An upcoming conference at Columbia Business School may be of interested to social studies of finance researchers. This coming January 18th, the Geofinance conference will address an issue that has been of long interest in this blog: what makes financial capitals, and how is the competition between New York, London and others evolving?

Here’s an excerpt from the conference:

What’s driving the decision to locate particular financial activities or functions in particular places? How are these decisions being influenced by technological advances, regulation and the rise of emerging markets? What matters most in the competition between New York and London to become the capital of international capital?

The conference is organized by Columbia Business School and the Wharton School.

Peter Erdelyi, wrote a very nice and accurate summary of the public symposium about the edited volume Market Devices. Peter: many thanks for this!

The latest ‘Chinese toothpaste’ panic and the way ‘China’ is constructed in the American public discourse reminded me of another episodes of economically driven or perhaps, economically reflected jingoism, that of the 1980s American car industry (see, for example, here and here). There are many similarities between what we are experiencing now with regard to ‘Chinese Import’ in general and between the ‘Japan is going to overtake Detroit’ of the 1980s. A quick look at both cases shows that transformation process took place whereby products, production methods, wholesale and retail practice were reduced into a national character. Hence, those were not Toyota or Nissan who were threatening the dominance of GM or Ford in the American auto market. Instead, those Japanese’ were gaining dominance over ‘an American industry’. Of course, the social and, indeed, societal processes that unfolded were much too complex for a blog post. Nevertheless, the fact that we see again, 20 years after that wave of jingoism, the emergence of another one should raise some question marks about the omnipotent power that we tend to assign to global economic factors. After all, if globalization in general and ‘the global economy’ in particular have gained dominance, why does the question of where exactly the cars or the toothpaste come from make headlines?

The NY Times is asking whether NY is still the ‘capital of capital’ mentioning that, among other things, the largest mutual funds are not based in the city, the biggest securities trading floor is no longer that of the NYSE (see here about the demise of open outcry trading and here more discussion about it):

[I]n today’s burgeoning and increasingly integrated global financial markets — a vast, neural spaghetti of wires, Web sites and trading platforms — the N.Y.S.E. is clearly no longer the epicenter. Nor is New York. The largest mutual-fund complexes are in Valley Forge, Pa., Los Angeles and Boston, while trading and money management are spreading globally. Since the end of the cold war, vast pools of capital have been forming overseas, in the Swiss bank accounts of Russian oligarchs, in the Shanghai vaults of Chinese manufacturing magnates and in the coffers of funds controlled by governments in Singapore, Russia, Dubai, Qatar and Saudi Arabia that may amount to some $2.5 trillion, according to Stephen Jen, a Morgan Stanley economist.

However, as financial markets become more distributed, we should re-evaluate the connections between geographical location and capital.

One potential direction that is hinted in the NY Times story is the preferred location for IPOs (initial public offering). The article refers to the fact that nine out the ten largest out-of-country IPOs (IPOs done outside the country where the company is incorporated) in the last year were held outside the US. IPOs, of course, are the fundamental building blocks of financial markets as through them new stocks enter the market. Knowing that NY is the traditional location for IPOs, we can pretty much equate US with NY. The meaning of this figure is that NY does not attract to the same degree it used to the types of people and institutions that perform IPOs. Instead, the story tells us, new urban ‘financial-attraction’ centres are rising (at least as far as IPOs go). Hong Kong seems to be one of New York’s major rivals, as are some European cities.    

So, what are the conditions that attract IPOs to a particular urban centre? The immediate conceptual candidates are human capital (experienced underwriters, for example), institutions, liquid capital and, inevitably, a social network that binds these ingredients together effectively. All of this may sound fairly basic to a sociologist, but in spite of the fact that there is considerable research about urban financial centres, to best of my knowledge the crucial element of IPOs has not been studied empirically from a sociological perspective. Having said that, a paper by Richard Florida analyses the demographic conditions that induce creativity among urban populations and thus may help to conceptualise the question of where IPOs are likely to take place. It can be that one of the reasons for this relative lack of academic attention is the fact that to understand what makes IPOs happen, one needs to witness the inner mechanisms of the process and these are not easily accessible, as this classic ethnography-like Fortune magazine story about Microsoft’s IPO shows.

A timely photo essay has just landed on the newsstands of New York City. Portfolio magazine, the glossiest newcomer to American business publications, features a striking photograph of Kuwait’s Financial Market: men in white Arab robes lounging about a carpeted room with red bench seats, all of it surrounded by electronic price boards. A strange crossover between airport and trading pit.

