Monthly Archives: June 2019

Episode 9. Finding prices, making prices

What’s in a price? This episode sets out to answer that question, via Joseph Wright’s Experiment on a Bird in a Pump, the construction of the London interbank lending rate, and some ruminations on the nature of fact. As for why it matters, we visit 80’s London for a tale of greed, sausages and a salmon pink Bentley. This is the end of the first part of the podcast. Episodes will restart in September.


There’s a picture hanging in London’s National Gallery called An Experiment on a Bird in a Pump. Painted by Joseph Wright of Derby in 1768, it’s extraordinary. It shines. I try to creep up on it, so as to take its figures by surprise. They are not bothered about me, for they are watching the experiment. Near the centre of the canvass there is a glass jar. It contains a parakeet, whose life is being brought to a premature and unpleasant end by the extraction of air from the chamber. Light spills out of the painting, catching the faces of the onlookers in movement; you can’t quite see the source for it is obscured by what appears to be a brain in a jar of liquid. Two young men watch the experiment earnestly. A young couple to the left of the painting have little interest in the wretched bird. A man, an enthusiast, wild haired, wrapped in a red dressing gown and a shirt open at the neck, is pointing to the jar and declaiming to the watching boys. His right hand hovers above the brass mechanism and winding handle of the air pump, a precision instrument of its time, set in a heavy, carved, wooden frame. Two young girls are visibly upset by the suffering. One covers her eyes with her hand, while the other clutches her sister’s gown for support. Another man comforts the girls. He is speaking and pointing to the bird. You can imagine him saying: ‘Come now, this is science. Put away your childish sorrow and take heed of our remarkable demonstration.’ Another boy, his face a mixture of malice and sorrow is shutting up the birdcage hanging from the ceiling, while, to the far right of the picture an older man rests his chin on his walking stick and stares at the apparatus with an unfocused, pensive gaze. Stepping back from the painting one can see the trappings of wealth: the rich finery of the clothes, the polished wood furniture and expensive apparatus, the heavy fresco plasterwork of a doorway in the background. The moon shines pale through a large sash window. It is a country house spectacle. These details are hidden in the half-darkness, away from the extraordinary chiaroscuro Wright achieves with the lamplight.

Compare this to another of Wright’s masterpieces, the Alchemist in Search of the Philosopher’s Stone. Again, the canvas is lit by light emanating from a glass vessel and the light catches faces in movement. But the setting is utterly different. The light, much hotter and brighter than the gentle lamp of the country house, boils out of a glass vessel held on a tripod, its stem bound tightly into a metal pipe running into a peeling brickwork chimney. It illuminates a room that resembles a church with Gothic arches built with plain stone; in the background the moon shines this time through a mullioned Gothic window. A man kneels by the vessel. He is old, grey haired, with a thick long beard, dressed like a hermit. His gaze is directed at the ceiling, so that his face, illuminated from below appears in an attitude of prayer. He is surrounded by the junk of alchemy, pots, vases, scrolls and a globe. Behind him there is some kind of writing table and two surly faced boys are chatting and pointing at the kneeling man. The sole, incongruent trace of modernity is a clock shown clearly in the middle of the picture.

Wright may well have seen these paintings as reflections of the same activity, the advance of science and progress, literally illuminating and metaphorically enlightening. But his two very different visions of scientific activity not only record the birth of modern experimental science but also give us a metaphor that helps us understand the practice of finance. On the one hand we see the entrepreneur discovering prices through a solitary process of experimentation in the market, groping in the dark for the light of price efficiency; on the other the gentlemanly, public spectacle of experimentation with its accompanying materiality and sociality – instrumentation, expertise, and collective agreement about the outcome. To be crude, the first is an economic conception, the second a sociological one. And we can use this metaphor to help us answer a question that has been vexing us since the outset: what’s in a price, and why does it matter?

Hello, and welcome to How to Build a Stock Exchange. My name is Philip Roscoe, and I teach and research at the University of St Andrews in Scotland. I am a sociologist interested in the world of finance and I want to build a stock exchange. Why? Because, when it comes to finance, what we have just isn’t good enough. To build something – to make something better – you need to understand how it works. Sometimes that means taking it to pieces, and that’s exactly what we’ll be doing in this podcast. I’ll be asking: what makes financial markets work? What is in a price, and why does it matter? How did finance become so important? And who invented unicorns?

We’ve covered a lot of ground in these last eight episodes, so let’s recap and try and pull some of the threads together. We’ve seen how stock exchanges developed through a mixture of historical happenstance, technological and economic innovation and political change. Exchanges are the central hubs of financial markets, and in my phrasing a synecdoche for them too. We saw how the birth of Chicago as a centre for agricultural trade, a phenomenon driven by advances in transport and communications, gave rise to The Board of Trade. Founded in 1848, that swiftly developed a market in agricultural derivatives. It was only later, as a result of commercial rivalry, that the legality of derivatives was settled in the Supreme Court and regulation caught up with the new market. The telegraph and ticker machine not only transformed the reach of the exchange but also bought regular time to the market and made possible new kinds of opportunity for profit, or indeed loss. We saw how London’s exchange grew from a commercial opportunity created by the government’s need to borrow from citizens to wage wars and its decision to make those borrowings liquid by recirculating them through the early joint-stock companies, notably the Bank of England and the East India Company. The wealthier jobbers, as the traders were known, purchased a building to house the dealing and charged their peers for access. There’s the beginning of the venerable London Stock Exchange; we can understand a great deal about how markets are shaped if we see them as venues where those at the top are continually stamping on the heads of those at the bottom. We took a detour to explore what stock exchanges could be doing, following hapless Sixtus and his efforts to set up a brokerage funding small companies. We then explored the social glue that binds stock exchanges together, the rules and rituals of the pre-digital London Stock Exchange, and how this was torn apart by the innovations of the 1980s: a global shift in political-economic contract from collective economic responsibility to individual self-help; the rise of new kinds of financial alchemy that turned the likes of you and me into subjects of financial interest; and the process of digitisation that provided the infrastructure to support this extraordinary expansion in the scale and scope of financial exchanges. As the stories have developed we have begun to understand that none of this was planned. Even the intellectual advocates of free market theory, who may claim to have made a meaningful contribution to the evolution of markets, began life as fringe figures until they were swept along by tide of global political-economic change and technological advance.


Think of those paintings again. The alchemist, pursuing his solitary work in the lab, happening by accident on the magical luminescence of phosphorus – by boiling urine, apparently – is roughly how finance thinks it works. Heroic traders, those shouting young men, the stuff of Tom Wolfe or Michael Lewis, or the desk trader taking a massive loss and casually puking in a bin before turning back to the screen – these are solitary figures pitting their wits against the market’s noise in pursuit of that distant, perfect price. (The sick in the bin anecdote comes from leading sociologist Donald MacKenzie, and I should say as always that full references are in the transcript on the podcast website)[2]. What about the other one? What is going on here, at least beyond the obvious, that a parakeet is coming to a miserable end in the name of progress. At the centre of the painting is an experiment, a public demonstration in which the laws of nature are temporarily suspended to effect a particular outcome. The experiment is structured and predictable. We know what will happen to the bird, and a demonstration proves a certain theory. It is a piece of theatre, combining the very latest in technology and knowledge to demonstrate a fact. That’s the theory, anyway. The truth is messier. Though it seems rudimentary to us, the air pump was cutting-edge in the mid-18th century; these pumps misbehaved, and in reality the outcome was not as predictable as all that. Ask any experimental scientist about the day-to-day practicalities of working in the laboratory and you will hear stories of knocked benches and malfunctioning equipment. The complex instruments of contemporary big science have personalities all of their own, and whole careers can be spent tending them. Experimental science is a messy, prolonged process; if not a country house entertainment, it’s a theatre of kinds, a spectacle of proof that’s ratified among learned professors at conferences and in the pages of academic journals.[3]

So it is with finance. It’s collective activity, the preserve if not of gentlefolk, certainly the well-educated, affluent, the social elite. It’s chaotic. Not everyone agrees on the outcome, and the process of testing and experimentation flows on as the markets follow the sun around the globe. Financiers, like scientists, debate: they meet in luxury hotels – the 21st-century equivalent of the country house – to settle the arguments, developing new kinds of practice and new ways of making money.

