Synthetic ETFs are changing the rules of the stock market “beauty contest”

This is a guest post written by Stefan Leins.

In his seminal book “The general theory of employment, interest and money” (1936), John Maynard Keynes articulated an interesting observation about the nature of stock markets which we recognize this today as the Keynesian beauty contest.

Keynes’ point? Rather than valuing stocks based on so-called fundamental data, speculators try to anticipate the other speculators’ stock market investment activities. Speculators are thus both observers and participants – and by participating by purchasing stock, they influence the actual outcome of the contest.

So what should we make of this new financial instrument called an Exchange Traded Fund (ETF) which is conquering stock markets?

ETFs are not traded over-the-counter like regular funds, but trade directly at the stock exchange. ETFs can take two different forms: Physical ETFs usually replicate an index by proportionally holding the stocks of a particular index as underlying; while Synthetic ETFs, which do not hold the stocks of the index they claim to replicate, only guarantee the client to pay back the return on investment the index would have theoretically reached. Synthetic ETFs are normally sold if a particular ETF claims to reconstruct the price development of an index whose stocks can only be bought by domestic traders, which is the case in China and many other so-called Emerging Market countries. To generate return, vendors of synthetic ETFs use Swaps or bet on divergent financial products.

Synthetic ETFs are undoubtedly among the most creative financial innovations since the famous Credit Default Swaps. And speculators love them! Since 2003, the ETF market has increased more than tenfold and is now estimated to have a value of almost USD 2 trillion. Given the low earning expectations in the US and Europe, it seems likely that many of these ETFs are targeting Emerging Markets indices and are thus synthetic in their form.

So how do synthetic ETFs influence the nature of the stock market? While some competitors (stock traders) still observe and participate in the contest, others (synthetic ETF traders) only observe without participating. Since their underlying is not the index they bet on, synthetic ETF traders do not influence the actual outcome of the beauty contest.

Or to put in Keynes’ words, synthetic ETF investors are the ones that look at the newspaper’s beauty contest, try to find out which face might be likened by others, but then end up throwing away the newspaper without handing in their guesses.

 

The general theory of employment, interest and money, (1936, New York, Harcourt, p 156): “[P]rofessional investment may be likened to those newspaper competitions in which the competitors have to pick out the six prettiest faces from a hundred photographs, the prize being awarded to the competitor whose choice most nearly corresponds to the average preferences of the competitors as a whole; so that each competitor has to pick, not those faces which he himself finds prettiest, but those which he thinks likeliest to catch the fancy of the other competitors, all of whom are looking at the problem from the same point of view”.

Workshop, Cambridge U — Economic reason: intellectuals and think tanks in the late twentieth century

Via Tomas Undurraga:

Economic reason: intellectuals and think tanks in the late twentieth century

Friday 28 June 2013, 1pm

Department of History and Philosophy of Science

University of Cambridge

 

The ECONPUBLIC project is hosting a workshop which will examine historical change in the public interventions of intellectuals and think tanks. It is an emerging consensus that public opinion has been wrestled away from the words and performances of intellectuals to be increasingly managed and dictated by collectives of intellectuals such as think tanks and policy institutes. This workshop will review the state of the art of public history and sociology, and set out implications for future research on the modes and content of public economic knowledge.

 

Programme:

13:00-13:40 – Ben Jackson (University of Oxford)

‘New right intellectuals and new right think tanks: the case of the IEA’

 

13:40-14:20 – Simon Griffiths (Goldsmiths)

‘After the counter-revolution: think tanks and the emergence of New Labour’

 

14:20-15:00 – Philip Mirowski (University of Notre Dame)

‘How Neoliberalism is Actualized by its Think Tank Perimeter’

 

15:00-15:30 – coffee break

 

15:30-16:10 – Patrick Baert (University of Cambridge)

‘Public intellectuals: Transformations in Positioning’

 

16:10-16:50 – Thomas Medvetz (University of California – San Diego)

‘Think Tanks and Cognitive Autonomy: Towards a Nietzschean View’

 

 

All welcome but as space is limited please contact us via email at hpsecon@hermes.cam.ac.uk to ensure a seat. There are advance papers available for circulation to those interested in attending. For further information, please see: http://www.econpublic.hps.cam.ac.uk/events/workshop-economic-reason/. 

Call for Proposals: Workshop on “Regimes of Calculation and Global Governance”

Dear Soc Financers!

Below is a call for proposals for a September workshop in Ontario, Canada that might be of interest. It’s not exclusively about finance, but finance is certainly a relevant form of calculation for global governance!

Regimes of Calculation and Global Governance
September 19-20, 2013
Balsillie School of International Affairs, Waterloo, Ontario, Canada

Please submit 300 word abstracts to calculation.workshop@gmail.com by June 15,
2013. Contact Sarah Martin sjmartin25@gmail.com, or Rhys Machold
rhysmachold@gmail.com with any questions or concerns.