The photograph is followed by a terrific photo essay. Dramatic photographs of exchanges around the world, taken by artist-photographer Robert Polidori. The piece is a very timely addition to our discussion on the rapidly-shrinking NYSE. From Chicago to Sao Paulo, Tokyo to Nairobi, Polidori’s shots provide a window into the tremendous multiplicity of exchange assemblages. In Nepal, prices are still written on the board like they used to in New YOrk eighty years ago. London’s exchange has added activity to its static computers by planting a four-story high art installation in its lobby. Kuwait looks like an airport lounge. Nairobi and Tehran both look like Internet cafes… brokers sitting on chairs, staring at a PC screen… and separated by mysterious partitions for confidentiality. Hong Kong is organized as concentric circles of benches. Chicago’s pit traders wear colorful jackets, whereas Sao Paulo’s counterparts show up to the pit in white shirt and dark tie.

Daniel, the NY link of this little London-NY collaboration, sent me this link to a NY Times article about the immanent closure of some of the physical trading floors of the New York Stock Exchange. Some of the readers of this blog came to a tour of the New York Mercantile exchange where a similar message, about the rapid move from face-to-face to screen-based trading, was conveyed (see here).

This article, however, implies to yet another dimension of the move to screen-based that’s less obvious:

After becoming a publicly traded company itself last year by merging with Archipelago Holdings, the exchange’s operator merged in April with Euronext, which owned stock and futures exchanges in London, Paris, Brussels, Amsterdam and Lisbon.

This gradual amalgamation of financial markets at the institutional level into a single techno-social network means, for many institutions, that traders would have to go home (either retire or trade from outside the floor). But, this also means that markets now would use unified clearing and settlement systems (Euroclear), or in other words, that the exchanges’ risk management is gradually becoming centralised. In fact, by the end of 2007, Euroclear, who provide clearing and settlement services for Euronext will “move into the implementation phase of our platform consolidation programme, with the launch in production of the Single Settlement Engine (SSE).” It is feasible that such consolidation will deliver better efficiency, but it also raises questions about the ability to manage financial risks in a cross-owned network of exchanges that constitutes a large share of the global trading volume. For example, the operation of a unified risk management system may create inadvertent drops in prices in entire sections of the market by generating sale orders. I am sure that Euronext are much more sophisticated than this, but, at least at the conceptual level we can ask the question about the new forms of risks that are introduced to the financial markets through the creation of such exchange conglomerates.

David Martin has organized a very remarkable panel titled “Ways of Performing Finance” at the 2007 annual meeting of the Society for the Social Studies of Science. The session will take place on saturday October 13th.

The papers are the following:

“Distributed Calculation: Artifacts for Deliberation in the Capital Markets,” by Daniel Beunza and David Stark (Columbia Business School / Center on Organizational Innovation)

“Making Corporate Social Responsibility Calculable and Legitimate on Financial Markets: The Social Construction of Socially Responsible Investment in France” Jean-Pascal Gond (Nottingham U)

“Governing global banking organizations: On the significance of organizational knowledge in regulatory practices” Matthias Kussin (U Bielefeld)

“Mutual Legitimization Process of ‘Market’ and ‘Theory’: the example of Volatility Forecasting” David Martin (U Toulouse-France)

“Making stock pricing methods performative: the everyday logics of interaction of professionals in contemporary finance.”
Horacio Ortiz (Ecole des Hautes Etudes en Sciences Sociales)

“Moral Behavior in Stock Markets is Shaped by Mandates and Market Structure” Aaron Pitluck (Illinois State U)

“How to be Fair in Finance? Knowledging Actuarial” Ine Van Hoyweghen (U Maastricht)

“Fairness in the Insurance and Reinsurance Business” Jacques-Olivier Charron (CNAM/LIPSO)

“What’s the market wage? How compensation surveys give form to the financial labor market” Olivier Godechot (Centre Maurice Halbwachs-CNRS/ENS/CEE)

“Comparative study of credit scoring in the USA and France” Martha Poon (UC-San Diego / CSI-Ecole des Mines de Paris)

The gathering is remarkable, I believe, for the diversity of its participants. It comes to show the strength of the performativity agenda, especially in the European intellectual space.

We’ve been hearing a lot about the possibility that the latest crash was, at least partially, computer-led. One report that I saw, however, draws a slightly more complex picture, that is worth our interest as sociologists of financial markets. This taken from a Newsweek story:

“On Tuesday at around 2 p.m., the market’s extraordinarily heavy trading volume caused a delay in our trading system,” explains a spokesperson for Dow Jones & Co., the media company that manages the index of 30 blue-chip stocks. For 70 minutes, a slow data feed to the Dow Jones industrial average (DJIA) calculator meant that traders were working off a slightly outdated set of numbers. When the error was caught, the system was switched to a backup server that immediately readjusted the figures—sending numbers across the board into a free-fall plunge of 178 points in a single minute.

“When they put the backup system in, [the market] went kerplunk,” Alfred E. Goldman, chief market strategist at A.G. Edwards & Sons Inc., tells NEWSWEEK. “That just scared the heck out of a lot of folks. […]” [T]he eye-popping adjustment helped lead to the market’s biggest single-day drop in almost four years, a total decline of 416 points.

