From Emilio Marti, Cass Business School

I learned more about high-frequency trading from scholars, who do social studies of finance (SSF), than from any other discipline. SSF scholars reconstruct the history of this financial innovation, bring in the perspective of practitioners, take into account and weigh insights from economic theory, and discuss the implications of high-frequency trading for the social construction of liquid markets. So I learned a great deal about whether high-frequency makes the economy more efficient and stable (the short answer: yes for efficiency, no for stability). At the same time, many people are also concerned about how financial markets and financial innovations are transforming the economy and society. Unfortunately, SSF scholars hardly talk about these bigger societal implications. In this post I show why this is a pity, and how SSF scholars could help illuminate these bigger societal implications.

My ideas partly build on a paper, co-authored with Andreas Scherer, on financial regulation and social welfare that is forthcoming in the Academy of Management Review (for an unedited and publicly available version of the paper see SSRN). Our starting point is that existing research shows that the growth of the financial sector is one of the major drivers of income inequality. In the US, investors spend around $528 billion (4% of GDP) for financial services each year (Bogle 2008). These fees feed the super-high wages of some finance employees. In the US, wages from the financial sector account for 25% of the rising GDP share of the top 0.1% (Bakija et al. 2012). For the UK between 1998 and 2008, super-high wages from the “City” account for 60% of the rise in income among the top 1% (Bell and Van Reenen 2010).

What is puzzling, however, is why investors (both private and institutional) are willing to spend so much on financial services. Indeed, over the past 50 years (back to Fama 1970), financial economists have consistently shown that low-fee/passive investment solutions make more sense for most investors, compared to the high-fee/active investment solutions that most investors end up buying. Kenneth French (2008), in his presidential address to the American Finance Association, speaks of “a futile search for superior returns” in which investors lose an average of 0.67% of return per year.

In our paper, we argue that financial innovations such as high-frequency trading may help why financial service firms can sell so many high-fee products. Financial innovations keep financial markets in a constant state of flux, thereby creating new opportunities and threats for investors. For example, some ten years ago, many investors saw mortgage backed securities as an excellent opportunity that they would miss with a passive investment strategy. Today, many investors perceive high-frequency trading as a threat and they seek “active” help from dark-pool providers and algorithm developers to fend off “predatory” high-frequency traders (Foresight 2011). By keeping financial markets in a constant state of flux, financial innovations allow financial services firms to showcase their expertise and to sustain demand for their services.

We argue that researchers from different disciplines should further explore whether financial innovations help sustain the growth of the financial system and, if so, how. And I think that the SSF could contribute to this endeavor in important ways. At the moment, however, SSF scholars rarely connect their studies of the emergence of new financial tools and practices to broader questions about the size of the financial system. Indeed, as Philip Roscoe notes in a 2010 post on this blog: “There is not, as far as I’m aware, any surprise registered in Donald MacKenzie’s work – or Yuval’s or Daniel’s – that derivative markets exist at all.” This narrow focus relates to the fact that SSF scholars mostly analyze how sell side people and brokers interact with each other.

Who is missing? The buy side! Investors! They are the customers of financial service firms and they pump hundreds of billions into the financial sector each year (as mentioned, $528 billion for the US alone) in what French (2008) describes as a “negative sum game.” Here, SSF scholars should follow the money. This would require that SSF scholars extend their focus and also include the buy side into their analysis. So far, SSF scholars have at most studied retail clients (see Poon 2009), but ignored big investors and the fee streams they generate. Specifically, I would be highly interested to learn how new tools help financial service firms sell ever new products. With this, SSF scholars could start to explore how financial innovations and the tools they produce contribute to the growth of the financial sector.

Ultimately, these ideas link back to the debate about whether the SSF are merely, as Karel Williams formulated it, “nerdish case studies” that neglect the “political” dimension of what is going on around financial markets (see Daniel’s 2010 post). I think that taking into account how tools shape the interaction between the buy and sell side would preserve the distinct SSF approach – ethnographic studies focused on tools – while producing insights that are relevant for the broader community of scholars interested in how financial markets are transforming the economy and society.

