The social studies of finance goes to Whitehall
March 9, 2012
Here’s some good news. After ten years of comfortable life in academic captivity, the social studies of finance has made it to the world policy-making. Since October 2010, a team of UK-based sociologists and myself are providing analysis for the British government, locally known as “Whitehall” after the location of its imposing headquarters.
Here’s how it happened. On August 2010 I got a call from the UK Department for Business, Innovation and Skills. Following the Flash Crash in May 2010, this government unit wanted to do a study on the future of automated trading. They had already spoken to Donald MacKenzie. This Foresight Project would engage various economists from Europe and the US to write “driver reports”. The report asked the following question: what has been the driver of automation in the past decades, and what will this lead to in ten years time? They wanted sociologists as well, especially because the Flash Crash flew in the face of the existing economic consensus, which saw automation as the best thing ever invented since sliced bread. Starting in October, and after several meetings, the team of sociologists started a “driver report.” This included Donald, Yuval MIllo, Juan Pablo Pardo-Guerra and myself (it’s interesting to see that three of us are at the LSE, which suggests that I was right to leave New York for London).
The final document, “Impersonal Efficiency and the Dangers of a Fully Automated Securities Exchange” identified ideology as a key driver of automation. Specifically, a mistrust of financial intermediaries among academic economists and regulators. The report called this the ideology of “impersonal efficiency,” that is, the belief that markets need to be disembedded to be efficient. The report argues that disentangling intermediaries has been the key reason why regulators imposed automation — finance as the Callonian strawberry market, writ large. Of course, automation has brought in many advantages such as thinner spreads, etc. But, it argues, these are not the main reason why automation happened. The report is now public, and you can find it here.
It will be interesting to see what happens now. One industry blog referred to our study in this manner.
This is what you may call a “common sense” paper. Rather than rattling off streams of mathematical formulas like most academic papers on high frequency trading love to do, this paper takes a step back and identifies new types of risk that have entered the market now that humans have basically been taken out of the market making process.
Will the report shape policy recommendations? To a large extent, this will probably depend on how it fits or not with the other sixteen reports, mostly written by economists.The final Foresight report will come out in Autumn 2012. It will be interesting to see what happens then.
For now, the sociologist team continues at it. Two months ago, Donald MacKenzie and the team had the first paper on the topic accepted in an academic journal, the Journal of Cultural Economy. The abstract reads as follows:
In 1999, Carruthers and Stinchcombe provided the classic discussion of ‘the social structure of liquidity’: the institutional arrangements that support markets in which ‘exchange occurs easily and frequently’ (1999, p. 353). Our argument in this paper is that the material aspects of these arrangements – and particularly the materiality of prices – need far closer attention than they normally receive. We develop this argument by highlighting two features of new assemblages that have been created in financial markets since 1999. First, these assemblages give sharp economic significance to spatial location and to physical phenomena such as the speed of light (the physics of these assemblages is Einsteinian, not Newtonian, so to speak). Second, they have provoked fierce controversy focusing on ultra-fast ‘high-frequency trading’, controversy in which issues of materiality are interwoven intimately with questions of legitimacy, particularly of fairness.
The paper is available here.