Tett on oil Price Reporting Agencies (PRAs)

April 14, 2012

Gillian Tett notes that the Price Reporting Agencies, or PRAs in the oil industry rely heavily on quotes from select industry players to calculate their benchmark prices (FT, April 12).  

This situation resembles the calculation of LIBOR reported by Donald Mackenzie in an article in the London Review of Books. As Mackenzie noted back in 2008, “Just after 11 a.m. on every weekday that’s not a bank holiday, traders at leading banks send in their estimates of the interest rates at which their banks could borrow money.”

Tett suggests the PRAs should take note of the fire LIBOR has come under and consider how they might reform themselves.

Angel Knight, who headed up the British Banker’s Association (the trade association responsible for LIBOR) during the tumultuous period of the credit crisis stepped down in early April 2012 under the mounting threat of regulatory intervention on how LIBOR is set.   

The method of compiling price quotes from market participants to set benchmark prices must have an interesting history.  Where does this convention come from (I’m guessing, trade associations) and what was it originally used for?  And what is it about this practice that strikes us as a potential sources of unfairness in markets today?

There is definitely a good story about how pricing in markets is evolving in the threads of this history…

11 Responses to “Tett on oil Price Reporting Agencies (PRAs)”

  1. israexile Says:

    Martha, it’s a good post and the points you raise are good!
    I would add to the emerging questions more general ones: what are the informal and semi-formal practices through which indices are determined? Empirically, as one possible direction: if one studies the social networks underpinning and supporting such practices and the connections among the actors (i.e. face-to-face, phone, screen-based, model-mediated) what would these show?

  2. danielbeunza Says:

    Hi Martha, great post. MacKenzie’s article is an exhaustive and balanced sociological analysis of the (1) advantages of using informal networks as a reporting system and (2) their weaknesses. It would be interesting to me to hear what are in your view the precise lessons that can be extracted for oil. Thanks again for bringing up such timely topic

  3. marthapoon Says:

    Looks like everyone is thinking in networks these days! The problem with the concept of networks is that it is constructed to evacuate history. It helps describes ‘social types’ but not ‘historical kinds’ (…as they would say in philosophy of science).

    What makes you guys think of these as informal practices?

    Like S&P, Platts, one of the major oil price reporting agencies is owned by the publishing giant McGraw Hill. I think there’s a historical angle here about how specialized information providers get started to serve a particular reporting service in one moment of time. For some reason, the solution that was innovated in the past – a solution traditionally associated to opinion making and journalism – is coming undone.

    The question is why?

    What kind of information ethos, what kind of market values make consulting a few select players an inappropriate method for solving the problem of calculating prices, interest rates or credit ratings today? It seems to me the nature and politics of market information is changing, and that (expressed through networks or not) is what is at stake in this issue…

  4. israexile Says:

    Yes, I like networks, be there social or socio-technical. Also, I don’t see a contradiction between doing interesting and theory-rich historical sociology and using (among other methods) in network analysis. Studying the historical processes (be they of institutionalization or of network-building) is important and this is what I have been doing in most of my works so far. But, to cover the ‘praxis gap’ – to see if people do as they preach – we also need to pay some attention to informal practices. We cannot always do it (access limitation, etc.), but this is something we should aim to achieve, in my opinion.

  5. danielbeunza Says:

    Hi Martha, thanks for such forceful reply. In my view the use of the networks terminology is a rather generic discussion that does not quite address the issue at hand. What exactly are the lessons from MacKenzie that you allude to? Would be great to hear your thinking on this issue.

  6. marthapoon Says:

    Hi Daniel,

    There seems to be an emerging suspicion over moments in markets where a benchmark is set by defined groups of people (referred to above as ‘informal networks’). The alternatives, if I’m not mistaken, usually involve tying the benchmark to a moving index or set up some other automated system in order to remove the discretionary component of the process.

    This relates, I think, to the point Annelisa Riles made in her book Collateral Knowledge where she argues that the politics of market automation are fundamentally anti-authoritarian: automation is a solution to the faults and failings of human beings that market participants suspect whenever other people are in a position of authority over a particular organizational moment in a system of value production.

    If Riles’ argument is correct, it seems fair to say that infrastructural change in finance (which promotes financialization) is occurring based on this politics. That is why LIBOR and PRAs as historically established processes are now coming into question….

    • danielbeunza Says:

      Very interesting and helpful. Thanks. Yuval and I are looking at automation of the NYSE, and we are also very interested in understanding the “politics of liquidity” behind it. In our case, however, more than anti-authoritarianism what seems to be going on is suspicion of the intermediary’s conflicted interests.

  7. yuvalmillo Says:

    Martha, do you really believe that “the politics of market automation are fundamentally anti-authoritarian: automation is a solution to the faults and failings of human beings”? What assumptions underpin the design and implementation of automated markets: the writing of computer code, the implementation of communication protocols, the setting of the topology of the routers’ wiring? Is this necessarily anti-authoritarian? I did a little research into market automation. JP Pardo-Guerra and Donald MacKenzie have done quite a bit more and I don’t think that’s the picture that’s emerging.

    • marthapoon Says:

      You guys! i said a politics of anti-authoritarianism. I didn’t say the practice of automation was devoid of politics. Indeed, the statement ‘anti-authoritarian’ could definitely be refined to include ‘conflicted interests’.

      My reading of Annelisa’s argument is that the politics over *whether* to automate are dampened because of a common (she calls it in American-speak ‘bipartisan’) agreement that having people in authoritative positions over the constitution of value are received as suspicious in markets.

      The politics are therefore displaced into the sphere of *how* to automate. This is an important distinction, because this is what places automation in the purview of SSF (studies of practice) rather than (econ.) soc (studies of social forces).

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