From Paula Jarzabkowski

Dear Socialising Finance Community,

As you know, our book on  Making a Market for Acts of God has recently been released. It has certainly raised controversial comment in the press, from the FT to the BBC and, most lately, Bloomberg TV: http://bloom.bg/1IxMXOi with much industry debate about the implications of bundling risk, and the influx of alternative capital underpinning the growth of insurance linked securities. Certainly, the potential for market failure arising from changes to existing changing trading norms and practices is one aspect of the book’s ‘call-to-arms” for the industry.

I therefore invite you, as members of the socialising finance community to hear what the book is really about, and to have your say. Please do feel free to also forward this invitation to any colleagues who might be interested to know more. You can register to attend on the link below.

You are invited to:  Reinsurance markets and the future of trading large-scale risk

Tuesday 9th June 2015, 6-7.30 pm 

Cass Business School, 106 Bunhill Row, EC1Y 8TZ

The global market for large-scale risks has never been more important, as climate change exacerbates natural disasters and concerns arise over new threats such as cyber-risk.

Join us for a drinks and canapé reception as we launch our Oxford University Press book: Making a Market for Acts of God: The practice of risk-trading in the global reinsurance industry (authored by Paula Jarzabkowski, Rebecca Bednarek and Paul Spee)

The event will present the findings about the practice of trading risk in the global reinsurance industry and will also feature an expert panel debating the implications for the future of trading in large-scale risk and reflect on the lessons we can learn from other markets.

To register and learn more about this event click: http://www.city.ac.uk/events/2015/june/reinsurance-markets-and-the-future-of-trading-large-scale-risk; #CassReinsurance

  • ​Speaker: Paula Jarzabkowski, Professor of Strategic Management at Cass Business School, City University London

Expert industry and academic panel:

  • Tom Bolt, Executive Team member and Director of Performance Management at Lloyd’s of London
  • Clem Booth, (re)insurance industry veteran, formerly executive board member of Allianz SE and CEO of Aon Benfield Global Inc and many other executive positions in the industry.
  • Michael Power, Professor of Accounting, and former Director of the Centre for the Analysis of Risk and Regulation at LSE

Event information

Date: 9th June, 2015 6pm registration, presentation and panel 6.30-7.30 pm, drinks 7.30-8.15 pm

Location: Room LG001, Cass Business School, 106 Bunhill Row, London, EC1Y 8TZ

The PRI Call for Papers is now open – EXTENDED DEADLINE 18 MAY 2015

From awareness to impact: mechanisms of change in responsible investment

We are delighted to announce that this year’s the PRI Academic Network Conference will be part of PRI in Person for the first time, with a full stream dedicated to academic research. The conference will be held on 8 – 10 September at the ICC, ExCeL London, enabling academics and investors to engage, learn and discuss the latest insights, and to network.

The PRI is also proud to collaborate with The Systemic Risk Centre, based at the London School of Economics and Political Science (LSE) for the PRI Academic Workshop. This additional event is for PRI signatories, other responsible investment professionals and academics to enhance their knowledge and practices, but also for deeper interactions in a distinct community setting. The Workshop will be held on 11 September.

Both PRI in Person and the Academic Workshop will showcase selected research papers from the call.

We invite submissions of full papers (but extended abstracts are acceptable) that focus on the following areas:

  •         ESG integration
  •         Long term investment
  •         ESG engagement
  •         Financial performance
  •         ESG impact

For more information and to apply, please visit our website or contact academic@unpri.org.

The extended deadline for submissions is 18 May 2015.

Conference committee:

Michael Barnett, Rutgers Business School

Daniel Beunza, London School of Economics

Fabrizio Ferraro, IESE Business School

Jean-Pascal Gond, City University London, Cass Business School

Michael Viehs, Oxford University, Smith School of Enterprise and the Environment

From Paula Jarzabkowski

You are invited to:  Reinsurance markets and the future of trading large-scale risk

Tuesday 9th June 2015, 6-7.30 pm 

Cass Business School, 106 Bunhill Row

The global market for large-scale risks has never been more important, as climate change exacerbates natural disasters and concerns arise over new threats such as cyber-risk.

