December 2, 2016
After the announcement that the Royal Bank of Scotland failed the Bank of England’s latest stress test, the UK’s Channel 4 News reported the story by showing RBS’s logo crumbling under the weight of a pile of concrete bricks. The image is appropriate. Since coming into public ownership eight years ago, there have been persistent concerns that RBS might not prove resilient to a further economic shock. The recent stress test showed that these fears are perhaps well-founded.
The test showed that in the event of a particularly severe synchronised UK and global recession (as well as shocks to financial markets and bank misconduct losses) RBS would barely scrape past its 6.6% capital ratio pass rate. Worse still, RBS failed to meet the minimum leverage ratio of 3%. The bank would have to raise an extra £2 billion to satisfy the regulators.
Barclays and Standard Chartered also fared poorly. While Barclays’s capital and leverage ratios passed the test, it missed its ‘systemic reference point’ before additional tier 1 instruments converted (bonds that turn into common equity if a bank’s capital falls below a certain point). Standard Chartered did better, but it was let down by its tier 1 capital ratio coming up short (a ratio that factors in other instruments in addition to common equity and retained earnings).
These are the headline figures the media focused on. Their meaning is difficult to interpret in an absolute sense, but they give an indicator of the relative resilience of the different UK banks and their specific points of fragility. Take a look at what the report has to say about the UK’s banking sector as a whole, however, and its most critical remarks are reserved for its ‘qualitative review’. Couched in the careful language of the financial policy world, the report states that although progress has been made across the sector the Bank is ‘disappointed that the rate of improvement has been slower and more uneven than expected’.
What does this refer to? The qualitative aspects of stress testing have received less attention than they probably deserve to. In a recent speech, a governor of the US Federal Reserve, Daniel Tarullo, even complained that they are ‘frequently overlooked’, despite both banks who failed the Fed’s 2016 exercise (Deutsche Bank and Santander) doing so on qualitative grounds.
The qualitative aspects of stress testing vary across jurisdictions, but in the UK they focus on how banks derive their figures. Just like in a maths exam, it’s nowadays not enough for banks to just arrive at the right number; regulators want explanations of their assumptions and justifications for their choice of models. Additional qualitative reporting obligations include the need for a detailed narrative about banks’ risk governance, capital planning processes and how they ‘review and challenge’ their models.
These qualitative reports might seem like inconsequential back-office documentation. But they are increasingly at the heart of what the stress tests are trying to achieve. The popular image of stress testing is that of the heroic technocratic venture lionised in Timothy Geithner’s 2014 memoir, Stress Test. Through the collection of vast amounts of data and the application of sophisticated quantitative tools, the regulator pierces through the epistemic fog and gets to the ‘true’ state of a bank’s balance sheet.
While that might describe the tests conducted by central banks during the financial crisis, in the years since the tests have served the additional, more subtle, purpose of attempting to change financial culture. As Gillian Tett writes in her latest book, The Silo Effect, one important cause for the financial crisis was excessive organizational complexity and a lack of joined-up thinking. Risks that should have been spotted by banks were obscured by divisional ‘silos’ impeding the free-flow of knowledge. The people who should have been talking to one another weren’t.
For this reason, the additional information the Bank of England’s report provides on their forthcoming ‘exploratory’ scenario in 2017 is noteworthy. This new biennial test will run alongside the standard test next year and has been the subject of much speculation since it was first announced in 2015. In the financial community it was widely expected to involve a historically-unprecedented or exceptionally severe scenario that would push banks modelling practices – and capital reserves – to their limit.
The report has confounded those expectations. Emphasising that the data collected from the banks will be ‘significantly less detailed’ than that in the regular stress test, the 2017 exploratory scenario will take place over an extended seven year time horizon and will test banks’ business models in light of expected competitive pressures from ‘smaller banks and non-bank businesses’. Already, the stress testing managers of UK banks are probably scratching their heads and consulting with colleagues about how they’re supposed to model that. That’s the point.