We can push the comparison further. Sociologists of science have argued that scientific facts are assembled in networks of instrumentation, of practice, of social relationships and institutional hierarchies. If you ask what’s in a fact, they will answer, ‘all of these things’. Facts are not lying around, partially invisible, waiting to be discovered but are assembled laboriously through the efforts of scientific specialists; they are fragile, held in place by those same efforts mechanisms, and political inasmuch as there is a politics to the production of science, as there is any institutional activity. This is not to say that facts are any less factual. If we are aware of the laborious rigour that surrounds their production we will take them all the more seriously: opinions and facts are not the same thing, precisely because of the very great difficulties involved in assembling facts. Bruno Latour, another great sociologist of science, has long urged climate change scientists to show their instrumentation, to make clear the price they must pay to be scientists. But after a while facts become naturalised, settled, domesticated. They are taken for granted, and the arduous circumstances of their production left behind. Such a process is necessary if science is ever to move forward or we would be forever reinventing our most basic findings. Facts become, Latour’s words, “black boxed”, often in instruments that simply make these earlier findings routine and invisible. It is only when things go wrong that we reopen and re-examine the content of these boxes.[4]

—-cash register—-[5]

So it is with prices. The price of your pension portfolio or mortgage is an obdurately real affair, and to understand that prices are made is not to somehow lessen their status. But prices, like facts, are assembled through demonstration, instrumentation, sociality and expertise. What then is in a price? Everything: the wires, screens, the telegraph or tickertape, the social rituals that bind exchanges together, the modes of calculation, the most innovative practices and knowledge of market participants, market regulation and vigorous lobbying, global political-economic shifts. All these things are rendered down into a vast collective agreement as to what something is worth. Rendered down and held in place for a day, a year, or a microsecond, before a new settlement emerges, and with it a new price. And it’s important to recognise the socio-material configurations of prices because we can start to see how changes in those social material arrangements can have an effect on prices, and in doing that to tell a story that is more subtle than the linear tale of technological improvement beloved of the financial economist.

Take LIBOR, for example. That’s the London Interbank Offered Rate, a daily calculation of the basic cost of borrowing money. Donald MacKenzie, who has researched it in detail, believes that LIBOR is interesting because it is so thoroughly black boxed, so completely regarded as a basic natural fact of the financial universe.[6]

Banks lend each other money all the time. This ‘interbank market’ is conducted through broker intermediaries, who deal with the bank clients. These are ‘voice brokers’, connected to their clients and their counterparties through complicated intercoms called voice boxes. “A bank’s dealer who wishes to place or to receive an interbank deposit,” writes MacKenzie, “will use his or her voicebox to tell a broker, who will then do one of three things: use his or her voicebox to try and find a counterparty; shout out the order to his or her colleagues; or ask a board boy (as they are still called) to write the order on one of the large whiteboards that surround the broker’s desks”.[7] A network of screens supplies current buy and sell prices for debt, and dealers are skilled at inferring the likely cost of borrowing across a range of risk and risk tolerance. So that’s how the market works. How then is LIBOR calculated? Well, in a highly routinized daily fixing, the LIBOR office asks the bankers how much money costs. Once a day, by 11:10am, representatives of 16 selected banks phone an office in the Docklands, passing on their best estimate of how much it would cost to borrow money. Sometimes, says MacKenzie, they forget and the office calls them. Their suggestions are sorted in order, the top and bottom quartiles ignored, and the mean of the second and third quartiles is published at 11:45am as the British bankers Association LIBOR. The process is is all very rule of thumb but it is also, as MacKenzie points out, sociologically robust. The banks’ inputs are made public and subject to scrutiny, while excluding the top and bottom quartiles makes wildcard or overly aggressive suggestions redundant. It would take a concerted effort to distort LIBOR, although a series of revelations in 2012 suggested that exactly such a thing had taken place, leading to a regulatory overhaul of the system, hefty fines, the resignation of a global banking CEO and the conviction of one trader.

This simple calculation, routine and forgotten by 11.46am each morning, serves as the basis for a whole superstructure of additional financial transactions: according to Wikipedia, some $350 trillion of derivatives are indexed to the number. “The importance of the calculation,” writes MacKenzie, “is reflected in the arrangements if a terrorist incident or other event disrupt the office in which I witnessed it. Nearby, a similarly equipped office building is kept in constant readiness; dedicated lines have been laid into the homes of those responsible for the calculation; a permanently staffed backup site, over 250 km away, can also calculate LIBOR.” Although LIBOR is thoroughly black boxed, the circumstances of its production rendered invisible, those circumstances remain important enough to demand not one but two replacement facilities for the case of emergency.

LIBOR is a price, and it contains the state of all information about the demand and supply of global credit. Let’s think of it through the analogy provided by those pictures. It is talked about – and used – as if it had been discovered by experiment, a natural artefact surfaced by the curiosity of financial man. This is – metaphorically speaking – the alchemist kneeling before his boiling pot. And this view, I think, explains the outrage directed at the participants in the rigging scandal; a sense that some kind of epistemological wrong had been perpetrated, that the natural order of things had been interfered with. When MacKenzie explains its construction, however, we can see that the process is more like the public spectacle of the bird and the air pump. It draws in the material architectures of credit brokers with their voice boxes and whiteboards; the judgement of expert traders as to what they might be able to borrow and at what price; regular calculative practices kept clean by the daylight of transparency and the threat of reputational damage; and at the highest level, a sharp politics of inclusion and exclusion determining who is able to contribute to the fixing and who is not. It is a messy process, contested and unsettled. Rival standards come and go, scandals break out. It is also exclusive, secretive, and hidden: financial facts, like any others, remain the domain of those expert and qualified enough to deal with them. In recent years citizen participation in science has been very much in the agenda: perhaps we should have citizen finance too.


It seems that some prices are better than others. But how can we tell? I’d like to finish with a cautionary tale, to show the kind of things that happen when we forget to check the instrumentation properly. It shows something else about prices – how they act as pivots through which forces of politics and contestation might flow, from richer to poorer, better placed and better informed to less so, insider to outsider. The most outside of outsiders are, in the words of one character in Scorsese’s Wolf of Wall Street, ‘Schmucks, mostly. Schmucks and postmen. There’s always postmen’.

In the early 1980s the British public became aware of a stockbroker-dealer, with the reassuringly classy moniker Harvard Securities. Harvard was run by a celebrity stockbroker named Tom Wilmot, who became a household name in 1985 after publishing a bestselling introductory guide to the UK’s over the counter markets. The OTC markets, not dissimilar to those occupied by Jordan Belfort, the Wolf of Wall Street himself, were Harvard’s hunting ground. According to the book, Harvard acted in ‘dual-capacity’, dealing in what Wilmot happily described as ‘speculative share issues’. Harvard Securities not only sold stock to the newly propertied Sids of the mid 1980s but also made the market in those stocks, benefitting from whatever spreads it happened to charge. It was better informed, better capitalised, and better staffed than those who purchased its shares; yet Harvard itself was opaque, and the spectacle of public proof very much absent from its dealings.

The firm had been founded in 1973 by a Canadian named Mortie Glickman; Wilmot, who knew a dodgy name when he saw one, refers to him in the book as Mr M.J. Glickman. It later emerged that Mortie Glickman had what journalists call a ‘colourful background’. Working with a man named Irving Kott, he had set up a broker named Forget in Montréal. It made a living employing high-pressure telephone sales to push stocks in dodgy Canadian companies onto European investors; much of the work was done through a Frankfurt-based operation, also set up by Kott and Glickman. The recipe was simple and involved buying a stake in the firm at a very low price and selling it on to investors at an inflated one. Forget was suspended by the Quebec Securities Commission in March 1973 and promptly went bust. Eventually, the Canadian authorities prosecuted Kott – but not Glickman – for fraud. He was convicted of issuing a false prospectus for shares sold through the Frankfurt firm. In other words, the shares he sold had slipped from real (but worthless) to imaginary (and still worthless). He had crossed a legal line, not that this would have made much practical difference to anyone who bought stocks from Forget.

Wilmot worked with Glickman as directors of Harvard Securities from 1975 until the latter stepped down in 1985. We might speculate that he learned his tricks during that first decade. ‘Tom was the biggest rogue of the lot,’ says one old Exchange hand, ‘and while Tom was dealing instructions to his dealers were, ‘Don’t buy anything, you are only a seller’’. Of course, a market with no buyers would look suspiciously quiet. Indeed, it wouldn’t be a market at all. But the ingenious Wilmot had a solution to this. In his book, he boasts that Harvard securities was taking the lead in making information on the over-the-counter market more widely available, paying the Evening Standard and Daily Telegraph – among others – to carry lists of stock prices. These ‘prices’ were, allegedly, not actual prices resulting from stock trades, but indicative ‘basis prices’ made – made up – by his own office. ‘Just to convince people it was all right,’ says the jobber, ‘he would put out his list of stocks, not many of them, 20 or 30 and he would move them up 1p a day, down 1p a day. And then he would move them 2p a day…People thought that it was all right but in fact they had bought a load of rubbish.’

In the early days Harvard Securities sold lines of American stock that could not be disposed of at home due to the SEC rules, then moved in the late 1970s to promoting its own offerings. It was busy during the boom years of the 1980s and bought a succession of companies to the markets. Some of these, notably Hard Rock Cafe and Park Hall Leisure, moved on to the main markets and became household names. The press reported that Harvard gained 20,000 new investors through the BT flotation in 1984, and Harvard claimed to already have 45,000 names in his database by that time. In a perfect echo of Jordan Belfort’s tactics, inexperienced investors who had made safe gains on a reputable issue – whether government stock or a famous leisure name like Hard Rock Cafe – then became the targets of aggressive telephone sales that exploited goodwill from the initial successful dealings. At the peak of the boom, turnover reached £200 million.


