Most attention, at least in the mainstream media, is directed at the potential ‘leakage’ of the crisis from financial markets to other parts of the economy. The most likely avenue for such leakage according to the media is through AIG. A potential demise of AIG, a major player in the re-insurance field, would send a shock to insurance market and would affect dramatically the premiums that business pay, even if they were insured through insurers other than AIG. This assumption is correct, but what seems to be neglected is that default risk is already commoditized and there exists a very active market for default derivatives (credit-default swaps, or CDS): contracts that give their owners a protection against the default of a specific entity. Hence, the prices of such contracts can indicate whether and to what extent the crisis has leaked to the economy at large. It has to be noted that there exists no central market for default swaps, as it is an area of unregulated OTC trading. Still, there are enough market makers in CDS to provide a picture. For example:

Credit-default swaps on Morgan Stanley soared 194 basis points to 458 and Goldman Sachs jumped 122 basis points to 321, according to CMA Datavision prices. Sellers demanded 50 percentage points upfront and 5 percentage points a year to protect the bonds of Washington Mutual Inc. from default on concern that the biggest U.S. savings and loan won’t survive the credit crisis, CMA data show. That compares with an upfront cost of 40 percentage points on Sept. 12 and means it would cost $5 million initially and $500,000 a year to protect $10 million in bonds for five years.

Note: it is true that AIG is a major seller in this market too, and if it goes under it will put the market into an imbalance. Yet, I would dare to say that here AIG is more a symptom than the main cause, as it seems that the problem is not specific to certain companies and that lack of confidence is translated very efficiently to illiquidity.

In attempt to inject liquidity into the anxious markets, the Fed softened its conditions for extending credit:

The Federal Reserve widened the collateral it accepts for loans to securities firms to include stocks in an effort to help Wall Street weather Lehman Brothers Holdings Inc.’s plans for bankruptcy.

This is a daring move, but a very risky one too, as it opens a door to a vicious circle. The markets where the stocks used as collateral are traded are the same markets that are now recording sharp drops… So, the collateral that will now be offered to the Fed for the loans will possibly be worth less, indeed, a lot less, than the loans against which it offered. In fact, if the securities firms use the loans to restore liquidity in the markets (and this is a big ‘if’) then prices will be established at lower level. Hence, even in such a situation, the Fed will be left with under-collateralised debts on its balance sheet. If that reminds you of the sub-prime crisis then you are not alone.

By guest photo-blogger Emmanuel Didier who has now returned to his home base in Paris.


It has become difficult to enter the CBOT. They say that because of 9/11 they no longer let the public enter, even though there is a visiting gallery on top of the main trading room. But I finally (after a fairly long search) wound up finding Curt Zuckert, Associate Director, GLC and Product education. He is a former trader and for whatever the reason he now organizes the visits and the education of new members of the company. (I visited along with a newly hired guy).




As you know, the CBOT is undergoing both a digitalization of activities and a merging with the Chicago Mercantile Exchange (the Mercantile exchange has actually bought the CBOT). The thing that they keep repeating is that I was lucky to be able to visit simply because digitalization will eventually make the physical trading rooms disappear. Apparently, however, although they’ve been saying this for five years there are still lots of people in there!  It seems to me that there still is something very valuable, something very important to gain in physical trading.


Kurt said that maybe it is the introduction of new products are made first on the physical floor and that these are a good way to make money. Yet that does not seem to be a enough reason for the persistence of the floor because these introductions are quite rare.  I could not put my finger on what it is about the trading floor, but I felt that the story of its disappearance is everything but a necessary evolution.  It seems to have crucial advantages that online trading does not.


The other thing which struck me is that at opening time, you really have a great frenzy, and then it’s much calmer.  Curt explained that, contrarily to what we might assume, there are lots of moments of inactivity for the traders. Often the market is simply flat, it does not evolve, and therefore (or because) nothing is sold, nothing is bought. It was interesting to me because it explained why this life is livable. It explains, I think, how psychologically it’s doable. It is noteworthy that the entrance of the building is the last place in the US where you still see actual crowds of smokers hanging around.  