October 28, 2016
Call for papers
Special issue on ‘Security and finance’
In recent years, the War on Terror and the global financial crisis have brought to the fore the manifold, complex ways in which finance and security are interlinked in contemporary societies. Anti-terrorism financing and anti-money laundering initiatives, for instance, illustrate a turn in security governance towards financial surveillance. At the same time, we see in the governance of financial stability a logic of collective security, working through techniques that emphasize systemic preparedness and resilience over active state intervention. More generally, a new epistemology of risk preparedness is emerging in connection with the notion of ‘financial transparency’. As these examples illustrate, contemporary financial and security risk management cannot be easily isolated and are imbricated in a series of instrumental and conceptual interrelations. Marieke de Goede’s 2010 study of financial security provides an important milestone in conceptualizing these links*, but the fast pace of technological development demands further empirical and theoretical research on the finance-security nexus.
This special issue calls for post-disciplinary submissions that document the diverse ways in which finance and security logics, institutions, and devices coalesce. This may be in the political economy of the reconfiguration of modern state functions through financial processes and tools, such as debt issuance and securitization. Alternatively, intersections between critical finance and security studies may shed light on the ways that market processes, routines, and devices feed into the intensification of security technologies. Finally, this call is also addressed to cultural economy researchers concerned with the securitization of the body and mundane everyday life, be this in the house, at work, or in spaces of leisure and consumption. Potential topics include (but are not limited to):
- Technologies of financial and data security
- Links between finance and governance structures or techniques
- Personal insecurity, vulnerability, and indebtedness
- Financialization, war, and militarization
- Securing bodies, embodied securities
Paper submission: Completed manuscripts of 9,000–11,000 words should be submitted to John Morris (firstname.lastname@example.org) and Mariana Santos (email@example.com) for initial review by 15 November 2016. The special issue will be published as vol. 3, no. 1 in July 2017. Further instructions for authors are available at: http://financeandsociety.org/house-style/
* de Goede, M. (2010) Financial security. In: Burgess, J. P. (ed) The Routledge Handbook of New Security Studies. Abingdon: Routledge, 100-09.
October 26, 2016
Posting the summary of the workshop (see Call for Papers earlier) Politics and Finance YSW 2016:
Young Scholars Workshop: Interdisciplinary Perspectives on Global Finance
21-23 September 2016, University of Bremen
In September, the research group “Transnational Political Ordering in Global Finance” led by Sebastian Botzem has hosted a young scholars workshop on the interdisciplinary study of finance at the University of Bremen. This event brought together 30 emerging academics from different universities, countries, and disciplinary backgrounds (including Political Science, IPE, Economic Sociology, Economics & Business Studies, Human Geography, and Economic History). Besides providing a platform for establishing international contacts among young scholars, the main goals of the workshop were to better understand the complexities of global finance and to discuss merits and constraints of interdisciplinary approaches to studying finance. Given the increasing relevance of finance, in both politics and everyday life, and finance’s susceptibility to crises, a more encompassing understanding of its dynamics is urgently required. In this respect, the three days of intense paper sessions, inspiring lectures and a concluding round table certainly provided new insights and ideas for the individual projects of the workshop participants as well as for a broader common research agenda on finance.
In his introductory remarks, Sebastian Botzem addressed different (often interconnected) levels of finance that merit academic attention ranging from international financial governance to the everyday repercussions of decisions in financial centers. In this regard, the transnational dimension of finance is particularly relevant since cross-border encounters, public-private interactions, and social structures beyond the nation state are at the heart of contemporary finance. Financial markets and actors are not only increasingly transnational but also highly dynamic, making their exploration even more important (and challenging at the same time). This is exemplified by the expansion of financial logics, the rise of new products, rules and practices, institutional change, the increasing speed of transactions, and the constant reconfiguration of actor constellations. All this calls for an interdisciplinary approach, since finance is simply too complex to be studied from one angle only. Thus, empirical curiosity is at the heart of interdisciplinary work.