Of course, this is only part of the story, but we can see that at least in this case it was not ‘the computers’ that are to blame in the crash, but the dependence of market participants on the efficiency of the computerised order-routing system. In other words, the traders got used to an immediate connection between price-changing information and the prices they got from the system. So, when the system ‘jumped’ and prices dropped suddenly, the reaction by many was to sell.

Independence at a price

February 9, 2007

What does the demand to appoint independent non-executive directors mean in practice?

In public companies, non-executive directors are intended to prevent a concentration of power with the chief executive officer and/or senior executive directors of the firm. To act as an effective counterweight to the executive membership of a board, non-executive directors are presumed to be independent from the firm. But, how is this independence achieved in practice?

Following a string of financial scandals including those of Enron and WorldCom, Derek Higgs was commissioned by the UK government to review the role and effectiveness of non-executive directors. Higgs’ report, which served as the basis for the Combined Code on Corporate Governace proposed that nomination committees should ‘consider candidates from a wide range of backgrounds and look beyond the “usual suspects”’.

The implicit assumption here is that if non-execs come from outside the social networks of the existing directors, it is more likely that they would be independent. Unsurprisingly, numerous services sprung up, offering to match potential NEDs with companies looking to satisfy the regulatory demands (for example).

But, what does the demand to ‘diversify the boards’ really do to nomination practices? The Combined Code asks the firms to appoint non-executive directors from backgrounds that are different from those from which non-execs usually came. Diversity, in effect, is understood and practiced as social distance: the more remote a candidate is from the firm, the more independent she or he are deemed to be.

Of course, social distance comes at a price. The more distant one is from a social realm, the less one would know about it. This introduces an inevitable trade-off the firms. The more knowledgeable the NED they appoint would be, the more likely it is that she or he would be seen as ‘too close’ and would not be recognized by the Code as independent. Conversely, appointing a person who is remote from the firm’s realm of activity may result in the appointment of someone who is virtually clueless about the nature of the business.

The result is that the current regulatory demands turn the recruitment of non-executive directors into a utility-maximization (or damage-minimization) exercise. Firms are asked, in practice, to find the ideal candidate, one who would be stranger enough to the firm to be regarded as independent, but not too ignorant about the commercial activity to stifle the operation of the board.

The Specificity of Finance

February 8, 2007

One disadvantage of setting a motto in the line of “social studies of…” is that it places great emphasis on the specificity of the object to which it applies: finance, in the case set out to be discussed in this blog. I remember that the discussion on the specificity of finance motivated heated debates among the (relatively) young researchers that initiated the Parisian social studies of finance seminar in 1999. Is there something wrong with finance, something that deserves a particular and differentiated sociological attention? Or are we done with what’s already available there in order to study financial activities just as any other economic activity involving people working for money?

Of course, our early gatherings, and the manifestoes that they produced (almost everybody there were young doctoral students coming from a variety of academic “chapelles”), ended up with a resounding “yes”. Yes, there is a specificity of finance, hence a need to build a proper sociology of finance. “Social studies” rather than plain “sociology”, probably because the group included an important number of political scientists, economists and impure sociologists: note for instance that, in France, social studies of finance owes a lot to the French-style economics of conventions. Some may also recon in this label an explicit and well-informed “clin d’oeil” to the social studies of science. This, of course, was to emphasize the role of mathematical and computational tools in the construction and transformation of the financial world: the construction of financial products, but also the development of the financial services industry as a whole, the modification of behaviors and professional careers, the creation of risk and so forth.

Well, that seminar in Paris (once held at the Mines, then at Jourdan, and now at CEVIPOF) has been working on an almost monthly basis for now almost seven years, and most of the people that were there at the beginning actually didn’t get bored and still go (this post is a blatant plug). And, from time to time, “la question de la spécificité de la finance” still pops-up, happily unsolved, fresher than ever. David Martin made special efforts to keep the question alive within the seminar, as did Vincent Lépinay earlier on, before leaving to the US.

My summary of the debate (if I dare): there is something rather specific with formalism in finance. And specificity is not just about “traders do use maths” or “there are lots of figures there”. It is about the very nature of what financial action is. A “financial action” is (but then you guess that you may need a theory of action that is not very conventional) a conditional action (literally, an action with an option), like insurance, but whose underlying assumptions are prone to purposeful and organized drift (i.e. trading). The consequence is that you can get (or loose) a lot of money with little, if you get yourself the proper formalistic (and not only social) tinkering that can enact this particular grammar of gain, or of action at large (funnily enough, “action” in French does also mean ‘stock’). Against this, of course, the evidence that finance is more complicated than that, that in finance there are a lot of things that do have nothing to do with that but a lot with other many things and sorts of action, etc.

On the overall, the question of the specificity of finance, I think, may probably not be a very healthy thing as such, but I prefer to salute it as a non-superfluous way of keeping alive an intellectual inquiry about what is done, by whom and how, in financial markets (unless you think that ‘money, by the dominant’ is a sufficient response).