Practices of calculation underpin modes of governance and enable new forms of
measurement and prediction at various scales and sites. Our life expectancy and
retirement funds are calculated, along with global greenhouse gases and national debts.
Calculation techniques can be profoundly inventive and transformative, conjuring up
previously unseen terrains of contestation while simultaneously obscuring others.
Calculation thus needs to be considered political from the outset. In sum, calculation has
become a common and taken-for-granted practice that shapes how we act in the world.
Without calculation, too, scholars of global governance are faced with large empirical
gaps and theoretical dead ends.

This workshop seeks to bring together scholars whose objects and purposes of
investigation may differ, but who share an important point of contact: a focus on
calculability as a technique that may come to exert forms of control over people, places
and things. The workshop asks: What is the role of calculation in global governance? To
what extent have recent and on-going ecological and financial crises opened,
constrained or otherwise transformed calculative projects? Using these questions as a
starting point, our workshop addresses ‘Regimes of calculation’ which are practices and
techniques for example that are used to represent social patterns through statistical or
quantitative measurement.

We encourage PhD students and junior scholars from fields including, but not limited to,
political science, sociology, geography, history and economics to submit proposals.
Travel fund support may be available. Proposals that address the following themes are
encouraged:

1) Calculative Vulnerabilities: Environment, Climate Change and Security,
2) Calculative (Im)mobilitites: Economies, Borders, and Regulation,
3) Sustaining Calculabilities: Food and Agriculture, Bodies, Health and Population,
4) Anti-Metrology: Sites of Resistance and Immunity from Calculation.

The event will consist of an opening keynote to situate regimes of calculation and global
governance by Dr. Stuart Elden, and confirmed participants include Dr. Suzan Ilcan,
University of Waterloo, Dr. Michelle Murphy, University of Toronto, Dr. Wendy Larner,
University of Bristol, Dr. Mark Salter, University of Ottawa, and Dr. William Walters,
Carleton University.

VWAP: art meets financial trading algorithms

I got this from Angus Cameron. It sounds like an interesting mixture of art and financial trading algorithms!

 

$45 Million proof that information infrastructure matters in finance

In Hours, Thieves took Millions in A.T.M. Scheme, NYTimes: “The significance here is they are manipulating the financial system to be able to change these balance limits and withdrawal limits,” said Kim Peretti, a former prosecutor in the computer crime division of the Justice Department who is now a partner in the law firm Alston & Bird. “When you have a scheme like this, where the system can be manipulated to quickly get access to millions of dollars that in some sense did not exist before, it could be a systemic risk to our financial system.”

Donald Mackenzie’s latest in the LRB

The London Review of Books is running an informative essay by Donald Mackenzie that discusses why banks prefer debt over equity.

The piece is written to explain what banks do to raise funds. To make this accessible to a broader audience Donald draws an analogy to personal housing finance. He explains that when a financial institution takes on debt instead of issuing equity, this is tantamount to a homeowner putting down a smaller down payment in favor of a bigger loan.  The consequence is that when the asset price falls, people with a lower down payment will find themselves in negative equity –  the popular term is ‘underwater’ – much sooner.

I would challenge the line, “Negative equity is nasty for a homeowner, but for a bank it is potentially fatal.” After all, the banks are alive and kicking for precisely the reasons Donald lays out: in the UK, when the credit system crashed they were given a £107 bn subsidy!  While countless people continue to struggle with their personal finances, RBS for example, “is expected to report one of its strongest quarterly profits when it discloses results for the first three months of 2013″. According to today’s FT, the bank’s chairman announced it will soon be ready for reprivitization.

Households are not distributed shareholder companies. They do not start suffering financially when they go into negative equity. Down payments are an essential form of personal savings, so when this value get gobbled by market fluctuation the consumer is threatened… immediately. The political result of the £107 bn subsidy is that disappearing equity has been very nasty for consumers in reality, but fatal to banks only in theory.

Despite this tiny burr, an artifact of his tight focus on the internal workings of financial institutions, Donald’s overall presentation in this piece does an excellent job of illustrating how financial theories such as the Modigliani-Miller theorem have influenced banking practice.

…No spoilers! The last two paragraphs – but you’ll have to work to get to them – are priceless.