Twelve paper sessions made up the backbone of the young scholars workshop providing useful hands-on advice for the authors and fruitful discussions on empirics, theories, and methodologies. The expectation of the conference organizers to have a dense workshop with intense and productive discussions of work in progress was fully met thanks to the great contributions of the participants and the interactive session format. Contrary to established conference habits, there were no presentations by the authors themselves. Rather, the projects were introduced and commented on by the respective co-panelists. The sessions covered a wide range of empirical subjects including the role of private and public banks, regional varieties of financialization, derivatives trading, rating agencies, the Eurozone crisis, financial literacy, housing and insurance, corruption, social investments, and global financial governance. Papers also adopted very different theoretical and disciplinary perspectives such as heterodox economics, critical and cultural political economy, social studies of finance, and the everyday life perspective addressing different scales and mechanisms at work. This diversity also translated into a variety of methodological approaches including qualitative case studies, statistical approaches, discourse analysis, different types of interviews, network analysis, participatory observation, and following-the-thing approaches.
Besides the paper sessions, three experienced scholars gave lectures on their current research and the merits of interdisciplinarity in studying finance. In the first talk, Eleni Tsingoufrom the Copenhagen Business School presented a project on “Ideational ecologies in central banking” she currently works on with Andrew Baker and Leonard Seabrooke. This project explores ideas as process (rather than as institutional fit) using the example of the Jackson Hole annual symposium run by the Kansas City Federal Reserve. The particular setting of this event provides a platform for testing, assessing, and spreading economic ideas since it brings together central bankers, academics, and other representatives of the global financial elite. Of particular interest for Eleni and her fellow researchers are instances of anti-mainstream ideas and debates that seem to pop up regularly and deliberately at Jackson Hole. The project pursues a rather ambitious mix-method agenda compiled of content analysis, sequence analysis, network analysis and the use of biographical information.
In the second lecture, Lucia Quaglia from the University of York presented the main insights from her recent book “The European Union and Global Financial Regulation” (Oxford University Press) that explores standard-setting processes in financial regulation from a Comparative Political Economy Perspective. In contrast to ideas, rules are quite easy to trace and research. However, according to Lucia, EU rule-stetting, previously, has been broadly overlooked while national standard-setting was at the core of the debate. Lucia compares regulatory capacities and outcomes in the US and the EU for different financial policy areas over time and finds mechanisms of uploading, downloading, and cross-loading. While the EU traditionally has been a downloader of international standards in many areas (sometimes uploaded by the US), it has become more influential after the recent financial crisis. In the subsequent discussion of her findings, the nexus between financial lobbying and regulatory policies as well as transnational dynamics in financial governance were addressed.
The third lecture was given by Phil Mader from the Institute of Development Studies (University of Sussex) who talked about the spread of microfinance as an instance of financialization based on his book “The Political Economy of Microfinance: Financializing Poverty” (Palgrave Macmillan). Phil introduced another definition of financialization focusing on the expansion of the frontier of financial accumulation. Microfinance, then, pushes this frontier through mobilizing narratives, constructing a specific form of governmentality, and extracting profit from the poor. This might also apply to financial inclusion, a concept that has become somewhat of a predecessor of microfinance (also engaging NGOs as drivers of financialization). Phil concludes that we need to vastly expand our view of financialization taking into account the pushing forward of frontiers, subtle ways of spreading financial logics, and the paradoxical appeal of finance as an (apparent) solution to contemporary problems like poverty (but also climate change).
In the concluding session, participants collected some of the recurrent themes of the workshop and discussed merits and constraints of interdisciplinary approaches. Throughout the workshop, the issue of financialization was relatively prominent, signaling its appeal to different disciplines and its potential to cross disciplinary divides. However, confusion remains about what financialization actually is and what the best way is to study it. The papers nicely brought together a wide range of definitions and literatures on the spreading of financial logics. In many of our discussions, the rather simple notion of regulatory or cognitive capture and lobbying power was deemed too simplistic. Still, the complexities and sometimes contractions involved in the diffusion of financial market rationalities to policy-making and the everyday life are difficult to grasp both theoretically and methodologically. This remains a core challenge of our common research agenda on finance.