Wilmot bought a salmon-pink turbocharged Bentley. His investors didn’t do so well. Many of the companies Harvard introduced simply went bust. Wilmot shrugged this off. ‘From the onset,’ he said, ‘we have told clients that for every 10 companies in which they invest, two or three would fail in business within a two-year to three-year period; three or four would perform reasonably well; while three or four should perform spectacularly.’ These are numbers that might appeal to angel investors, wealthy, sophisticated business folk who know exactly what they are doing, the kind of odds quoted by Sixtus. The investors Wilmot targeted were not those who could stand risks like this – and the real risks turned out to be far, far higher.

Wilmot’s book was published in 1985, and made him into a minor celebrity among the investing public. He was a larger-than-life character. A big man, some 17 stone by accounts, he ran through staff quickly. At one point he was changing secretaries once a week: a colleague, quoted in The Times, remarked acidly that Wilmot ‘likes them to be pretty, to be a hostess and to do instantaneous work – it’s a difficult job’. He moved into an eight bedroom house, a 1930s affair designed by Bauhaus architect Walter Gropius. And anyone who had seen Wilmot arriving at the offices in his spanking new pink limousine might have called the height of the boom, but once again he had an answer: the man who always told investors to be wary of a company if its chairman drove a Rolls simply pointed out that his machine was a Bentley.

In 1984 Harvard Securities raised £2.1 million through a public offering, valuing the company at nearly £5 million, and listing its shares on its own market. The money was, he claimed, intended to develop the firm’s market-making activities and create a war chest for investing in early-stage firms that were not quite ready for the over-the-counter but with promising prospects. Forget’s business model suggested that, in practice, the cash would be used for buying ‘founder’ shares at an early stage that could then be resold to investors at a huge profit. The offer had the side-effect of making Tom Wilmot, who owned 37% of the firm, a paper millionaire – a very secure one too, as his salesmen controlled the price of that paper.

But wealth isn’t everything. I’ve made clear throughout these episodes that finance is a club, a gated community, and Wilmot wanted to be on the inside. Perhaps he wanted respectability, or perhaps he cynically understood that the validity of his prices depended greatly upon his membership of class of experts allowed to construct such things. It doesn’t really matter.

In 1986, Harvard announced its intention to apply for Stock Exchange membership. Soon, however, the over-the-counter practitioners committee, of which Harvard Securities was a prominent member, suggested that the licensed dealers would do better to launch their own regulated exchange. ‘It is not’, said Wilmot, ‘in the interests of the industry for the Stock Exchange to control the OTC’. These plans seemed to come to nothing. Then, in April 1987, Mortie Glickman sold the remainder of his stake to David Wickins, a reputable businessman and founder of British Car Auction Group, in return for a £1 million investment. This deal fuelled speculation that Wilmot would step back from the company and that Wickins would become the new chairman; Wickins hoped to end the practice of cold calling customers and instead re-brand the firm as a specialist corporate financier focused on growing companies. But these talks broke down in August 1987. At the same time, the London Stock Exchange refused to accept Harvard Securities as a member and effectively blackballed Wilmot. Shut out by the financial establishment, Wilmot tried and failed to find a buyer for his own stake in the firm.

—– Thunder —–[8]

In the last few episodes I’ve discussed the changes that overtook finance throughout the 1980s. They took place, of course, against a backdrop of a roaring bull market with stock prices heading steadily towards the sky. But markets can go down as well as up, and in October 1987 they did just that. The warning signs came from New York. Shares began to slide on Wednesday 14 October. On Thursday the slippage worsened. Overpriced shares were knocked by fears of interest rate increases and it is widely thought that computers programmed to trade at certain levels – for example, if the market falls by a certain amount – exacerbated the fall by causing a self-reinforcing feedback loop of selling and collapsing prices.

When Wall Street sneezes, the saying goes, the rest of the world catches a cold, and one might have expected panic in London on Friday. But nothing happened. During Thursday night, while New York’s traders had been piling on the sell orders, the south-east of England had been hit by the most savage storm in a century. Eighteen people died as walls collapsed and trees were uprooted, falling through buildings and onto cars. The hurricane shredded power lines and blocked railways, wrecking the capital’s infrastructure. London’s financial markets never opened that Friday morning. Many could not get to work, and those who did found power cuts and darkened screens. The Stock Exchange did manage to get its screens running by lunchtime, showing a rudimentary service, but there was hardly anyone in the office to deal. Those that did were busy short-selling insurance companies as quickly as they could, or picking up stock in the young and hungry do-it-yourself retailer B&Q which announced that sales of chainsaws and wheelbarrows were healthy and that its stores would be open all weekend. Those who did make it into the office left as soon as they could, and the half-hearted trading session finished at roughly two o’clock in the afternoon, just before the American markets opened.

So London, for once, was not paying much attention to the goings-on at Wall Street. On the other side of the Atlantic, things were not good at all. Friday 16 October was a bleak day for the American stock exchange: three hundred and forty-three million shares changed hands, more volume than any day previously, and the Dow Jones index fell by 4.6%. Traders were worried about interest rates and the long-term economic output; more and more, they were just plain worried, for this had been the worst week that Wall Street had ever seen. Then came the weekend, a queasy quiet before Monday’s market opening.

London opened before New York. Traders, shaken by Friday’s events, both meteorological and financial, tried to pre-empt heavy selling by marking prices down even before the market had opened. To no avail. Phones rang and rang, traders panicked and computer screens struggled. The London Stock Exchange was obliged to post a ‘fast market notice’ on its price screens to show that screen prices might be wildly different from those actually available from a broker; the fundamental basis of screen-based dealing, that the screen’s prices would be honoured, had been smashed by the sheer volume of sales. During the course of the day London lost twelve percent of its value, roughly fifty billion pounds worth of assets evaporating in a few hours. Newspapers used the words bloodbath, panic, meltdown, and even Armageddon. Black Monday, 19 October 1987, smashed the record for the previous largest single-day fall. Panic spread. The Australian Stock Exchange lost twenty percent of its value in the first few minutes of trading and the Tokyo exchange fell 11 percent. It was a catastrophic day. It wasn’t just the professional traders who were burned, but also the legions of newly-minted private investors. In Oxford Street, the Debenhams department store contained a small investors’ boutique run by the fledgling private client broker The Share Centre. The Guardian newspaper records a crowd of individuals seeking to rescue some value from their ruined portfolios, and a total inability to transact in the market: ‘“Just do the deals,” said Share Centre manager, Jackie Mitchell, a former filing clerk. “Can’t do the bloody deals, and they won’t answer the phone,” came the voice down the intercom.’[9]

There’s something else in prices: emotion. Sometimes greed and sometimes fear. There is a huge literature of behavioural finance exploring such things, but I don’t want to spend much time on it partly because others have, and partly because I think it misses the real story.[10] Stock markets are remarkably robust, anchored in all these years of history and practice, all these organisational architectures. Black Monday and the weeks following it did not destroy the markets; John Jenkins and his crew may have lost £10 million on Monday as they struggled with computers that couldn’t keep up with changing prices (the material again!) but they were trading again on Tuesday and Wednesday, nimble, surefooted, making money. Prices keep on being made, even if those making them don’t care for the direction of travel.

Harvard Securities, on the other hand, was not sociologically robust. Investors suddenly began asking for their money back, and when it became clear that the broker who had sold shares was unwilling to buy them again they wrote to the DTI and complained. Harvard laid off staff and in February 1988 reported a loss of £2.5 million for the first quarter. Its auditors qualified the accounts: it wasn’t clear, with the Financial Services Act looming, whether the business could continue in any form if it couldn’t secure regulatory oversight. In the summer of 1987, a formal motion was raised in the House of Commons by the Labour MP for Workington, one Dale Campbell-Saviours, advising investors to pull out of Harvard Securities. Campbell-Saviours was emerging as an unlikely champion of those investors who had been sold stock by the firm. He prodded the DTI to investigate and asked the shadow secretary for industry – a little known politician named Tony Blair – to take up the cause. Wilmot dismissed these allegations, saying that investors who had made a profit did not write to the DTI. Though there was an embarrassment of riches as far as potential misdemeanour was concerned, investigators focused on a film distributor called VTC; the dealers had sold on £132,000 of stock by promising buyers exciting figures and a significant increase in profitability – while VTC itself was supplying accounts predicting a £1.1 million loss. Campbell-Saviours also noted to the House that Harvard’s salesmen had been instructed to avoid repurchasing stock in distressed companies. It later emerged that dealers earned double commission for selling over-the-counter stocks to investors but had their commission docked should they repurchase any from a client who wish to sell.