Join us for a drinks and canapé reception as we launch our Oxford University Press book: Making a Market for Acts of God: The practice of risk-trading in the global reinsurance industry (authored by Paula Jarzabkowski, Rebecca Bednarek and Paul Spee)

The event will present the findings about the practice of trading risk in the global reinsurance industry and will also feature an expert panel debating  the implications for the future of trading in large-scale risk and reflect on the lessons we can learn from other markets.

To register and learn more about this event click: http://www.city.ac.uk/events/2015/june/reinsurance-markets-and-the-future-of-trading-large-scale-risk

  • Speaker: Paula Jarzabkowski, Professor of Strategic Management at Cass Business School, City University London

Expert industry and academic panel:

  • Tom Bolt, Executive Team member and Director of Performance Management at Lloyd’s of London
  • Clem Booth, (re)insurance industry veteran, formerly executive board member of Allianz SE and CEO of Aon Benfield Global Inc and many other executive positions in the industry.
  •  Michael Power, Professor of Accounting, and former Director of the Centre for the Analysis of Risk and Regulation at LSE

Event information

Date: 9th June, 2015 6pm-7.30pm

Location: Room LG001, Cass Business School, 106 Bunhill Row, London, EC1Y 8TZ

About Making a Market for Acts of God:

We thought that the risk society would cause humanity to ponder the sustainability of the conditions of its existence. The book shows, however, that the risk society is also, above all, a formidable opportunity for financial markets. By analysing how reinsurers turn natural disasters unpredictable and theoretically incalculable Acts of God into tradable objects, the authors provide a major contribution to understanding the marketization of our societies and its implications. Michel Callon, Professeur à l’Ecole des mines de Paris, CSI. Ecole des mines de Paris.


This astonishingly thorough global ethnography, involving fieldwork in seventeen countries and over four hundred interviews, paints a fascinating picture of the practices of a unique, and hugely important industry. Donald MacKenzie Professor of Sociology, University of Edinburgh.

From London to Honk Kong and Monaco to Australia, the authors cast an ethnographers eye on the practice of reinsurance, extending the strategy as practice paradigm into the terrain of insurance and finance. In doing so, Making a Market for Acts of God provides a unique material portrait of how markets and organizations deal with risk at a global scale, offering a new and important contribution to the social studies of finance. Daniel Beunza, Assistant Professor of Management, London School of Economics.

For further endorsements, see:  http://ukcatalogue.oup.com/product/9780199664764.do

It’s spring in London, and the beautiful weather this week reminds me that the LSE is now taking applications for my favorite Summer School, “Firms, Markets and Crises: Foundations of the Social Studies of Finance.” The course is due to start on July 6th, and runs till July 24th. See the official site here.

The backbone of the course is a distinct approach to financial markets that is neither orthodox finance (with its emphasis on impersonal markets) nor behavioral finance (and its focus on individual mistakes and psychological biases). Instead, the course is premised on the idea that social relations matter to the functioning of banks and financial markets. Their influence includes the effect of social networks among bankers, the tools used by traders (technology, after all, is socially constructed), and the culture of financial institutions such as the values, beliefs and attitudes in them. The course can be taken by undergraduates in finance who want to differentiate themselves from their peers with broader exposure to sociology and anthropology. Alternatively, it serves as a great introduction to the City and Wall Street for undergraduate students in business, economics or social sciences like sociology and anthropology. Master’s students are also welcome and typically make up one third of the class.

Here’s how the typical day works. Class starts at 10.00 am in our very Victorian 32L building, with one hour and a half of lectures where I teach the content of a given topic in an interactive manner (PowerPoints are for losers!). We then have a half-hour break, and then I facilitate a session with speaker form the industry for another hour. We’ve had people from Barclays, the FCA regulatory authority, the PRI, a fintech incubator, a hedge fund, investment firm Pimco, the Bank of England… everyday, a different speaker. There’s an hour for lunch, and in the afternoon there are cases for one hour and a half with our TA, Megan Peppel, who is flying from New York to teach in the course. The rest of the afternoon is dedicated to reading ahead of next day’s lecture (the park at Lincoln’s Inn Fields serves as a great library) though students have sometimes been spotted at The George, our local pub at the LSE.