The final round table on interdisciplinarity revealed both merits and constraints of crossing disciplinary boundaries. Sebastian Botzem argued that interdisciplinary perspectives have the potential to provide more in-depth understanding of real world phenomena. Such more innovative approaches can reveal insights usually hard to detect with approaches that are narrowly confined to strict disciplinary perspectives. Interdisciplinary approaches are particularly suitable to understand complex phenomena that address, for example, boundary spanning activities, multiple loyalties and embeddedness or multi-level governance. . At the same time, naïve approaches of interdisciplinary research are highly problematic as they tend to delegitimize interdisciplinary research by appearing simply eclectic causing more confusion than bringing about additional insights. As Lucia Quaglia noted, real world problems are usually rather complex and rarely fit one-sided theoretical assumptions and concepts. Borrowing literature, methods, and theories from other disciplines might induce new questions and ideas and enable us to speak to broader audiences. Phil Mader agreed with this and stressed that finance is probably particularly prone to interdisciplinary investigation. However, he reminded us that we cannot include all disciplines at the same time, especially in a dissertation. Natalia Besedovsky shared some of her experience in different disciplines pointing to the need of disciplinary homelands and potential downsides of interdisciplinary research in terms of career development. Thus, we should always engage in translating concepts and findings back into our disciplines. After all, crossing disciplinary boundaries might bring us closer to our empirical subjects, but often also entails moving towards uncomfortable territory. This endeavor needs occasions and a supportive atmosphere. We hope to have provided both with this workshop.
This workshop would not have been possible without the generous support by the Center for Transnational Studies (ZenTra) and the Foundation of the University of Bremenfor which we are very grateful. Moreover, we want to particularly thank our three speakers and Hans-Michael Trautwein (University of Oldenburg & ZenTra) who not only contributed to our program but were also outstandingly active in the paper sessions. Finally, a huge compliment goes to our student assistants Berit Dießelkämper and Fabian Besche who did much of conference organizing and kept the event running smoothly behind the scenes.
Enacting Dismal Science is the new collection on performativity, edited by Ivan Boldyrev and my colleague at Leicester, Ekaterina Svetlova.
With contributions on behavioral economics experiments, naturalism in economics, game theory, incentives, description as a moral problem, hydraulic governability in postwar Keynesianism, institutions, and much more.
Philip Roscoe of this very blog is among the authors.
Table of Contents:
October 5, 2016
Call for Abstracts
Financialization and Beyond: Debt, Money, Wealth, and the Capture of Value
April 6-8, 2017, University of Iowa, Iowa City, USA. Abstracts due December 1, 2016.
Finance is hard to escape. In recent years, the increasing social impact and interconnection of ﬁnancial discourses, markets, actors, and institutions have been understood under the broad concept of financialization. Natascha van der Zwan identifies three distinct research streams that have approached financialization as 1) a regime of accumulation, 2) the influence of financial markets and instruments on non-financial corporations as well as the banking and finance industry, and 3) a discourse of risk-taking, self-management and self-fulfillment that is transforming people into investing subjects. Some anthropological skeptics, however, argue that finance has a far longer genealogy than the financialization literature has to date recognized. For example, in the context of a lengthy human history of creating hierarchy, financialization may simply be a new technology serving an old purpose.
On behalf of the Society for Economic Anthropology, and in co-sponsorship with the International Sociological Association’s Economy and Society Research Committee, we aim to put in dialogue divergent visions of what constitutes finance and financialization, and how finance and financialization impact our societies. The program committee especially welcomes scholarship from anthropologists (in all sub-fields), sociologists, scholars in the social studies of finance, and other social scientists who do not necessarily self-identify as financialization scholars, but whose work provides comparative, historical, ethnographic, or quantitative insights into the workings of finance and financialization.
