September 13, 2016
With the SEC’s recent approval of the Investors Exchange (IEX), a new national securities exchange has been added to the US financial-markets landscape. IEX is the first exchange to openly challenge the rise of automated, high-frequency trading (HFT), where computer algorithms buy and sell within seconds, and without any direct human intervention. Over the past decade, HFT has gained a foothold as a significant trading mechanism, and HFT firms are now estimated to be behind over half of the trading volume in U.S. equity markets. But like every hi-tech innovation intended to supplant human actors, HFT has triggered a fierce debate between its proponents and adversaries.
HFT’s proponents see it as a much welcomed rationalization of financial markets. HFT will take the emotional urges out of human traders. It is touted as being a cooler, more rational approach to trading. Indeed, HFT’s champions proudly claim that it will finally put an end to the human emotionality of financial markets. Critics of HFT, however, highlight the unfair advantage it gives fast market participants. HFT is also seen as a kind of techno nightmare where the wrong algorithm could cause new types of market crashes. Critics often cite the so-called Flash Crash of May 6th 2010, in which trading algorithms produced a dramatic drop on US markets until trading was suspended. Should investors welcome the entry of high frequency trading? Who benefits? And who shoulders the risks?
Part of the confusion lies in the lack of transparency in the HFT industry. Surprisingly little is known about the people who develop, program, and deploy these superfast algorithms. The industry is intensely secretive, and high-frequency traders prefer to operate under the radar of public scrutiny. This is understandable: in a field where the competitive edge of a new trading algorithm can rapidly dissolve if others copy it, who would want to disclose the source of their profitable trading? The problem, though, is that the lack of knowledge about what these traders are actually doing can easily lead to an overemphasis on the more spectacular aspects of HFT, whether it be its alleged crash-prone nature or the ostensible transformation of financial markets into an elite of HFT firms dominating an underclass of exploited non-HFTs. Of course, avoiding financial crashes is in everyone’s interest, and we also need to prevent any unfair or illegal market practices. However, we can only do this by truly understanding how HFT works and what it does.
In order to better understand HFT, and to provide a more complete picture of this new reality of financial markets, we have spent the past few years studying high-frequency traders and their work in especially Chicago and New York. Doing research among the HFT tribe is challenging, not only because of its secretive nature, but also because the field is rapidly changing. Despite these challenges, we have been able to gather some valuable insights into the world of algorithmic finance – some of which we discuss in a new article entitled ‘High-frequency trader subjectivity: emotional attachment and discipline in an era of algorithms’, just published in Socio-Economic Review.
In our research, we focused on HFT as a workshop where traders and programmers develop, test, monitor, refine, and deploy their trading algorithms. Despite their project to take the human emotions out of trading, our research reveals a complex relationship between rational-scientific analysis and emotional commitments. Successful traders are those who can navigate this relationship between the algorithmic and the emotion.
The emotionality of HFT is revealed in the way traders become attached to their algorithms. Similar to many other types of work, high-frequency traders invest a lot of themselves in their algorithms. It is not uncommon for traders to describe their algorithms as extensions of themselves, as babies in need of constant care and attention. As a result, traders are inclined to let their algorithms run longer than is strictly rational – in the hope that, while seemingly ‘misbehaving’, their ‘babies’ will eventually straighten up and yield the expected profits. Traders’ emotional attachment to their algorithms is in stark contrast to HFT’s own self-understanding as a means of avoiding the dreaded ‘emotional interference’ in financial markets. However, our research has shown that human emotions do not disappear with HFT. Rather, high-frequency traders deal with their emotionality in novel ways.
One way is to emphasize a strictly scientific ethos, seeing themselves as researchers in a discovery process rather than ordinary traders with yet another new magic bullet (several of our interviewees have PhDs in physics, computer science, engineering, etc.). This emphasis on the scientific approach entails an emphasis on the need to be able to explain profit and losses. Our traders are not afraid of losses. Rather, they accept losses if they are explainable. Likewise, high-frequency traders are not content with random profits; they only want the kind of profits that follow strictly from their algorithmic strategies.
The scientific ethos of high-frequency traders is also revealed in their continual back-testing of algorithmic strategies against historical market data. The challenge they face here is not only to demonstrate that a particular algorithmic strategy was viable in a historical market data. It is to ascertain whether future market situations adequately reflect the past ones on which the strategy was tested, giving rise to what they refer to as the ‘Heisenberg uncertainty principle in finance’. It seems that intuition and a (humanly emotional) feel for the market are required in such circumstances, which contrasts with the high-frequency traders’ faith that algorithmic trading is purely rational.
Like all traders, high-frequency traders must deal with the scale and risk of their investments. If an algorithm proves successful, traders, and especially their managers, will often be inclined to put more money behind it. But traders realize that such scaling up increases risk exponentially. Consequently, and testifying to the continuing role of human emotions in finance, several of our interviewees cautioned against being too euphoric about profitable algorithmic strategies; like all successful market actors, they balanced their risk-taking by advising careful and incremental steps forward.