In September 1988 Harvard Securities shut its doors, and an estimated £20 million of investors’ money disappeared.  It had failed to gain recognition from any of the five potential regulators. Approximately 3000 investors had written to the DTI; many had been sold Harvard’s own stock and lost their money here too as the firm finished with final year losses of £7 million. Those who did try to liquidate their holdings its final few days found that the market-maker was unwilling to repurchase stock; Harvard told investors that it had moved to trading on a matched basis and of course there were no buyers to be seen.

—–market traders—–[11]

Wilmot moved on. You can’t keep a good man down, and City gossip columns gleefully followed the progress of his new firm, a sausage company. The pink Bentley doubled as the firm’s van, sausages heaped on the back seat and a refrigerator jammed in the boot. When deliveries were too far away Wilmot delegated driving to his chauffeur, who also seemed to act as personal assistant, fielding calls from journalists. Perhaps this doubling up was a sign of straightened times. If so, it was the only one and Wilmot was soon abroad and embroiled in a lengthy dispute with the taxman. Wilmot’s son Christopher even joined the sausage business, leaving one commentator to speculate that he might learn some bad habits from his father. The commentator showed some prescience: In August 2011 Wilmot and his two sons were jailed for a total of 19 years for operating a ‘boiler room’ scam on an enormous scale.[12] This enterprise was more of the same as far as Wilmot’s prior history was concerned, just bigger. The scammers controlled 16 offices stretching across Europe – Christopher ran the IT operation from Slovakia, for example – and during five years of operation they relieved members of the public of some £27 million, £14 million of which was never seen again.

So what can we say about all this? Prices matter, and some are obviously better than others. But they’re not better because they are more right, a more accurate reflection of some externally existing financial reality. They are better because they are better made, more carefully crafted, because the artisan who shapes them cares about their production. Harvard Securities shows what happens when we take our eye of this process. It’s a crass example, but when we come to the global credit crisis we will find the same problem underpinned it. Those who made prices gave up caring whether they were good or bad and we citizen scientists failed to apprehend this. The Queen famously asked the economists why no one saw the crash coming. They blustered about probabilities and distributions, but the real answer is somewhat different: they were simply not sociological enough.

I’m Philip Roscoe, and you’ve been listening to How to Build a Stock Exchange. If you’ve enjoyed this episode, please share it. If you’d like to get in touch and join the conversation, you can find me on Twitter @philip_roscoe or email me on I’ve come to the end of this section of the podcast and I’ve said pretty much everything I can about the materials of the market. I’ll be taking a break over the Summer. Who knew podcasting would be such hard work? But join me again in September, when we’ll continue in our quest to find out how to build a stock exchange.


[1] Sound recording from

[2] Donald MacKenzie and Juan Pablo Pardo-Guerra, “Insurgent Capitalism: Island, Bricolage and the Re-Making of Finance,” Economy and Society 43, no. 2 (2014).

[3] There is a huge literature here, but see, for example Karin Knorr Cetina, Epistemic Cultures (Cambridge, Massachusetts: Harvard University Press, 1999); Bruno Latour, Pandora’s Hope (Cambridge, Massachusetts: Harvard University Press, 1999); ———, Facing Gaia: Eight Lectures on the New Climatic Regime (John Wiley & Sons, 2017); Andrew Pickering, ed. Science as Practice and Culture (Chicago: University of Chicago Press, 1992).

[4] Bruno Latour, Reassembling the Social: An Introduction to Actor-Network-Theory (New Edition), Clarendon Lectures in Management Studies (Oxford: Oxford University Press, 2007).

[5] Sound recording from

[6] The following relies on MacKenzie’s account, see especially Material Markets: How Economic Agents Are Constructed (Oxford: Oxford University Press, 2009).

[7] Ibid., 80.

[8] Sound recording from

[9] The Guardian, October 21, 1987. ‘Darkening clouds as the little yuppies go to market’, Edward Vulliamy

[10] An excellent introduction is George A Akerlov and RJ Shiller, Animal Spirits (Princeton and Oxford: Princeton University Press, 2009).

[11] Sound recording from

[12] A boiler room is simply an operation pressure selling worthless or imaginary stock to private investors, and for some reason they are often based in southern Spain.

Episode 8. Wires!

Modern stock exchanges couldn’t exist without wires. They are virtual, global, infinitely expanding. Their trading floors are humming servers. But no one ever planned this transformation, and it took many by surprise. This episode explores the long processes of automation throughout the second half of the twentieth century. We hear about engineers, screens, and how technology created a new stock exchange almost by accident.


Let’s take a walk through a stock exchange. In the 1980s, it would have sounded like this…

—– trading pit —–[1]

That’s a trading pit, with the bell sounding, bodies crammed together, pushing, shouting. We have heard it a few times by now. In the late 1980s, when Tom Wolfe visited the trading room of Pierce & Pierce, he still found a terrible noise, ‘an ungodly roar, like the roar of a mob…an oppressive space with a ferocious glare, writhing silhouettes…moving about in an agitated manner and sweating early in the morning and shouting, which created the roar. It was’, he writes, ‘the sound of well-educated young white men baying for money on the bond market.’ But the market is only partly in this trading room, it is outside, absent, on the screens. And if you walk through a stock exchange today, it would sound like this…

——– ‘singing servers’—–[2]

Isn’t that eerie? The sound of servers in a data centre, chattering to one another. A beautiful recording, too. These changing sounds are the background to the story in today’s episode, that of automation, the transformation from spoken markets to those of near instantaneous speed, a transformation that has made possible an increase in the volume and scale of financial transactions to a level that would have been simply inconceivable 30 years ago. Economists delight in pointing out how technological improvements in financial markets lead to socially beneficial outcomes through facilitating liquidity and choice. That argument, however, supposes that changing the medium of trade has no consequences other than making it easier. By now, we know this cannot be the case: throughout the first part of this podcast we have seen how the shape, function and purpose of financial markets are every bit as dependent upon their material structures as on regulatory regimes and global political-economic conditions. Through the 1980s and 1990s, automation turned stock exchanges inside out. That is today’s story – even if we don’t make it all the way into the cloud in one episode.

Hello, and welcome to How to Build a Stock Exchange. My name is Philip Roscoe, and I teach and research at the University of St Andrews in Scotland. I am a sociologist interested in the world of finance and I want to build a stock exchange. Why? Because, when it comes to finance, what we have just isn’t good enough. To build something – to make something better – you need to understand how it works. Sometimes that means taking it to pieces, and that’s exactly what we’ll be doing in this podcast. I’ll be asking: what makes financial markets work? What is in a price, and why does it matter? How did finance become so important? And who invented unicorns?

The last two episodes have focused on the upheavals felt in the world of finance during the 1980s, the decade when greed became good. We saw, in episode six, how shifts in the tectonic plates of global economic governance and the intellectual fashions around ownership and collective versus individual responsibility had led to the birth of a new kind of social contract, the individualism of Thatcherism and Reaganomics. We saw how – in the UK at least – that manifested itself in a new kind of investor, Sid, the archetypal blue-collar worker turned property owner who bought into the newly privatised industries and could consider himself a member of the rentier classes. In episode seven I explored the new deals imagined by those working on the cutting edge of finance – the invention of elaborate investment bonds fashioned from home mortgage repayments, and the leveraged buyout beloved of corporate raiders and asset strippers. This was when you forced your target to borrow money to buy itself, tore it to pieces and sold them off to pay the debt, and kept yourself a handsome profit in the process. You justified your actions by claiming that you were returning value to oppressed and voiceless shareholders, whom managers had apparently been robbing for years. But none of this would have been possible without steady, mundane, and often barely noticeable changes in the technological infrastructures of the stock exchange.

Of course, these changes were not always invisible. Some came with a big bang, as on  Monday 27 October, 1986, when London’s markets finally went electronic. You may recall that regulatory changes put in place with Big Bang saw the end of single capacity trading and the role of the jobber, the end of fixed commissions and the liberalisation of ownership rules. The fourth and final plank of the Big Bang reforms was the London Stock Exchange’s decision to replace spoken trading with a distributed, screen-based system called SEAQ – S –E-A-Q. Market-makers – who replaced jobbers and were able to deal for clients and on their own account – published ‘two way’ buy and sell prices over the screens.

The best prices for any security were highlighted by a yellow strip at the top of the screen and a broker who wished to deal would call the market maker on the telephone and strike a bargain. London had borrowed this distributed-trading model from NASDAQ: even the name showed a debt of gratitude, the Stock Exchange Automatic Quotation, echoing National Association of Securities Dealers Automatic Quotation. The new system looked so like the American over-the-counter market that the New York Stock Exchange put itself in a perilous political position by banning its members from trading on the London Stock Exchange, just as they were banned from NASDAQ. A week later New York retracted, a spokesman conceding that, ‘If the British Parliament says it is an Exchange, that’s good enough for the Big Board.’[3] (I should say, as always, that full references are available in the transcript that accompanies this podcast).