As an initial organizing tool we have divided areas of potential contributions into three categories of inquiry. These are not exclusive categories and we welcome contributions that don’t readily fit in what we outline.
- Finance predates capitalism. Therefore, what are relevant cross-cultural, historical, and archaeological cases which help illuminate our current moment?
- Tracing who owes what to whom is as old as the discipline of anthropology. Do new financial instruments such as credit default swaps share forms and logics with older kinds of reciprocities?
- Are the new instruments of finance comparable to those found in the cultural and archaeological record, and especially to other forms of debt?
- Numerous scholars have argued that financialization is creating new subjects and selfhoods, accompanied by a shift of risk from states to households. What are the material objects, spaces, and infrastructures that translate financial abstraction into new ways of understanding personhood?
Wealth, Money, and Financial Instruments
- Does financialization alter our comprehension of what kind of social organization goes with what type of wealth—a leitmotif in the comparative study of human societies, particularly since the rise of agriculture?
- How can we interpret potentially novel forms of financial innovation, such as Islamic finance and banking?
- How do ideologies such as shareholder value or social finance transform economic practices?
- How do non-elites use new forms of money (such as phone cards, paypal, gift cards, local currencies) to alter hierarchies or seek alternative forms of wealth accumulation? How and with what consequences are elites transforming money’s materiality?
Depoliticization and the Capture of Value
- Many have noted that financialization promotes a depoliticizing process, in which state services, formerly held accountable to government, are now being replaced by private markets. How do these processes compare to other instances of political drift and shift that have come with new modes of abstraction?
- How is finance racializing and gendering?Where can we observe moments of openness, where finance can be emancipatory?
- What kind of ethics, politics, and social goals do financial elites envision? How do these compare to those brought into being by classes that dominate the wealth and financial systems in different cultural or economic contexts? What new forms of informality are promoted by financialization?
- The supply chains of financial products connect different places and political projects across the globe. How do such financial instruments transform social life?
We request abstracts for both papers and posters on these topics. Please indicate whether your abstract is for a paper, a poster or either. Proposed papers must pertain to the meeting theme. SEA also welcomes poster abstracts on any aspect of economic anthropology.
The Society for Economic Anthropology publishes Economic Anthropology, a peer reviewed journal published electronically via the American Anthropological Association (AAA). Each year Economic Anthropology dedicates one of its two issues to the theme of the SEA meeting. A special issue on financialization will be developed from select conference presentations.
How to submit an abstract
Abstract deadline is December 1, 2016.
Abstracts of proposed papers and posters should be no more than 500 words. Abstracts are advised to include the following information: problem statement or theoretical frame, methodology, findings, and implications. If you submit a paper abstract, please indicate your willingness to present a poster if the organizers are unable to accommodate your paper in the plenary sessions. Poster sessions at SEA are taken very seriously, and most conference participants attend these sessions. In order to be considered for inclusion in the journal issue tied to this theme, please plan to have a complete, publishable-quality version of your paper ready at the time of the conference. Additional information for potential authors will follow.
To submit an abstract, you must first register for the conference through the AAA. At the moment, the registration site is not yet available on the AAA web site. SEA is working with AAA to get the registration site up; this will occur shortly.
- Go to americananthro.organd log in. If you don’t have a login id and password, create one (you do not need to join the American Anthropological Association).
- Once you are logged in, look to the left hand column, click on Meeting registration.
- Click on register under the SEA 2017 Annual Meeting then follow online prompts to register for the meeting (if we do not accept your abstract and you decide not to attend, you may request that your registration fee be refunded and we would be happy to do so).
- Once you are registered, AAA will automatically send you an email inviting you to submit an abstract. Click the link and follow the instructions.