Unfortunately I only took a few pictures, because I was not allowed to take any while walking through the floor.



This is a replica of the statue which is on the top of the building.  It is a depiction of Ceres, the Greek goddess of agriculture.  It has been suggested that she is faceless because at the time the bulilding was erected it was considered to be so tall that nobody would ever be able to get close enough to inspect her features.

This is a replica of the statue which is on the top of the building. It is a depiction of Ceres, the Greek goddess of agriculture. It has been suggested that she is faceless because at the time the bulilding was erected it was considered to be so tall that nobody would ever be able to get close enough to inspect her features.




The really great pictures of the CBT are those by the famous artist Adreas Gursky (see here).  Of course, the traders and clerks don’t necessarily wear these colored jackets anymore.

Curt Zuckert can be reached at

Session Title: Market Devices: Understanding the Underbelly of Financial Markets
Submission Type: Symposium | Session Sponsor(s): (OMT, MOC, TIM)
Date & Time: Monday, Aug 11 2008 from 10:40AM – 12:00PM
Location: Anaheim Marriott, Grand Ballroom – Salon F

Session Title: How financial issues impact our organizations?
Submission Type: Paper Session | Session Sponsor(s): (PNP)
Date & Time: Monday, Aug 11 2008 from 10:40AM – 12:00PM
Location: Anaheim Marriott, Platinum 1

Session Title: Market Formation and Construction Processes: What we Know and the Questions we Ask
Submission Type: Symposium | Session Sponsor(s): (AAS)
Date & Time: Monday, Aug 11 2008 from 12:20PM – 2:10PM
Location: Anaheim Marriott, Grand Ballroom – Salon E

Session Title: When Financiers become Entrepreneurs: Understanding Institutional Entrepreneurship in Finance
Submission Type: Symposium | Session Sponsor(s): (OMT, ENT, BPS)
Date & Time: Monday, Aug 11 2008 from 2:30PM – 3:50PM
Location: Anaheim Convention Center, 210D

Session Title: Financial Markets: An Economic Sociology Perspective
Submission Type: Symposium | Session Sponsor(s): (BPS, OMT)
Date & Time: Tuesday, Aug 12 2008 from 8:30AM – 10:10AM
Location: Anaheim Convention Center, 202A

Trading Post No 12

July 22, 2008


Photo-reportage by guest blogger Emmanuel Didier (assisted by Martha Poon).


Trading Post No 12 at the University of Chicago Graduate School fo Business


This is what you see when you enter the University of Chicago’s Graduate School of Business: Trading post No 12.  It is a horse shoe shaped desk from which was traded, in its day, a specific set of shares including Gould, General Motors and Central Telephone and Electronics.



 As this brass panel explains, as the NYSE became electronic, the old exchange posts were sent to different schools and museums throughout the US.




The desk is designed for share quotes to appear on an convex panel running around the top. 




Traders presumably stood on the outside of desk where they could see these prices.  The desk provides pull-down seats, perhaps for them to rest while waiting for orders.  Note the impressive number of built-in drawers and cubby holes.




The agents receiving the transactions presumably stood inside of the horse shoe…




 ….where they had their own little drawers and organizational devices.




According to Greg Redenius, the facilities person responsible for taking care of No 12 and the only person able to provide any meager information about it, “the center ‘island’ with the holes in it worked similarly to the vacuum transport system at a typical bank drive through”. 





Here I am pressing the buttons.


If you have “visual question” please ask – I’d be happy to go and take further photographs. Coming soon, a report on my recent trip to the Chicago Board of Trade…


Emmanuel Didier is a researcher at CSDIP in Paris and was a visiting scholar at the Morris Fishbein Center for the History of Science and Medicine, University of Chicago this spring.



His forthcoming book, En quoi consiste l’Amérique? Les sondages et le New Deal, (What is the Composition of America? Statistical Surveys and the New Deal) is forthcoming from La Découverte.



Nassim Taleb pointed me to a note on his web site. Taleb says there, among other things, that: when writing history, we project our mental biases in a way to produce agency and increase the role of theory. The idea that academics, in general, are more theory-oriented than explanation-oriented is not new. Indeed, there is a wide spectrum of critical approaches towards theory, from, for example, Paul Fayeraband’s epistemological anarchism to evidence-based medicine.