While the SEC was carrying out its approval process of IEX over the past several months, Ernst and Young, one of the world’s largest financial service firms, has been running an advertising campaign with the slogan ‘How human is your algorithm?’ We can answer in the words of the German philosopher Nietzsche: ‘Human, all too human’. While high-frequency traders strive to develop algorithms that appear scientific and rational, purged of human emotion, the daily work of high-frequency traders has more in common with Nietzsche’s dictum than with a computer program. HFT is also High-Feelings Trading.
August 24, 2016
In the previous post, Suhaib Riaz posed an important question, “how critically aware are we that finance is also on a mission to socialize us?” The post demonstrates an earnest effort at self-reflection. Such efforts are not nearly as common as one (I) would hope or expect from our various institutions of knowledge.
I come to social studies of finance by way of science and technology studies/ science and technology policy. I study the science and politics of insurance ratemaking including, the role of technological experts in the decision making process. So, truth be told, I am more familiar with policy scholars and climate scientists than the relevant scholars in organizational studies and management. But I generally learn quickly and I have found that a select few have made a journey similar to mine.
After reading Riaz’s post, I commented.
I likened the concerns expressed in the post to those regarding the politicization of science. As I have watched such politicization unfold and the impacts it has on society’s ability to cope and ameliorate its problems, I responded to Riaz’s post by urging collaboration and continuous self-reflection.
Just after my comment, as I was going through emails at the time, I learned that a notable American science policy scholar, Dan Sarewitz, published an eloquent essay geared towards ‘Saving Science’… mostly from itself. His work, indeed much of his work, aims to lift the veil from science by encouraging scientists and non-scientists to more critically consider the production of science and technology in the context of societal needs, hopes and fears.
I thought more deeply about Riaz’s concern.
Science, much like finance, has benefited and suffered from the myth that ‘unfettered’ production inevitably leads to societal benefit. In this way, one only needs to be armed with curiosity and all that results will be glorious.
A free scientific enterprise is a myth because it simply isn’t so, at least not anytime remotely recent. Government steps in often to offer a hand and establish rules of the playing field. Technology gives science applicability and in turn, drives certain areas of knowledge over others. In a myriad of ways, we see that societal benefit is not inevitable. Advancements in science and technology have resulted in new risks, severe inequalities, and challenges to our sense of morality.
Yet the myth acts to demarcate the boundary between society and scientists and insulate the institution of science from the critical lens of accountability. I dare say the myth has served economics and finance in much the same way.
When scientists believe their work occurs separate from the rest of everyone they have no choice but to be self-serving. I have met countless scientists who believe their work is not about politics. But, their scientific efforts support their worldview and their worldview supports their scientific efforts. In either direction the nexus is politics because the justification for inquiry is based on personal visions of what ought to be. There is always politics. I think that is ok. But one has to be aware of it, check in with the rest of society to see how it’s going and honestly consider the role one play’s in guiding the fate of others.
There is much for social studies of finance scholars to glean from the existing science policy literature from both sides of the Atlantic.
In the closing of his essay, Sarewitz notes the “tragic irony” of long standing efforts by the scientific community to shield itself from accountability to ideas and curiosities beyond itself thereby, resulting in a stagnant enterprise detached from the society it claims to serve. As a means forward, he encourages improved engagement between science and the “real world” as a means to stir innovation, advance social welfare, and temper ideology.
The same suggestion can be made to the world of finance and its growing cadre of prodding social scientists.
To be held on 3-4 November 2016 at City University London, UK
Recent years have seen a growth in innovative research on finance across the humanities and social sciences. Following on from the success of the ‘social studies of finance’ approach and the new literature on ‘financialisation’, scholars are taking up the challenge of theorising money and finance beyond the conceptual constraints of orthodox economic theory, with different research agendas emerging under various new monikers. This two-day conference aims to bring these approaches into closer dialogue. In particular, it seeks to identify new synergies between heterodox political economy and various sociological, historical, and philosophical perspectives on the intersections of finance and society.
The conference is organised by the journal Finance and Society (with support from the Department of International Politics at City University London), together with the Social Studies of Finance Network at the University of Sydney (with support from the Faculty of Arts and Social Sciences, University of Sydney).