The course is demanding. There is a quiz, a midterm and a final exam. The readings are long, and  challenging. But I can promise the effort is worth it. Those who come will find an exciting environment of incredibly international and smart students. Long-lasting friendships are formed. Last year the percentage of satisfied/ very satisfied students was a whopping 100 percent. And I’m hoping it will be at least as good this year.

How to reform bank culture? A panel event on bank culture that I organized this past May 19th at the LSE took up this question by examining the practical solutions that banks are introducing (see photos here). The panel underscored the need for both cultural reform and structural measures. To some extent, the more measures the better. However, it is crucial to ensure that structural changes complement, and do not trivialize or contradict, cultural reform. Changing values and beliefs is a delicate matter, and brute force does as much harm as good, even when voters feel morally justified to use a bazooka.

The event, held at LSE’s Systemic Risk Center, chaired by Joel Shapiro (Oxford University) and supported by the Department of Management and the Principles for Responsible Investment initiative, built on a previous session that called into question the narrow emphasis on structure of the official reports on financial reform. But critique, that longtime favorite of academics, can only go so far, and for that reason in the latest panel I assembled bankers, academics and journalists with the explicit purpose of discussing solutions: what new practices are banks attempting to reform their culture? Which ones are working? Which are not? What do we learn from it all?

Tone from the top and other cultural changes

Appropriately, the panelists started by tracing banking scandals directly to culture, that is, to the values, norms and beliefs that define these banks. One panelist, Patricia Jackson (EY), reminded us about the infamous cabbages that managers of HBOS (a UK retail bank) placed on the desks of underperforming salespeople. The over-effectiveness of this technique, which encouraged the hard selling that ultimately derailed the bank, underscores an established sociological tenet: that internal standing, status, esteem and avoidance of social opprobrium mater as much –if not more- than incentives. Another example of symbols that matter is the bottles of champagne that Libor-rigging bankers received from colleagues for “taking one for the team.”

But if culture is the problem, it can also be the solution. Another panelist, Andre Spicer (Cass), mentioned the importance of the tone from the top, that is, a careful attention to the symbolic actions and messages sent from the top management and especially from bank CEOs. This approach is now very much in use by large banks such as Barclays to “turn around the supertanker.” (Another approach entails mimicking non-banks such as gyms and airlines, but this is only possible for more agile start-up banks).

But exclusive reliance on soft aspects such as norms and values can make financial reform fragile and transitory. Another panelist, Sarah Butcher (eFinancialCareers) reminded us that soul-searching and reform discussions were widespread as far back as 2002, following the dot-com bubble and the widespread perception that equity analysts were responsible for inflating it. Yet despite the banker contrition at the time, the dot-com bubble was followed by the subprime trouble. Memories are short, it seems. Repentance is quick to fade.

Skin in the game and other structural changes

Partly for this reason, panelists to agreed that cultural change needs to be accompanied by structural reforms, that is, by changes in incentives, limits to the banks, etc. Most such reforms are variations on  “greater skin in the game:” make bankers subject to the consequences of their actions. In this regard, one policy that according to panelist Yann Gindre (PRI), appears to be working, is deferred bonuses and compensation. This has reduced the turnover of bankers within the City: by getting employees to stay in the same organization they can be expected to take greater responsibility for their actions. Gindre also recommended making fines come out of the bonus pool rather than from the bank’s profits, as otherwise it is the shareholder that foots the bill.

An intriguing variation of “skin in the game” idea is to combine accountability with financial models, and specifically risk management tools. According to Patricia Jackson, regulators have traditionally faced a problem in managing the risk of the banks, which its opacity. But by pushing accountability for risk management down the line, Jackson hopes the heads of the various businesses will be more accountable.

