their clients.
Why did jobbing end?
Jobbing ended primarily due to the "Big Bang" deregulation of the London Stock Exchange in October 1986. These reforms abolished the "single capacity" rule, allowing firms to act as both brokers and dealers, and paved the way for electronic trading systems which ultimately replaced the traditional floor-based jobbing system.
Are there jobbers today?
No, the specific role of a "jobber" as it existed on the London Stock Exchange is no longer present. However, the function they performed—that of a market maker providing liquidity and facilitating trades—is still vital in modern financial markets, albeit carried out by sophisticated firms using advanced technology.