CFP: Modelling Capitalism

From co-editor Nathan Coombs, a call for papers of possible interest to Soc Finance readers:

Journal of Critical Globalisation Studies
Issue 7 Call for Papers: ‘Modelling Capitalism’
Deadline for submissions: 1 August 2013

The next issue of the Journal of Critical Globalisation Studies on ‘Modelling Capitalism’ will be the journal’s most ambitious special issue to date. We aim to be the first interdisciplinary journal to examine this important global trend: the increasing use of models and computer simulations to understand global economic dynamics.
Frequently held in suspicion by critical thinkers, modelling and simulation technologies are nonetheless more and more integral to how the world works, utilised by international bodies, governments, financial firms, and large corporations. This special issue wishes to approach in a synoptic fashion some of big themes raised by this development. Questions we are concerned with include fundamental philosophical issues: Can economic models ever be realistic? Can they model complexity? Pragmatic questions: Is their use responsible for the depression initiated with the 2008 crash? To what extent are they changing the nature of capitalism? Political debate: Do models merely dress up dominant ideologies in technical drapery? Can models be used for critical purposes, or for proposing economic alternatives? With this issue we thus aim to bring into dialogue scholars working in diverse fields including the philosophy of science, economic modelling, the social studies of finance, and political theory.
To explore these issues, the journal is open to articles, essays and interview contributions in the following streams:

1. How realistic are models?

2. Can models model complexity?

3. Can value theory be modelled?

4. Are models making capitalism in their image?

5. Models: oppressive or liberating technologies?

We are also willing to consider suggestions for other lines of investigation or special features.
In the first instance, please send an abstract to editor-in-chief for issue 7, Nathan Coombs, detailing your proposed contribution: nathan@criticalglobalisation.com
Please send complete manuscripts to: abstracts@criticalglobalisation.com.
Final submission deadline: 1 August 2013

SSF Jobs: Lecturer or Senior Lecturer, School of Management, Leicester

We are looking for people in accounting, finance and SSF. 

The School of Management  looking to expand our research and teaching strengths in finance and accounting and to continue to develop our speciality in the Social Studies of Finance. We are particularly interested in strengthening our portfolio in one of the following specific areas:

 In the accounting area:

-Accounting, in particular financial accounting 
-Social Studies of Finance

In the finance area:
-Financial econometrics/Quantitative finance 
-Corporate Finance/Asset pricing

You will be responsible for research, teaching, administration and other activities supporting the work of the Department and developing and enhancing its reputation, both internal and external to the University, both nationally and internationally.

 

Informal enquiries are welcome and should be made to Prof Simon Lilley, Head of the School of Management, on s.lilley@le.ac.uk or 0116 223 1261.

The closing date for this post is midnight on 09 May 2013

We anticipate that interviews will take place early on 22nd May 2013

 

More details

Job vacancy: doctoral candidates/ post-docs in the SSF field, University of Lucerne (Switzerland)

From Leon Wansleben:

Attached I send you an ad for a research position at the University of Lucerne/eikones (CH).

Please click here: VisualSemanticsE

We are looking for docs or postdocs who are interested in conducting an independent research project, which connects social studies of finance or broader economic sociological matters with a focus on techniques of observation and visualization. I would be happy answering any further questions (leon.wansleben@unilu.ch) concerning the post.

Summer course announcement: Foundations in the Social Studies of Finance, LSE, July 2013

I am pleased to announce a new addition to the LSE’s summer school offerings. A course on the Social Studies of Finance. See here for the website.

The course builds on the very positive experience that Yuval and I had in Columbia Business School with “From Bodies to Black-Scholes.” This was a one-day course in 2008 for graduate students from Chicago, Cornell, or Berkeley. (Interestingly, now some of them are on the faculty at some of those institutions.)

The new course, however, is primarily meant for undergraduates in social sciences: sociology, anthropology, management, psychology or economics. Or recent graduates. Some students may have limited professional experience in banking or consulting. But most will probably not. It is an academic course, with classes almost every morning and seminars almost every afternoon. There is a ton of readings, an exam and a grade. And an LSE certificate at the end.

The aim of the course is to give students a firm grounding the social studies of finance. This includes: the notion of performativity, the role of material devices, and the ways these complement social networks and institutionalist approaches to markets. We are going to teach the award-winning papers, including this one and this one. The social studies of finance is the most exciting new intellectual development in sociology in the past years. Do you think I’m exaggerating? Check out a citation analysis impact here. And the regulatory impact here.

So who’s teaching this? I will be teaching most of the lectures, sometimes with guest lecturers – hedge fund managers from the City. We might even have a trip to the city, to see those banks and funds on site. Yuval Millo will be teaching in it too: even though he moved for a professorship at the University of Leicester, he’ll be here. We’re also lucky to have Juan Pablo Pardo-Guerra (sociology, LSE), specialist on the London Stock Exchange. And we will be using the textbook written by Donald MacKenzie, Material Markets.

In sum: come and join us! The LSE Summer School is a phenomenal intellectual experience, and this new course will give you an original perspective on how financial actually markets work. If you have questions, feel free to write to me at d.beunza@lse.ac.uk