Those designing the new market had no particular wish to disrupt the old one. The system was built with continuity in mind and made it possible for people to trade on the Stock Exchange floor, just as they had always done. Many firms took leases to pitches on the new floor, refurbished and upgraded at the cost of several million pounds. But the jobbers knew that their world was changing. While the big firms were buying long-term leases, the jobbers knew that they would never set foot on the floor of the house again. On Friday 24 October, the last day of spoken trading, the floor of the house hosted a day of wild festivities. Jobbers chased a pantomime horse containing two clerks round the floor, and the Spitting Image puppet of Chancellor Nigel Lawson made an appearance. In all, says one historian, it was more a ‘rowdy Irish wake’ than the solemn, final day of a mighty institution.[4] Managers, expecting business as usual, were caught out: ‘Within five minutes of Big Bang,’ says one, ‘on Monday morning, it was clear to me that the floor was dead. I’m not bragging. I was the last person in the City to figure it out.’[5] But there was no reason to loiter downstairs, struggling to elicit prices from a seething crowd of traders when one could survey the whole world of prices from the comfort of one’s desk. The crowds just moved to their offices upstairs, so promptly that, by mid-morning on Monday it was clear that the trading floor was finished. In January 1987 only a hundred people traded regularly on the floor – just a tenth of the crowd that had traded there a year previously – and the Financial Times was speculating about whether the new six-sided pitches might become a ‘Hexagonal Wine Bar’. The trading floor closed three months later.[6]

—- keyboard and typewriter sounds, here and below —-[7]

If technology merely improved informational efficiency, why was there such inevitability to the collapse of floor trading? And why couldn’t the banks and investment houses themselves see it coming? It was not just more comfortable to trade from one’s desk, but also safer. Traders were now obliged to trade at the prices offered on the screen, for these were ‘firm prices’. But if the telephone was ringing, it was always possible to check the screen before picking it up. In fact, one of the great complaints about screen trading was that during sudden market collapses – when lots of people simultaneously want to sell – dealers stopped picking up the phone. Traders could have more screens on their desk, bringing in all kinds of information from the outside world, and placing them at an advantage to others; office organisation could deliver the same benefits, with salespeople, analysts and other experts easy to reach.[8] Moreover, everyone in the office knew the news first – the technology inverted the relationship between floor trader and clerk, between front office and back. And moving to screens did not mean abandoning all those social relationships that had sustained trade on the floor. Those young men in Peirce & Peirce’s trading room are shouting into telephones, making deals with others that they spoke to, as one trader wryly pointed out, more frequently than they spoke to their spouses. Telephones formed a useful bridge between the bodies of the floor and the disembodiment of screens. Under the SEAQ system, brokers still dealt by phone, or by direct lines connected to an intercom known as the box. These devices were crucially important in the operation of major stock markets in the late 1980s and the 1990s: ‘If you don’t have your brokers in the box, you are not in the market’, said one Parisian trader.[9]

Mechanisation had become a preoccupation of stock exchange officials worldwide. This interest stemmed from the middle of the twentieth century. Often, it had egalitarian underpinnings: if mechanism could reduce manpower, wrote one author, ‘we might even reduce the costs to such an extent that small orders became profitable and the ideal of the Cloth Cap Investor at last became a reality.’[10] Fischer Black, the economist whose option pricing theory was to transform the financial world, had dreamed of a fully automated securities market. His pamphlet was illustrated with a line drawing of an enormous machine straight out of B-movie science fiction, the market machine drawn as a riveted dustbin on stilts with enormous tendrils, like vacuum cleaner tubes, reaching down onto the desks of bankers and traders. It is hard to read the expressions of those occupying the desks, but they certainly are not joyful. Thinking such as this was never entirely benevolent: it also had roots in the desire for effective supervision of market participants, whose dealings by handshake and conversation could be easily hidden. But we should be careful of reading the history of automation as a smooth transition from lumpy, inefficient bodies to sleek, efficient machines at the hands of strategically visionary management. Juan-Pablo Pardo Guerra, who has written extensively on the topic, asks why – bearing in mind the comfortable, profitable market positions held by senior players within the organisation – did automation happen at all? He argues that the process is haphazard and diffuse. It begins, inevitably, with the routine tasks of settlement and clearing; in London, the post war years saw mechanical calculating devices, and then computers, introduced to streamline what had been a labour intensive, time consuming process. Crucially, according to Pardo Guerra, these early machines allowed a new kind of participant, the technologist, into the closed world of the LSE. Calculators and computers demanded technical expertise, and the technologists who worked on them built their own quiet and often invisible networks of power within the organisation. The members of the exchange (the brokers and market-makers) were used to treating back-office workers as staff, secondary in status and in access. They treated the technologists the same way. Pardo Guerra passes on a story about a member meeting the Exchange’s new technical director – a senior appointment – in the lavatories of the sacred seventeenth floor, a space reserved for members, and expressing his displeasure about sharing the facilities with the staff. One can hardly blame the technologists for pushing changes through, until, one day the members woke up to find that they were not in charge any more.

The details of automation are complex, and are exhaustively covered in Pardo Guerra’s book. Change was incremental. In 1970 the London Stock Exchange introduced its Market Price Display Service to show middle prices on black-and-white television sets in offices throughout its newly constructed concrete tower block. The service was a manual-automatic hybrid that relied upon Exchange representatives patrolling the trading floor, physically collecting prices. The blue buttons were happy to delegate this work to them and began quoting prices verbally rather than chalking them up on a board. MPDS prices often differed from those made available by the Financial Times and Extel – rival data producers – so the Exchange banned these organisations from the trading floor, thus creating itself a monopoly in the new and lucrative commercial market for data.  This early analogue computer, data carried in coaxial cables, was soon outdated. The LSE implemented a database called EPIC (The Exchange Price Information Computer) able to hold a limited amount of price information for every single stock traded. Then, in 1978, it launched a new system named TOPIC (or, less snappily, Teletext Output of Price Information by Computer) based on the Post Office’s proprietary teletext system, named Prestel. ‘TOPIC,’ writes Pardo Guerra, ‘was not simply a scoping device, a way of seeing the market: it was, rather, a common platform, a standardized mechanism for displaying market information – from prices and company announcements, to charts and tailored analytics – and reacting to it from afar.’[11] As Pardo-Guerra points out, the crucial advantage of this system was that data could flow both ways – from the trader’s terminal to the central hub and back. TOPIC made possible new modes of visualization and calculation. It was, in other words, creating a new market place: the screen. In the early 1980s the looming Big Bang provided the technologists with an opportunity to cement their grip on the organization of trades, and they set to work to render the sociality of the exchange into cables and screens, a utopian endeavour that simply never came to fruition. Forced to adopt a quick fix to meet the deadline, the Exchange hammered TOPIC and EPIC – its two existing systems together into a new combination, named SEAQ, which underpinned the change to dual capacity trading in October 1986.

So a series of incremental improvements, driven by political concerns, attempts to grab a bigger share of an emerging market for data provision, and the struggles between managers and technologists, eventually coalesce around a system that makes the trading room redundant. Nobody had expected this, and certainly no one had planned it. It caught many off guard. Those who had spent their careers on the floor of the house had learned to read bodies, not numbers. They did not really need to know the long term prospects for a company, how much its dividend might be or whether the bank was likely to foreclose. They simply needed to know who wanted to buy stock, and who wanted to sell; even better, to know who wanted to sell, and who had to. Bodies were enough for that. Eyes, sweat and movement, the look of tension on the junior’s face, these things told an experienced jobber everything they needed to know. Screens project a new kind of market. There are no people, no bodies: no scent of greed or fear, no recognition of friends or foes. The screen trader must make sense of strings of numbers, learning to read the market in an entirely different way. Screens make possible a global market, unrolling through an electronic network that circles the globe from bridgehead city to bridgehead city: Tokyo, Frankfurt, London, New York. Screens are devices that visualize and create the market; the sociologist Karin Knorr Cetina describes them as ‘scoping devices’, analogous to the instruments of a laboratory. Traders arriving at work, she writes, ‘strap themselves to their seats, figuratively speaking, they bring up their screens, and from then on their eyes will be glued to that screen, their visual regard captured by it even when they talk or shout to each other, and their body and the screen world melting together in what appears to be a total immersion in the action in which they are taking part.’[12] Making sense of this vast world of information means building new kinds of calculators, and prices tracing across screens are the perfect material for doing so. Traders’ tools are the graphs and spreadsheets of the Bloomberg terminal, with its endless, varied representations. At first, innovative computer programmers sought to recreate the bodily world of the trading floor. Programs simulated crowd noise, rising and falling in line with activity, but these were never successful. Other prompts and shortcuts grew to fill the space instead. In London, for example, the Exchange introduced the FTSE 100 ‘trigger page’. This showed the code for every single stock in the FTSE 100 on a single, teletext screen. A blue background to the code signified the share was moving up and a red that it was moving down. You no longer needed to hear the crowd to know how the market was faring; the information one needed was there, brightly coloured, on a single screen.[13]

Screen-based markets make it possible to trade without any human help at all. In many ways, this was the dream of visionaries such as Fischer Black, using machines to cut costs and trim trading margins until a truly efficient, democratic market was achieved. According to a certain line of thinking, the proliferation of trades that machines bring creates liquidity and benefits all market participants. The jury is still very much undecided as to whether computerised trading leaves us better off – Michael Lewis’ Flash Boys argues passionately that it does not, and we’ll return to the topic in due course. But it is undeniable that computers react more quickly than people and without any sense of restraint. At the time of the Big Bang, computerised trading had nothing of the sophistication of modern algorithms. Robots followed a simple set of rules designed to launch sales if the market fell too quickly.

