Bringing sociology to the New York Stock Exchange
August 7, 2013
The food is ordered. The seating plan is finished. And the security guards at the NYSE are alerted to the arrival of a small army of sociologists. The Workshop on the Sociology of Market Microstructure is almost ready to start. I can barely believe that this unusual project of Yuval and I is happening: bring sociologists –fifty of them– to the floor of the NYSE.
Why this workshop? My hope is to start a new sociological conversation about stock exchanges. This is very much necessary. In the past decade, the automation of financial exchanges –shaped, imposed and enforced by the SEC– has led to the displacement of trading floors by data centers. Most of the action is now in data centers. Yet the cost reduction and greater competition achieved by automation has arguably been offset by a number of blowups, leading numerous observers conclude the system is “broken.” These problems include the Flash Crash of 2010, the failed IPO of Facebook in 2012, or the crisis and demise of automated-trading firm Knight Capital in 2012.
In this context, what do sociologists have to offer? A lot, I would argue. The existing market design was shaped and influenced by economists. An entire subfield of economics, market microstructure, has grown in the past four decades around the study of financial exchanges. So even if economist-bashing is not my favored academic sport, it is indisputable that the way in which the SEC operates is based on an economic conception of markets. Our own analysis of the existing regulation suggests that the SEC viewed markets as information processing mechanisms, as opposed to networks and institutions. And exchanges were viewed as databases to help in that processing, rather than venues to sustain social relations. In this economic conception, floor intermediaries can easily be replaced by data centers. This is particularly clear in the work of economists like Black (1971), Glosten (1994), Christie and Schultz (1994) and others.
So what is the sociological alternative? As specialists on social relations, sociologists understand how social interaction on trading floors sustains trading. The seminal work of Baker (1984) and Abolafia (1996) is key here. Markets, they argued, are beset by opportunism and uncertainty, and require institutions and networks of intermediaries that enforce informal norms, help in sensemaking and ensure that buyers match with sellers.
The purpose of this workshop, then, is thus to assemble sociologists, industry insiders and NYSE executives under one same roof to foster new thinking about financial exchanges. In this, I hope that the debate will abandon the dichotomy between automated vs. manual trading. The question is not whether automation is beneficial, but rather what design of automation is can preserve the social dynamics that trading floors made possible?
Here are some other questions that I would like to see addressed:
- Does automation remove the potential for opportunism among market participants? If not, how can opportunism be prevented in an automated setting?
- What would a sociology of high frequency trading look like? And more broadly, is high frequency trading the problem that some critics claim?
- How can the social cues and social context provided by a trading floor be reproduced on a computer screen? For instance, how can social media be leveraged for the purpose of sensemaking?
- How to regulate a heterogeneous market system, comprised of both electronic and floor-based exchanges? This matters because the NYSE has a special feature (its “liquidity replenishment points”) that allow it to “go manual” in situations of crisis. Should the NYSE be allowed to keep it, or should the SEC legislate the same single-stock circuit breaker across the board?