However, Nassim’s approach becomes the most interesting when he refers to the area he knows best: option pricing. In a talk at the LSE earlier this year (at the Accounting department) Nassim claimed not only that the history of the Black-Scholes formula [shows] that mathematics is often there to “lecture birds how to fly”, but, more provocatively, that options’ traders hardly ever use the Black-Scholes-Merton model and that, in fact, the put-call parity is enough to trade options. Nassim’s claim is coming from his extensive experience as an options trader and I am sure that his observations are authentic and valid. The important question about BSM model, however, is no longer whether or not individual traders use it or not, because when entire price quotation systems are based on BSM, individual traders matter very little in this respect. The question then becomes: to what extent is BSM theory entrenched into financial market systems? The answer to this is fairly obvious: it is profoundly embedded into today’s markets.

Now, let us go back to Nassim’s claim that science in general, and economics in particular, are too theory-oriented. I agree with this claim whole-heartedly, and I think the BSM model case is a very good example for this tendency. However, the arenas where such theory-biases unfold and become effective are not the pages of economics journals (let alone those of philosophy of science), but trading floors, trading rooms and increasingly, trading and risk management algorithms. That is, economic theory is frequently inaccurate (BSM, for example), but is very affective. In other words, in markets, birds (and more so, bird growers) do read flying manuals.

Just returned from an inspiring academic event. The First Workshop on Imagining Business just took place last week in Oxford, at the Said School of Business. Visualization, especially as applied to finance, is a true passion of mine: it is a crucial component of contemporary markets (see my work on merger arbitrage), it offers lucrative business opportunities for innovation (see previous blog post), and it has been used to great effect by artists to re-imagine Wall Street (see my article here). Given all this, I attended the Oxford event with at least the same enthusiasm that my fellow Spaniards showed at the European soccer final. What, I asked myself, does existing research say about business visualization?

The organizers — Paolo Quattrone, François-Régis Puyou and Chris Mclean – were aware of the importance of the visual in organizations, and offered a perspective based on Science and Technology Studies. According to them:

Organizations are saturated with images, pictures, and signs that impact on many different aspects of everyday organizational life (…) Over the past decades, Science and Technology Studies have largely contributed to clarifying the importance of “representation in scientific practice” (Lynch & Woolgar, 1990). Through their focus on the process of re-presentation they highlighted how specific practices of making things visible … were central to ‘doing’ science. We wish to extend this to a study of business.

In other words, science is first and foremost about visualizations. What about its more practical, mundane and prevalent cousin — business? What to make of, “budgets and accounting tools, advertising literature, design specifications?” What do we think is the visual power of “public relations leaflets, standard operating procedures, schedules, reports, graphs, charts, organizational hierarchies [and] maps?” These were the questions that the presenters set out to answer. As a very refreshing novelty, the conference was accompanied by an art exhibition curated by Nina Wakeford, Lucy Kimbell and Alex Hodby.

The approaches to visualization were numerous and varied. I could not attend to all the presentations. But according to my own taxonomy, the presentations fell into four different groups: one set of papers explored how images (mostly photographs) are used for public relations and communication. A fascinating piece by Sue Hrasky explored the use of visual cues and images in corporate annual reports. Whereas researchers in accounting and management tend to decry the use of smiling people as not constituting “information,” Hrasky shows how images complement, reframe and expand the meaning conveyed by the text. On a similar note, Charles Cho, Jillian Phillips and Amy Hageman explore the significance of images in corporate social responsibility.

Another line of presentations engaged with images from a semiotic perspective. Presenters offered their interpretation of the meaning of the images used by businesses. A interesting example from the finance industry was provided by Frandsen, Bunn and McGoun: the authors explore how the changing architecture of banks through the 20th C. –from the closed imagery of a safe to the alluring aesthetics of retail – has changed to fit evolving social views of money. As money changed from a “stock” that needs to be protected to a virtual flow that needs to be kept active, so has the architecture of banks adapted.