Programme trading, as this was called, soon came to the world’s attention when global stock markets suffered their ever worst day of falls: 19 October 1987, Black Monday, just a year after Big Bang. We’ll pick this up next week.


It turns out that technological processes have overflows far beyond their creators’ expectations. In fact, technology can start a stock exchange almost by accident, and in 1995 it did just that. The exchange was called OFEX, and if we are interested in the possibilities of small-scale exchanges for the funding of social goods, we should take good notice of its story.

You may remember from episode six how the Jenkins family established a small jobbing firm in London, specialising in dog tracks and holiday camps; how John Jenkins grew to be senior partner; how they made £1 million in five minutes of trading when the British Telecom issue came out; and how the firm was sold to Guinness Mahon and thence a Japanese investment bank. In the bear market that followed the crash of 1987 the trading desk was closed and Jenkins found himself unemployed, bruised and battered by a difficult period in a toxic working environment. But John had not just traded dog tracks. He had also developed a specialist expertise in the London Stock Exchange’s little-known Rule 163.[14]

The rule, which later became Rule 535, and then Rule 4.2, allowed members to conduct occasional trades in companies not listed on the London Stock Exchange. Trades had to be conducted on a ‘matched bargain’ basis. This meant that the jobbing firm had to line up a buyer and a seller and ‘put through’ the trade, taking a commission of one and a quarter percent on each side. Each bargain had to be reported to the Stock Exchange and was carefully noted and approved by the listings department. It was clearly not meant as a volume operation. But Jenkins & Son already traded like this: jobbers in the smallest stocks could not rely upon a steady flow of buy and sell orders so were reluctant to hold stock on their books, tying up capital, possibly for years. Instead they would build up lists of potential buyers and sellers, and only when they could make a match would they trade. It was fiddly work, says John, though lucrative: ‘Nobody else wanted to do it, nobody else wanted to fill the forms out, run round and you would fiddle about in those days, would the client take 1,049, well I know he wants to buy 1,000 but will he take 963 and then you would have to piece it all together and do it…But for a grand a day, in those days!’

In the early 1990s John was twiddling his thumbs and missing his old trading days. He fancied starting a new firm but his application to the London Stock Exchange was twice turned down. John was on the verge of giving up but his blue button – his apprentice – from a few years before, Paul Brown, was made redundant as well, and this moved John to a final try. Brown remembers the conversation:

‘I rang John up and I said to him, “Look, John, just to let you know, before you hear it, I have been made redundant.” And he went, “Okay”. I’ll never forget it. He said to me, “Okay, Brownie, I’ll come back to you”. And that was it. And he rung me back the next day and he said, “Look, I went for a walk along the river, and I’ve thought about it. I’ve had this idea, trading what was 535(2) stocks then. How about you and I give it a go?” He said, “I can’t pay you a lot of money but it’s a start-up, we’ll get an office, just you and me, and we’ll give it a go.” So I said, “Yeah, fine.”’[15]

The third submission was accepted by the London Stock Exchange, and on 11 February 1991, Jenkins and Brown set up JP Jenkins Ltd with a mandate to trade unquoted stocks ‘over the counter’ under the Stock Exchange rules.

There followed a period John remembers as one of the happiest in his working life. JP Jenkins occupied a small office above the ‘Our Price’ music store in Finsbury Square. A friendly Dutchman on the floor above would descend on their office mid-afternoon bearing a bottle of gin. It was just ‘two guys and a sofa’ trading with pen, paper and phone.

‘John had this old computer,’ says Brown, ‘so he brought it in, so it sat on the desk, but we never used it. We just had it there for show… it was a sofa and a computer that didn’t work. It did absolutely nothing. I mean it did nothing. It just sat there.’

Business was about making lists and matching, and the firm was soon known for the catchphrase “I’ll take a note”. They never said no, they just made a note; they had a good name, and they did well.

In 1992 the firm moved to Moor House in Moorgate. There was a separate room for the back office. Shares traded did not fall under the London Stock Exchange’s Talisman regime, so trades were settled in house, by the ‘manual XSP’ method. A typewritten catalogue of stocks includes some well-established entities such as Rangers and Liverpool football clubs, National Parking Corporation (NCP), breweries such as Daniel Thwaites and Shepherd Neame, Yates’ Wine Lodges, and even Weetabix. Alongside these were the stocks of smaller, high-risk, or less frequently-traded entities: Pan Andean Resources, Dart Valley Light Railway and the Ecclesiastical Insurance Office, to name three at random. Trading business grew steadily and the firm was profitable; John Jenkins’ horizons were not much bigger – no ‘delusions of grandeur’ as he put it.

No man is an island. Nor is any small market-maker, and the tendrils of automation soon began to wind their way into the comfortable life of these traders. Ironically, John was always an early adopter of technology. Even before the Big Bang swept terminals into London, he had travelled to the USA, visiting a broking firm named Herzog Heine Geduld, and watched the computer-based NASDAQ. He returned one of the few believers. His new firm soon got rid of the broken computer and installed its own bespoke system. Processes of automation bring existing taken-for-granted practices and assumptions to the surface, so we shouldn’t be surprised that John’s new computers simply mimicked what he and Brown had been successfully doing with pen and paper. But the big story was outside of John’s office.

Alongside SEAQ, the Exchange set up a ‘non-SEAQ board’. It was just another set of teletext screens, a home for Rule 535 stocks. It published rudimentary data and also historic trades. In doing so it made the traders’ margins visible, a matter made worse by screen’s long memory. John’s son, Jonathan, explains:

‘[It] didn’t show any live prices, didn’t show mid-price.  It showed the previous day’s close and it would show you the price at which trades had happened.  It used to piss people off because you’d get someone saying, “I bought them off you at nine and it prints on there you bought them at six.” It showed everybody exactly what we were doing.

But it was the market’s place. At some point in the early 1990s, JP Jenkins took over the operation of the LSE’s non-SEAQ notice board. The LSE had threatened to discontinue the service and the firm could not imagine life without this central, public space. To be excluded from what Knorr Cetina calls the ‘appresentation’ of the market – the electronic production of a virtual form – is to be excluded from the market itself.[16]  Alongside the non-SEAQ board the firm created ‘Newstrack’, a rudimentary news service for the small companies that it traded, displaying prices and a limited amount of company information over the Reuters network – Jenkins struck a chance deal with Reuters, then looking to expand its content. The service provided market capitalisation and some volume information. A rudimentary connectivity between the market makers and Newstrack meant that that if the price moved the market capitalisation would also move. Firms released final and interim results through the pages, published dividends and were encouraged to make trading announcements. In other words, Newstrack consciously mimicked the London Stock Exchange’s Regulatory News Service (RNS). JP Jenkins realised that there was money to be made here, too, and started charging firms to use the service. It had inadvertently stumbled into that new and growing revenue sector for stock exchanges: data provision.

Do you see what’s happening here? All of a sudden JP Jenkins is operating something that looks very like a small-scale stock exchange. It offers a venue where smaller companies can have their shares bought and sold, and where they can achieve some of the publicity and regulatory kudos that comes with a public listing. They can even raise money, for entrepreneurial corporate finance firms have spotted this thing that looks very much like a market and have begun to issue documents for fundraisings. JP Jenkins is making a tidy profit from its market-making, and starting to make inroads into the data sales sector. And all of this under the LSE’s regulatory banner. Remember that exchanges are themselves businesses,  and that they operate in a competitive market for exchange services. It’s not surprising that the LSE starts to become really rather uncomfortable, so much so, that it gives in to political pressure on another front and sets in motion a process to set up another market for growth stocks.[17] You must forgive me jumping around here, but that’s another story… What matters is that in 1995, the LSE closed both its Rule 163 reporting and the non-SEAQ board. It was an overtly defensive measure, but it was too late, for the path dependencies of organisations cannot easily be rolled back. Many of companies traded by Jenkins did not want to go to the LSE’s new venue. They petitioned John who – naturally – was keen to keep his business going. But he was confronted by another problem, the loss of his public venue, of his market place. What trader can manage without a marketplace? He had no option but to build his own space onto his existing data infrastructure. He called it OFEX (for off exchange). At first, it was nothing more than a label. Bolted onto the exiting Newstrack service, running through Reuters’ wires, OFEX was technically a trading facility. But taken as a whole, the assemblage – the wires, the screens, the trading mechanisms and networks of corporate financiers – could be seen as a capital market. On the basis of walks like a duck, talks like a duck (as one executive put it) it was a stock exchange. OFEX, specializing in the stocks of start-ups and small companies, was ready and waiting for the dotcom boom years of the late 1990s. But that’s a story for another episode.

