Paradox, drama, and the sociology of Nasdaq’s handling of Facebook’s IPO

Nasdaq’s delay with the initial public offering of Facebook is revealing of the current struggle between competing exchange models. In its coverage of the news, Telis Demos at the Financial Times rightly points out that the problems are symptomatic of two colliding views of what a financial exchange should be. To Nasdaq’s fully automated model, the NYSE counters with a hybrid approach that combines humans and algorithms:

The danger is that it will not only harm relations between Nasdaq and banks, who are privately furious with Nasdaq for the way it handled Facebook’s opening, it also allows NYSE to promote its own “hybrid” market that combines software with floor traders who can monitor a company’s initial listing. NYSE and Nasdaq have competed heavily for tech listings – LinkedIn and Yelp chose NYSE, while Zynga and Facebook chose Nasdaq. “Why wouldn’t this 21st century internet revolutionary company [Facebook] want to have human beings helping to trade,” wrote Kenneth Polcari, a veteran NYSE floor trader and managing director at ICAP, in a note to clients. “It’s exactly this human connection that ensures the strength of the NYSE.”

Yet the drama of the botched IPO is not an isolated event. For most of the past ten years, the automated model of exchange seems to have carried the day. The NYSE’s market share has dropped dramatically. Algorithmic trading has grown exponentially. New electronic exchanges have sprung up in multiple asset classes.

But events in the last three years seem to be giving arguments to those who favor some form of human intermediation: the Flash Crash in 2010, the debacle in the initial public offering of Bats (another electronic exchange) and more generally the turn towards greater responsibility in financial innovation after the credit crisis all support a mixed human-algorithm model.

In grasping where market microstructure is going –and guiding the problem of how to think sociologically of beastly new “hybrids” that combine computers and human flesh– a growing body of work in the social studies of finance offers tools. Here’s a quick list of relevant works in descending chronological order:

MacKenzie, Beunza, Millo and Pardo-Guerra on high-frequency trading.

Beunza, MacKenzie, Millo and Pardo-Guerra on the dangers of market automation.

Marc Lenglet on algorithms.

Aaron Pitluck on execution.

Fabian Muniesa on the process of automating an exchange.

Fabian Muniesa on the automation of the market open auction at the Paris Bourse.

Kate Zaloom on automation and the trading pits of Chicago.