But my favorite piece was by Brigitte Biehl. She analyzed the cultural symbols at the trading floor of the Deustche Borse. The German stock market has recently upgraded its floor from a dark, low-tech space to an expensive and futuristic-looking market. The Borse also engages in publicity stunts a la Dick Grasso at the New York Stock Exchange: celebrating carnival on the floor, or inviting models in bikinis. All this performative drama gives rise to the obvious question: why such expenditure on the floor, just as electronic trading seems to be dominating the rest of world exchanges? Biehl has a cynical but interesting answer: because the investing public is ignorant of finance. Exchanges reduce the cognitive distance that retail investors experience vis-à-vis earnings, indexes, and other complications of the capital markets.

What to make of this argument? The problem with the “circus” approach to finance, of course, is that it sends a misleading signal. Even if they look serious and powerful on TV news, the clerks at the Borse are not actually responsible for the price movements. One of the attendees in the public offered an interesting solution: if the problem is the need to show people in the evening news, why not do it the way it’s done in London? Put a camera inside the trading rooms of the large investment banks, broadcast TV news from there.

Regardless of one’s view, Biehl needs to be congratulated for sparking a much-needed debate on this type of strategic semiotics of financial exchanges.

A third line of work engaged the imagining side of images: exploring how images can promote novel thinking on a certain issue. Here, the plenary presentation by Donald MacKenzie was one of the most talked about. MacKenzie asked, what would it take for a market to address current environmental problems? The existing European cap-and-trade system (so-called carbon trading) does not seem to be a success… but why? MacKenzie views cap-and-trade systems as a case of performativity: a practical instantiation of Ronald Coase’s theory of property rights. According to some, this performative move was too complex — an economist’s pet project, turned sour. MacKenzie’s presentation delved into accounting and regulatory details that have prevented vigorous trading in pollution permits, even suggesting some regulatory changes of his own. Fascinating work, and very different from the more distant historical perspective he took on Black-Scholes. As an SSF researcher, I can only salute this initiative and welcome the start of SSF research with real political impact (a topic of recent post by Yuval and Martha).

An enlightening “imagining” presentation was offered by Susan Scott and Wanda Orlikowski. Following a very broad review of the management literature on social media, the authors found that the choice of methodological tradition is very related to the way social media is imagined. Research that follows the strategy/ economics- inspired paradigm tends to view technology as a distinct entity, cut off from its users; whereas research in the ethnographic/ sociological tradition views technology in terms of community, with little focus on the unity of the phenomenon. I found this divide intriguing. The authors emphasized the need to overcome a dualistic image of social media, suggesting Pickering’s expression, “the mangle of practice.”

My own presentation engaged with images in a different manner – what I would call “calculative visualization.” In a nutshell, I talked about the spread plot (080623-distributed-calculation-at-imagining-business1). The spread plot allows merger arbitrageurs to calculate the “implicit probability” of merger completion: the probability that “the market” assigns to a successful completion of mergers that have been announced but remain to be solidified. It is special in that if you know how to use it (as professional hedge fund traders do) you can “see” the probabilities of merger between two companies. If you don’t – as is the case with retail investors – you are left guessing. Images like the spread plot, I argue, are responsible for part of the billions of profit made in these past decade by the hedge fund industry. And the more recent diffusion of these tools may well account for the limited returns experienced by these funds nowadays. (Two other examples of this were provided by presentations on SAP and the imaging system used by oil companies.)

To conclude — what did I learn about business visualization? That research in them falls on four very different types: corporate communications, semiotic analyses, re-imaginary approaches and calculative images. Perhaps predictably, I find this fourth type most persuasive. Beyond the natural allure of photographs, brochures or interfaces, I am particularly interested in visualizations that have color but also data, that let people imagine but also count, that inspire but are also practical. The capital markets are a terrific environment to explore these.

In any case… whether one subscribes or not to my view, the overall message from the conference is clear: visualizations are key to contemporary business. Researchers need to engage with them. The organizers of this workshop need to be congratulated for putting together a novel, daring and successful event.