Structural measures such as the above can help with the changes in values and attitudes pursued by cultural change programs. For instance, Butcher gave testimony to a change in attitudes in City institutions following the reduction in bonus sizes: there is now less interest in bonuses among job searchers in finance; banker arrogance –the attitude that financiers are the only hard working and competent people in the country– is partly gone. Butcher’s point illustrates the remarkable and often upside-down and counterintuitive manner in which cultural change operates: employees first change behavior, and then adjust their beliefs to stay consistent. Another panelist, Jo Geraghty (Culture Consultancy), emphasized the importance of integrating the espoused changes in culture within the structure of the organization.

Paying bankers for being good?

One key challenge in adopting structural measures is to avoid crowding out –if not simply destroying– positive cultural dynamics. Treating employees as dishonest immediately reduces their ethical commitment. For instance, banks are currently introducing cultural fit into reward and promotion measures, and developing metrics that measure culture. By explicitly paying more to the bankers that appear to behave in accordance to the espoused culture, the hope is that cultural change will be advanced.

Will this work? My concern (and one echoed by my informants in New York) is that explicitly accounting for values with pounds and dollars may create a confusion that can only be detrimental. First, it attempts a reduction of the domain of the moral into the economic, but by quantifying the monetary value of “good behavior” (e.g., ten percent of the bonus) it suggests that sufficiently high profits might compensate for obnoxious behavior such as hazing new recruits. Second, this approach may also come across as too controlling and manipulative: values and norms are and need to be broad because they call for judgment in specific circumstances, and by boiling them down to hard rules the judgment is eliminated. And third, it invites gaming and cynicism, potentially reinforcing the materialist message that the only point of work is the compensation.

Bring back the partnership model?

By contrast, culture and structure come together remarkably well in Sandy Pepper’s proposal to revisit the traditional institutions of the City of London, prior to the Big Bang of 1986. Before the arrival of the large Wall Street banks, the City was dominated by traditional merchant banks. While these were far from perfect –specifically, the diversity of their workforce was close to inexistent– careers in them were structured as tournaments, partners were collectively liable for losses, turnover was much lower, and employees arguably took greater responsibility for their actions. As Pepper says, these institutions contained pay and limited the traders’ tendency (given the visibility of their contribution to the bottom line) to become irresponsible hired guns.

While it’s tempting to dismiss such interest in the 1980s as romanticizing an inexistent golden age, I have been hearing similar interest in partnerships in my recent fieldwork in New York. And indeed, the organizations that come closest to it – hedge funds and private equity firms – have been the ones that performed best despite fears, well before the financial crisis, that their small size would make them vulnerable. Partnerships relied on status differences, so to the extent that these structures come back, we can expect the return of other retro aspects that come with them: formal dress codes at work, grander facilities, perks that reinforce hierarchical differences and signal esteem. In fact, it is interesting that retro fashion and formal wear appear to be back.

The partnership model will obviously not be viable for the large banks. The key will instead be to understand how to adopt elements of it, both symbolically and structurally, and combining it with technology. One possibility would be to argue for a complete reform of investment banks that shifts risk-taking into smaller hedge funds and private equity firms. The question then is whether capital markets need large global banks willing to risk capital in moments of crisis. This is in fact also Jamie Dimon (JP Morgan’s CEO) criticism of Dodd Frank, and indeed Dodd Frank has been cited as one of the reasons for the recent Treasury bill Flash Crash of 2014. Size, in other words, continues to be a  point of contention in discussions of financial reform.

From Bill Maurer

I’m happy to announce that the book Data, Now Bigger and Better!, the outcome of a number of interrelated ISTC activities and coedited by Tom Boellstorff and myself, is now out! (http://press.uchicago.edu/ucp/books/book/distributed/D/bo20285526.html).

With chapters by Genevieve Bell (Intel), Melissa Gregg (Intel), Tom Boellstorff (Irvine), Nick Seaver (soon to be at Tufts) and myself, the book is “an exploration of the kinds of theoretical provocations and conceptual enframings that are so needed when, it is often claimed, the very nature of big data means that knowledge is ‘at scale’ and concepts aren’t needed any more.” Prickly Paradigm Press (which publishes through University of Chicago Press) seeks to “bring the old-time pamphlet back… writing unconstrained and creative texts about meaningful matters.” In that spirit we had a lot of fun putting the book together and I hope you enjoy it!

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