So what have we learned today? That technological change – automation – shapes markets in ways participants do not expect, and that exchanges have histories and path dependencies that count for at least as much as regulation and global politics. And that, if you do want to build a stock exchange, the easiest way to do so seems to be by accident. Well, who said it was going to be easy?

I’m Philip Roscoe, and you’ve been listening to How to Build a Stock Exchange. If you’ve enjoyed this episode, please share it. If you’d like to get in touch and join the conversation, you can find me on Twitter @philip_roscoe or email me on Thank you for listening, and see you next time when, in the last episode of this first section,  I’ll finally answer that question I’ve been asking all along: what’s in a price, and why does it matter?



[1] Sound recording from ‘touchassembly’ via, under a creative commons attribution licence

[2] Recorded by Cinemafia,

[3] Norman S.  Poser, “Big Bang and the Financial Services Act Seen through American Eyes,” Brooklyn Journal of International Law 14, no. 2 (1988): 327.

[4] Elizabeth Hennessy, Coffee House to Cyber Market: 200 Years of the London Stock Exchange (London: Ebury Press, 2001), 184.

[5] Eric K. Clemons and Bruce W. Weber, “London’s Big Bang: A Case Study of Information Technology, Competitive Impact, and Organizational Change,” Journal of Management Information Systems 6, no. 4 (1990): 49.

[6] Poser, “Big Bang and the Financial Services Act Seen through American Eyes,” 325. Quotation taken from Clemons and Weber, “London’s Big Bang: A Case Study of Information Technology, Competitive Impact, and Organizational Change,” 49.

[7] Sounds from Keyboard sound

Typewriter sound

[8] ———, “London’s Big Bang: A Case Study of Information Technology, Competitive Impact, and Organizational Change.”

[9] Interviewed by Fabian Muniesa, “Trading Room Telephones and the Identification of Counterparts,” in Living in a Material World, ed. T Pinch and R Swedberg (Cambridge: The MIT Press, 2008), 295.

[10]  A Mr M Bennett, writing in the Stock Exchange Journal of 1959, and quoted by Juan Pablo Pardo-Guerra, “Creating Flows of Interpersonal Bits: The Automation of the London Stock Exchange, C. 1955–90,” Economy and Society 39, no. 1 (2010): 93.

[11] ———, Automating Finance: Infrastructures, Engineers, and the Making of Electronic Markets (Oxfoird: Oxford University Press, 2019), 128.

[12] K Knorr Cetina and U Bruegger, “The Market as an Object of Attachment: Exploring Postsocial Relations in Financial Markets,” Canadian Journal of Sociology 25, no. 2 (2000): 146.

[13] Pardo-Guerra, “Creating Flows of Interpersonal Bits: The Automation of the London Stock Exchange, C. 1955–90.”

[14] for more detail on this history see my booklet, downloadable at

[15] Brown interview

[16] Karin Knorr Cetina and Urs Bruegger, “Global Microstructures: The Virtual Societies of Financial Markets,” American Journal of Sociology 107, no. 4 (2002).

[17] This is my claim, but it’s supported by Posner’s account of strategic rivalry among exchanges. Elliot Posner, The Origins of Europe’s New Stock Markets (Cambridge, Mass.: Harvard University Press, 2009).

Episode 7. The New Deals

1980s Wall Street was as inventive as it was ostentatious. New kinds of deal turned the relationship between finance and society on its head: collateralized mortgage obligations made homeowners into raw material for profit, while the leveraged buyout allowed corporate raiders to tear up companies in the name of shareholder value, all this backed by the new science of financial economics. This episode takes a random walk around some of finance’s most rapacious innovations.


The investment-banking firm of Pierce & Pierce occupied the fiftieth, fifty-first, fifty-second, fifty-third, and fifty-fourth floors of a glass tower that rose up sixty stories from out of the gloomy groin of Wall Street. The bond trading room, where Sherman worked, was on the fiftieth. Every day he stepped out of an aluminum-walled elevator into what looked like the reception area of one of those new London hotels catering to the Yanks. Near the elevator door was a fake fireplace and an antique mahogany mantelpiece with great bunches of fruit carved on each corner. Out in front of the fake fireplace was a brass fence or fender, as they called it in country homes in the west of England. In the appropriate months a fake fire glowed within, casting flickering lights upon a prodigious pair of brass andirons. The wall surrounding it was covered in more mahogany, rich and reddish, done in linen-fold panels carved so deep, you could feel the expense in the tips of your fingers by just looking at them. All of this reflected the passion of Pierce & Pierce’s chief executive officer, Eugene Lopwitz, for things British. Things British, library ladders, bow-front consoles, Sheraton legs, Chippendale backs, cigar cutters, tufted club chairs, Wilton-weave carpet were multiplying on the fiftieth floor at Pierce & Pierce day by day. Alas, there wasn’t much Eugene Lopwitz could do about the ceiling, which was barely eight feet above the floor. The floor had been raised one foot. Beneath it ran enough cables and wires to electrify Guatemala. The wires provided the power for the computer terminals and telephones of the bond trading room. The ceiling had been lowered one foot, to make room for light housings and air-conditioning ducts and a few more miles of wire. The floor had risen; the ceiling had descended; it was as if you were in an English mansion that had been squashed.

This is Tom Wolfe, of course, from his remarkable Bonfire of the Vanities, as we first encounter the workplace of the protagonist – I won’t say hero, for he’s certainly not that – master of the universe, possessor of a Yale chin – Sherman McCoy. It turns out that this kitsch Englishness is just the drapery on something much more primal. Wolfe continues…

No sooner did you pass the fake fireplace than you heard an ungodly roar, like the roar of a mob. It came from somewhere around the corner. You couldn’t miss it. Sherman McCoy headed straight for it, with relish.

On this particular morning, as on every morning, it resonated with his very gizzard. He turned the corner, and there it was: the bond trading room of Pierce & Pierce. It was a vast space, perhaps sixty by eighty feet, but with the same eight-foot ceiling bearing down on your head. It was an oppressive space with a ferocious glare, writhing silhouettes, and the roar. The glare came from a wall of plate glass that faced south, looking out over New York Harbor, the Statue of Liberty, Staten Island, and the Brooklyn and New Jersey shores. The writhing silhouettes were the arms and torsos of young men, few of them older than forty. They had their suit jackets off. They were moving about in an agitated manner and sweating early in the morning and shouting, which created the roar. It was the sound of well-educated young white men baying for money on the bond market.

The sound of well-educated young white men baying for money.

Wolfe, already a famous long-form journalist, did his research properly. This isn’t just any trading room, but the forty first floor of Salomon Brothers, New York: the biggest and most brash of all the 1980s investment banks. It’s the same trading room that Michael Lewis uses as the background for his extraordinarily popular debut, Liar’s Poker. The two writers were there at the same time, and their books tip a symbolic wink to each other. There is such a lot in this passage, and we will be back to some of it in another episode: Wolfe’s careful presentation of toxic masculinity, class and racism, especially. He takes delight, over the next few sentences, in showing us the mixture of profanity, youth, and privilege exhibited by these traders, pumped and sweating, cursing, even at the very beginning of the working day.  But for now, I’ll just take the room as it stands, and as Wolfe intended it: as the emblem – and engine – of everything that was wrong with 1980s Wall Street.

Hello, and welcome to How to Build a Stock Exchange. My name is Philip Roscoe, and I teach and research at the University of St Andrews in Scotland. I am a sociologist interested in the world of finance and I want to build a stock exchange. Why? Because, when it comes to finance, what we have just isn’t good enough. To build something – to make something better – you need to understand how it works. Sometimes that means taking it to pieces, and that’s exactly what we’ll be doing in this podcast. I’ll be asking: what makes financial markets work? What is in a price, and why does it matter? How did finance become so important? And who invented unicorns?