Money, utopia, and dystopia – Nigel Dodd (London School of Economics)
Pricing the future – Elena Esposito (University of Modena-Reggio Emilia)
Financialisation and its discontents – Perry Mehrling (Columbia University)
Financial innovation and the meaninglessness of money – Anastasia Nesvetailova (City University London)
Finance and social theory
Lisa Adkins (University of Newcastle Australia)
Melinda Cooper (University of Sydney)
Yuval Millo (University of Leicester)
Finance and political economy
Dick Bryan (University of Sydney)
Marieke de Goede (University of Amsterdam)
Ronen Palan (City University London)
Themes on which we encourage contributions include
Money and/beyond language;
Performativity and affect in finance;
Finance and social theory;
Engaging orthodox economics and finance theory;
Central banking and shadow banking;
Historicity and futurity;
Gifts and debts;
Financial crises, past and present;
Finance and neoliberalism;
The politics of finance.
Contributions are invited in two formats
Papers; abstract of up to 300 words
Panels; panel proposal plus paper abstracts
Please submit abstracts and proposals by 8 August 2016 to both Amin Samman (email@example.com) and Martijn Konings (firstname.lastname@example.org).
The conference organisers aim to publish a selection of the papers as special issues in Finance and Society and other prominent peer-reviewed journals. Participants who would like to be considered for these should aim to submit a draft of an original paper by 1 October 2016.
We have limited funding, with priority given to graduate students. Please indicate in your email if you want to be considered for this.
Deadline extended to July 29th: Professional Development Workshop, Financial Markets and Organization, at AoM August 2016
July 26, 2016
Emilio Marti and I have extended the deadline for the Professional Development Workshop, “Financial Markets and Organization Theory” that we organizing. The event will take place on Aug 5, 14:15-15:45, in the “Newport Beach/Rancho Las Palmas” room at the Anaheim Marriott, seehttp://my.aom.org/Program2016/SessionDetails.aspx?sid=11641
Our workshop brings together organization theorists who work on financial markets. In Part 1, three scholars will talk about their work: Mary Benner on securities analysts, Paula Jarzabkowski on the reinsurance industry, and Marc Schneiberg on community banking. Part 1 is open to all participants and does not require pre-registration.
In Part 2 of the PDW, you can receive feedback on your work from the presenters and convenors. I would like to encourage you to send us your work. There are still places available and we have extended the submission deadline to July 29. If you are interested, please send an extended abstract or a short version of your paper (up to 3.000 words) to Daniel (D.Beunza@lse.ac.uk).
I hope to see you in Anaheim!
July 24, 2016
Academy of Management PDW: Social Practice Theory: Uncovering Large-Scale,
Systemic Risks in Financial Markets
Date/time: Saturday 6th August between 4:15-6:15pm; California D (Room), Hilton Hotel.
This Professional Development Workshop (PDW) will take forward debates about the value of sociological approaches generally and a social practice theory approach specifically to studying financial markets. The goal is to show how and why practice theoretical approaches can uncover and shed new light on issues in financial markets, for instance how they trade and manage risk. It explores the inherent risks, such as weaknesses arising from global connectivity and a reliance on industry-standards such as ‘models’, within financial markets.
Part one of the PDW focuses on advancing this research agenda through presentations from leading scholars who advocate diverse but complementary theoretical perspectives that, together, develop a compelling picture of the power of sociological approaches to explain large-scale phenomena such as the practice of markets. Part two of the PDW will involve round-table discussions followed by a concluding panel in which the emerging discussions will be woven together.
Rebecca Bednarek, Birkbeck, University of London
Paula Jarzabkowski, Cass Business School, City University London
Paul Spee, University of Queensland
Panel of Leading Scholars:
Paula Jarzabkowski, Cass Business School
Davide Nicolini, Warwick Business School
Hugh Willmott, Cass Business School
Daniel Beunza, LSE
Financial Markets and Organization Theory: Professional Development Workshop at the 2016 Academy of Management
June 13, 2016
Emilio Marti and I are organizing a professional development workshop for organization theorists interested in financial markets.
The event has two parts. In Part 1, three senior scholars of finance and management will talk about their work: Mary Benner on securities analysts, Paula Jarzabkowski on the reinsurance industry, and Marc Schneiberg on community banking. Part 1 is open to all participants and does not require pre-registration.
In Part 2 of the PDW, you can receive feedback on your work from the presenters and convenors. To participate in Part 2, please send an extended abstract or a short version of your paper (up to 3.000 words) to Daniel Beunza (D.Beunza@lse.ac.uk) and Emilio Marti (email@example.com). The submission deadline is July 15, 2016.
When: Friday, Aug 5, 14:15-15:45 (Part 1: 14:15-15:10, Part 2: 15:15-15:45)
Where: Room “Newport Beach/Rancho Las Palmas” at the Anaheim Marriott
Sponsors: OMT, CMS, and SIM
We will also be hosting an informal “OMT coffee” session on that same day at 5:00 pm, at the NFUSE bar in the Anaheim Marriott. Open to everyone.
Hope to see you there!
Further information: http://my.aom.org/Program2016/SessionDetails.aspx?sid=11641
Full description:2016-01-06 Finance and Organization Theory PDW description