September 26, 2016
University of Edinburgh, 4-5 May 2017
This international meeting will focus on a set of important, related issues:
- The role of intermediaries in financial markets.There are increasingly lengthy chains of intermediation between savers and the end-users of their savings, and a plausible hypothesis (to be explored at the meeting) is that intermediaries’ situations in those chains strongly shape what they do and the influence they have. Also of interest is the sheer cost of intermediation, highlighted by the recent findings by Thomas Philippon and Guillaume Bazot that the unit cost of financial intermediation has not declined (in the US since 1886, in Europe since 1950), despite the huge advances in finance’s key technology, computing.
- How market participants estimate the economic worth of the financial instruments that they trade.Valorisation and evaluation have become major topics in recent economic sociology and related fields, and at this meeting we will explore how this exciting new literature can best be extended to understand evaluation in finance.
- Machines as mediators or intermediaries within financial markets.For example, in many markets, most trades now pass through the ‘hands’ of machines, and there is now, for instance, a growing literature on high-frequency trading (HFT). How do machines perform their roles as mediators/intermediaries? How, for example, do HFT algorithms evaluate the financial instruments that they trade?
The meeting will be held in Edinburgh’s George Square, much of it in the top floor of the Chrystal Macmillan Building, with its panoramic views over the Pentland Hills and Edinburgh Castle. The meeting will open with a keynote address by the economist and financial commentator John Kay, author (for example) of Other People’s Money: Masters of the Universe or Servants of the People? (London: Profile, 2015). Keynotes on the second day will be given by Ann-Christina Lange (Copenhagen Business School) and Gregory Jackson (Free University of Berlin).
We encourage submissions on any of the above three topics, especially from early-career scholars (modest funds will be available to provide partial support for travel expenses for those who have no other source of funding). Although we welcome submissions from economists with sociological or political science interests, the meeting will primarily be focused on ‘social studies of finance’, the application to financial markets of wider social-science disciplines such as anthropology, gender studies, human geography, political economy, politics, science and technology studies and sociology.
Please send a summary (in no more than 300 words) of your intended contribution to the meeting organisers, Arjen van der Heide and Julius Kob (firstname.lastname@example.org; J.J.Kob@ed.ac.uk) by 15th December 2016. Say which of the meeting’s themes your paper will inform, and if it is an empirical paper please also make clear what material it is based on. Selection of papers will be by a little scientific committee (Lange, Jackson, Iain Hardie, Donald MacKenzie).
Financial support for this meeting comes from the European Research Council project EPIFM (Evaluation Practices in Financial Markets, GA291733).
September 13, 2016
With the SEC’s recent approval of the Investors Exchange (IEX), a new national securities exchange has been added to the US financial-markets landscape. IEX is the first exchange to openly challenge the rise of automated, high-frequency trading (HFT), where computer algorithms buy and sell within seconds, and without any direct human intervention. Over the past decade, HFT has gained a foothold as a significant trading mechanism, and HFT firms are now estimated to be behind over half of the trading volume in U.S. equity markets. But like every hi-tech innovation intended to supplant human actors, HFT has triggered a fierce debate between its proponents and adversaries.
HFT’s proponents see it as a much welcomed rationalization of financial markets. HFT will take the emotional urges out of human traders. It is touted as being a cooler, more rational approach to trading. Indeed, HFT’s champions proudly claim that it will finally put an end to the human emotionality of financial markets. Critics of HFT, however, highlight the unfair advantage it gives fast market participants. HFT is also seen as a kind of techno nightmare where the wrong algorithm could cause new types of market crashes. Critics often cite the so-called Flash Crash of May 6th 2010, in which trading algorithms produced a dramatic drop on US markets until trading was suspended. Should investors welcome the entry of high frequency trading? Who benefits? And who shoulders the risks?