I’ve just returned from “A Turn to Ontology?” a provocative workshop at the Said School of Business in Oxford. It was organized by the resident Science and Technology Studies group: Steve Woolgar, Javier Lezaun, Daniel Neyland and others. This group is by itself interesting: they study things such as focus groups, advertising — the non-finance counterpart of social studies of finance. (Last year, two alumni of this group, Elena Simakova and Catelijne Coopmans put together an interesting workshop covered here.) Given all this, I attended the workshop in search for new clues to think about Wall Street.

The main contention of the workshop, according to the organizers, is that “the essence and existence of entities are best understood as the temporary upshot of interconnecting relations.” The most circulated example came from Daniel Nyland and Steve Woolgar:

Recent work on mundane terror shows how ordinary objects in eg airport settings become transformed into objects requiring various apparatuses of regulation, monitoring and control (…) ordinary objects acquire an insecure ontology. A water bottle is transformed into a potential object of terror. (…) For example, when Dan and Steve travelled from Heathrow recently, they started by getting security cleared (and having various liquids confiscated in the process). Steve then purchased a terror free bottle of water in the departures lounge. But they managed to misread the signs (in the chaos of terminal 1) when walking to the departure gate and found themselves again the wrong (“dirty”) side of another security check. At this point the terror free bottle was transformed into
an object of potential terror and promptly confiscated.

The ontology of a water bottle, the example suggests, is not simply determined by the properties of the water, but by the social arrangements at the airport. Is any of this relevant to finance? I am not yet sure. I have already stumbled upon ontological issues in my research; what I’d like to do is to discuss it here and let the reader judge.

The setting was my ethnography of arbitrage. After two years of fieldwork at the equity derivatives trading room of pseudonymous International Securities with David Stark, I eventually concluded that modern arbitrageurs sustain above-normal returns by challenging the ontology of normal securities. In effect, the arbitrageurs that I followed, whether in statistical arbitrage, options arbitrage or merger arbitrage, devoted themselves to breaking up and isolating the properties of stocks to their own advantage.

How? Consider, for example, merger arbitrage. By buying the target company and shorting the acquirer, arbitrageurs cancel out their exposure to those factors that are common to the two– typically, the industry. So, for instance, when HP made a bid for Compaq and the traders played the trade, they were both short and long on the computer industry, thereby cutting their net exposure to the computer industry. They limited their exposure to the only factor they devoted their research to, the completion of the merger.

To see ontological dimension to this, think of the exposure created by a stock as a pie. Its overall value is determined by different qualities: its liquidity, volatility, mean reversion in the price, sector, etc. Think of these qualities as portions of the pie. Whereas buying a stock – let’s say, IBM – entails exposure to all the factors that determine its price, arbitrage entails limiting one’s exposure to just one. What arbitrageurs do, in other words, is to break up a whole into its constitutive parts.

This challenge to ontology came apart this summer in August 2007. As a remarkable paper by Amir Khandani and Andy Lo has argued, this approach at breaking up the qualities of a stock was subject to disruption. As multi-strategy funds lost money on their subprime bets, they winded down their positions in other, more liquid bets such as merger arbitrage. This seemingly inexplicable fall in stock price then led to further margin calls and, in turn, additional losses — adding up to a staggering nine percent in one day.

Recombining wholes into parts is not unique to finance. We see the same in the new high-tech Spanish cuisine. Star Spanish chef Ferran Adria isolates the individual qualities of food – their tact, aroma, color and texture — and then reshuffles them in the form of liquid paella, puffy rice grains or foamy coffee. Like Adria, equity arbitrageurs selectively strip their exposure of their unwanted qualities, then reshuffle them to their advantage.

These challenges to conventional financial ontology can also be found in fixed income. Indeed, it is arguably one reason for the current mortgage crisis. Securitization, or the aggregation of different mortgages into a single combined asset, creates a whole out of different parts. The operation first endows the mortgages with calculativeness – an average default rate, a mean return and a standard deviation. More recently, structured finance has also allowed bankers to transform bonds into different parts, or “tranches,” of different degrees of risk. (Incidentally, for outstanding treatment of the mortgage crisis, see the article by Donald MacKenzie.)