Part of the confusion lies in the lack of transparency in the HFT industry. Surprisingly little is known about the people who develop, program, and deploy these superfast algorithms. The industry is intensely secretive, and high-frequency traders prefer to operate under the radar of public scrutiny. This is understandable: in a field where the competitive edge of a new trading algorithm can rapidly dissolve if others copy it, who would want to disclose the source of their profitable trading? The problem, though, is that the lack of knowledge about what these traders are actually doing can easily lead to an overemphasis on the more spectacular aspects of HFT, whether it be its alleged crash-prone nature or the ostensible transformation of financial markets into an elite of HFT firms dominating an underclass of exploited non-HFTs. Of course, avoiding financial crashes is in everyone’s interest, and we also need to prevent any unfair or illegal market practices. However, we can only do this by truly understanding how HFT works and what it does.
In order to better understand HFT, and to provide a more complete picture of this new reality of financial markets, we have spent the past few years studying high-frequency traders and their work in especially Chicago and New York. Doing research among the HFT tribe is challenging, not only because of its secretive nature, but also because the field is rapidly changing. Despite these challenges, we have been able to gather some valuable insights into the world of algorithmic finance – some of which we discuss in a new article entitled ‘High-frequency trader subjectivity: emotional attachment and discipline in an era of algorithms’, just published in Socio-Economic Review.
In our research, we focused on HFT as a workshop where traders and programmers develop, test, monitor, refine, and deploy their trading algorithms. Despite their project to take the human emotions out of trading, our research reveals a complex relationship between rational-scientific analysis and emotional commitments. Successful traders are those who can navigate this relationship between the algorithmic and the emotion.
The emotionality of HFT is revealed in the way traders become attached to their algorithms. Similar to many other types of work, high-frequency traders invest a lot of themselves in their algorithms. It is not uncommon for traders to describe their algorithms as extensions of themselves, as babies in need of constant care and attention. As a result, traders are inclined to let their algorithms run longer than is strictly rational – in the hope that, while seemingly ‘misbehaving’, their ‘babies’ will eventually straighten up and yield the expected profits. Traders’ emotional attachment to their algorithms is in stark contrast to HFT’s own self-understanding as a means of avoiding the dreaded ‘emotional interference’ in financial markets. However, our research has shown that human emotions do not disappear with HFT. Rather, high-frequency traders deal with their emotionality in novel ways.
One way is to emphasize a strictly scientific ethos, seeing themselves as researchers in a discovery process rather than ordinary traders with yet another new magic bullet (several of our interviewees have PhDs in physics, computer science, engineering, etc.). This emphasis on the scientific approach entails an emphasis on the need to be able to explain profit and losses. Our traders are not afraid of losses. Rather, they accept losses if they are explainable. Likewise, high-frequency traders are not content with random profits; they only want the kind of profits that follow strictly from their algorithmic strategies.
The scientific ethos of high-frequency traders is also revealed in their continual back-testing of algorithmic strategies against historical market data. The challenge they face here is not only to demonstrate that a particular algorithmic strategy was viable in a historical market data. It is to ascertain whether future market situations adequately reflect the past ones on which the strategy was tested, giving rise to what they refer to as the ‘Heisenberg uncertainty principle in finance’. It seems that intuition and a (humanly emotional) feel for the market are required in such circumstances, which contrasts with the high-frequency traders’ faith that algorithmic trading is purely rational.
Like all traders, high-frequency traders must deal with the scale and risk of their investments. If an algorithm proves successful, traders, and especially their managers, will often be inclined to put more money behind it. But traders realize that such scaling up increases risk exponentially. Consequently, and testifying to the continuing role of human emotions in finance, several of our interviewees cautioned against being too euphoric about profitable algorithmic strategies; like all successful market actors, they balanced their risk-taking by advising careful and incremental steps forward.
While the SEC was carrying out its approval process of IEX over the past several months, Ernst and Young, one of the world’s largest financial service firms, has been running an advertising campaign with the slogan ‘How human is your algorithm?’ We can answer in the words of the German philosopher Nietzsche: ‘Human, all too human’. While high-frequency traders strive to develop algorithms that appear scientific and rational, purged of human emotion, the daily work of high-frequency traders has more in common with Nietzsche’s dictum than with a computer program. HFT is also High-Feelings Trading.