In this sense, securitization and structured finance is not so different from the secular movement towards processed food of the past century. Salami, sausages, spam, hamburgers and similar products make meat inexpensive by combining average and useless parts of an animal into acceptable food.

That this meddling with the ontology would entail unexpected challenges – and in the case of CDOs, financial catastrophe – is perhaps not that surprising. As we now know only too well, processed food opens up the danger for manipulation – for you don’t know what’s inside. The ontology workshop rightly reminded me to keep thinking about the ways in which resourceful traders turn apples into oranges, iron into gold — and mortgages into senior, “super-safe” tranches of a CDO.

This op-ed by Dan Koeppel (here) incites a perfect opportunity to respond to Yuval’s thoughtful urging for an expanded post about inequalities in food pricing.  Last time it was carrots; this time it’s bananas.


“That bananas have long been the cheapest fruit at the grocery store is astonishing. They’re grown thousands of miles away, they must be transported in cooled containers and even then they survive no more than two weeks after they’re cut off the tree. Apples, in contrast, are typically grown within a few hundred miles of the store and keep for months in a basket out in the garage. Yet apples traditionally have cost at least twice as much per pound as bananas.”

After this central observation, which privileges the constitution of inequalities between food items (objects), Koeppel goes on to explain how the banana was engineered into a circulable product: it was ensconced in a network of railroads, communication lines, refrigeration techniques, marketing campaigns, biological standardization and disease control.  If the banana ‘acts’ as the Big Mac of the fruit world, it is because it is conferred with such agency through an infrastructure that supports its coming into being as an inexpensive and mobile staple.

As Koeppel points out, “bananas have always been an emblem of a long-distance food chain.”  But with the price of oil rising every day, he remarks that “Perhaps it’s time we recognize bananas for what they are: an exotic fruit that, some day soon, may slip beyond our reach.”  Because the banana is not a local product to us, the idea of a valuation chain that can fall apart is not at all surprising.  

The carrot in my original example, however, is raised locally on the tropical island of Jamaica.  Its disappearance is more of a mystery.  Even though ‘oil’ might in small part explain how a U.S. carrot might out price a Jamaican carrot on Jamaican soil  – Jamaican currency is so depressed that oil must be relatively more expensive to island producers – it is still not enough to fully explain the power of the U.S. price.  Perhaps that’s because oil is only one part of the network of global food production along with the numerous other elements mentioned with regards to bananas above. 

We do not doubt that objects can be valuated differently, but my question is about the calculative underpinnings that sustain inequalities between food producers (humans).  It is one thing – as SSF has done – to show that pricing and valuation of goods is socio-technically produced.  It is quite another to pinpoint just how these prices have, in actual cases, participated in created economic inequalities capable of wiping out entire agricultural industries and shifting the geo-politics of production in favor of some populations over others.  What’s missing in our field is a wider notion of how human history is intertwined with process of valuating objects and what Callon has called ‘economicization’.

The broader question I’m trying to raise is: What are politics and power dynamics going to mean to SSF?  The greatest criticism the research program faces is the same as that faced by laboratory studies – the inability to move out of the organization of micro-activities.  These micro-studies can certainly be the foundation for how visible and naturalized forms of lived power relationships come into being without resorting, as critical analysts do, to technically and materially empty movements of change (i.e. the general spread of capitalism, globalization or neo-liberalism).  But the difficult empirical work has not yet been done to fully show how… 

Radical uncertainty

June 21, 2008

For a recent discussion of Austrian and neoclassical approaches to uncertainty, read Tyler Cowen’s post and follow the links.

Can economists make markets out of anything? How much knowledge do you need to to build a calculative device? Do you need Bayesian priors to create trade? Or can you create markets de novo?

Arnold Kling says:

I think that we will not see contingent claims markets emerge in the case of unknown unknowns, because the bets are too hard to define. If you can define a bet, then you have created a known unknown. If you cannot define a bet, you have an unknown unknown.

Do economists transform untradable unknown unknowns into tradable known unknowns?

It makes me go “Hmmm”.