In this part of the series I am getting to grips with finance and its role in society. If we want to build a stock exchange worthy of the future – and without wanting to give too much away too soon, I’ll bet that’s going to be small scale, local, and politically respectful – we need to understand how finance got where it is today – vast, global and politically invasive. I’ve suggested its present form is largely the result of changes in the 1980, when the Wall Street financiers became, as Wolfe put it, the ‘masters of the universe’. In the last episode I explored how exchanges were shaped by changes in global political economy and a rethinking of the social contract under governments that embraced the newly fashionable free market ideology. It was during the eighties that the UK’s national industries were sold off and a new class of everyday shareholder was born. He rapidly became known as Sid, inspired by the advertising campaign – under eighties capitalism, even nicknames had to be the produce of corporate endeavour. In the next episode I’m going to explore the automation of stock markets, the move away from open outcry trading pits or the ambulatory trading of London’s Gorgonzola Hall to the miles of wiring described by Wolfe: from the huge open spaces of the Board of Trade’s specially designed hall or the dome of London’s Old House to squashed and cramped, shabby, trading rooms like that of Pierce & Pearce. In this episode, though, I’m going to look what these masters of the universe bought and sold and the deals they concocted, and in doing so I’ll explore the birth of a new kind of social contract, one where finance sits very much on top of the heap. I’ll show a change, too, in the very nature of capital, as it tears itself away from its roots in production and seeks ever higher returns through a proliferation of financial contracts.

—- Trading sounds—[1]

So what were they doing, these traders. What were they trading? What, indeed, were – and are – bonds? The short answer is that a bond is simply a loan contract promising that interest will be paid at a given time until a particular date, when the bond is redeemed and the loan paid off.  Pension funds, governments and corporate treasuries are big holders of bonds, institutions that hold money and need some sort of return but need absolute (or relative) safety too. The notion of safety is itself a highly interesting and problematic one, as we all found out in 2008, and we are going to come back to it in episode nine.  Prices move up and down, driven by sentiment and alternative sources of risk-free interest, usually central bank rates: bonds pay their interest at a predetermined rate, so if interest rates go up, bond prices go down in order to bring those predetermined returns into line. Investors demand higher returns the longer the length of the bond, to compensate for their money being tied up; conversely, as the redemption day nears, prices fall to reflect the limited future yield. This is the yield curve, another central device for plotting the future of markets. If markets are crystal balls, and we only have to open the newspapers to see how many think they are, then the proliferation of bond contracts can only be a good thing. So are the Masters of the universe, pure speculators, trading nothing more concrete than the promise of future returns, but in doing so making this crucially important market happen. That’s the theory, at least.

These perfect market imaginings suppose – yet again – that new markets or goods just appear. It is never that simple. Take the mortgage bond, the instrument at the base of the financial Jenga-tower that decomposed in 2008. In the late 1970s and early 1980s, Wall Street’s eyes lighted on mortgages as a source of possible opportunity. For people whose business was buying and selling debt, the cumulative amount owed by America’s homeowners – following post-war decades of suburban growth that saw home ownership as a crucial part of the American dream – must have been mouth-watering. But there were certain problems. Government regulation during the same period had been heavily skewed towards the interests of the borrowers. According to Lewis Ranieri, the Salomon Brothers trader who pioneered commercial mortgage bonds, the “mortgage instrument becomes so perfect for the borrower that a large economic benefit is taken away from the other participants, including the long-term investor”.[2] That didn’t especially matter because mortgages were owned by small-scale savings banks, known as thrifts in the United States, or building societies in Britain, whose business was conservative, low risk lending to homeowners. Moreover, two giant government-sponsored bodies, Fannie Mae and Freddie Mac, underwrote a portion of these loans with the intention of expanding the pool of eligible borrowers and thus broadening home ownership. These institutions also provided mechanisms through which loans could be resold by the thrifts in order to increase the supply of money into the sector. They bought up loans and resold them in bundles as bonds, but the results were attractive only to specialist investors. You see, as an investment, the mortgage had several problematic characteristics. It was small. It was attached to an individual, and therefore inherently unpredictable. Mr and Mrs Smith might lose their jobs, or die, or remortgage. The last was a particular issue.

Regulation designed to protect homeowners allowed anyone to pay off a mortgage without penalty at any time. This prepayment risk made mortgages unattractive investments for pension funds, corporations, and governments whose primary objective was long-term stability: if interest rates went down, rather than holding a more valuable bond, investors will be left with cash returned by homeowners changing to cheaper deals, cash for which they couldn’t find a lucrative home. As a result, if interest rates went down the price of mortgage bonds changed little, as everyone knew the underlying loans would already be in the process of being redeemed. Michael Lewis chronicles the birth of the mortgage bond in Liar’s Poker. He writes:

‘The problem was more fundamental than a disdain for middle America. Mortgages were not tradeable pieces of paper; they were not bonds. They were loans made by savings banks that were never supposed to leave the savings banks. A single home mortgage was a messy investment for Wall Street, which was used to dealing in bigger numbers. No trader or investor wanted to poke around the suburbs to find out whether the home owner to whom he had just lent money was creditworthy. For the home mortgage to become a bond, it had to be depersonalized…At the very least, a mortgage had to be pooled with other mortgages of home owners. Traders and investors would trust statistics and buy into a pool of several thousand mortgage loans made by a Savings and Loan, of which, by the laws of probability, only a small fraction should default. Pieces of paper could be issued that entitled the bearer to a pro rata share of the cash flows from the pool, a guaranteed share of a fixed pie . . . Thus standardized, the pieces of paper could be sold to an American pension fund, to a Tokyo trust company, to a Swiss bank, to a tax evading Greek shipping tycoon living in a yacht in the harbour of Monte Carlo, to anyone with money to invest.’[3]

In 1977 Bank of America, in conjunction with Ranieri’s team at Salomon Brothers, launched the first private mortgage bond. The process, which Ranieri dubbed securitisation, was elegant in principle, if complex in actuality. Here’s Lewis, again, on the construction of the ‘collateralized mortgage obligation’ or CMO:

‘The CMO addressed the chief objection for buying mortgage securities, still voiced by everyone but thrifts and a handful of adventurous money managers: who wants to lend money not knowing when they’ll get it back? To create a CMO, one gathered hundreds of millions of dollars of ordinary mortgage bonds—Ginnie Maes, Fannie Maes and Freddie Macs. These bonds were placed in a trust.

The trust paid a rate of interest to its owners. The owners had certificates to prove their ownership. These certificates were CMOs. The certificates, however, were not all the same. Take a typical 300 million dollar CMO. It would be divided into three ‘tranches’ or slices of 100 million dollars each. Investors in each tranche received interest payments. But the owners of the first tranche received all principal repayments from all 300 million dollars of mortgage bonds held in trust. Not until first tranche holders were entirely paid off did second tranche investors receive any prepayments. Not until both first and second tranche investors had been entirely paid off did the holder of a third tranche certificate receive prepayments. The effect was to reduce the life of the first tranche and lengthen the life of the third tranche in relation to the old-style mortgage bonds. One could say with some degree of certainty that the maturity of the first tranche would be no more than five years, that the maturity of the second tranche would fall somewhere between seven and fifteen years, and that the maturity of the third tranche would be between fifteen and thirty years. Now, at last, investors had a degree of certainty about the length of their loans. (Lewis, 1989: 160–1)

—– market traders —-[4]

There is an interesting story in the background about the gentrification of finance over the same period. Ranieri had worked his way through the ranks of Salomon, from mailroom to the partnership. By the mid-eighties, however, the university of lifers were being squeezed out by the Ivy League graduates gleefully described by Wolfe. This was also the case in Britain. In 1982, the London International Financial Futures Exchange, or LIFFE. It was deliberately modelled on the trading pits of Chicago, and it offered London a first sight of the loudmouth, barrow boy trader that came to epitomise so much of the nineteen eighties. The LIFFE traders came from the county of Essex, a harsh, flat, damp, grey landscape north-east of London that had soaked up refugees from the city as industrial slums had been cleared. Those who lived there were Sierra Women and Men and more. They had made money, bought property, and they wanted the world to know: ‘the affluent, industrious, ruthless and caustic typical inhabitants of South Essex’, writes the anthropologist Caitlin Zaloom, quoting a British member of Parliament, were ‘the shock troops of the Thatcherite revolution, the incarnation of the new economic freedom she had bestowed upon a broadly ungrateful nation’.[5]  In London they didn’t disappoint. Their motto was spend, spend, spend: traders distinguished themselves by their flamboyant dress sense and their equally flamboyant expenditure. They shouted on mobile phones before anyone else even owned one. They became the archetypal figures for the new City, the poster boys of the early nineteen eighties. They were coarse, loudmouthed and abrasive, London’s counterpart to the mortgage bond traders of Wall Street. But these Essex boys who came to trade on LIFFE were rapidly displaced by university graduates qualified in economics and the hard sciences. One primary cause was the enormous increase in the complexity of the contracts that confronted market traders, and to get there we should trace another story, and the birth of another kind of contract.

You may recall from my second episode that the Chicago Board of Trade evolved organically as a means of providing a speculative market in the future prices of agricultural goods. You may also recall how disagreements over the legal and moral validity of futures trading found their way to the Supreme Court, where in 1905, Chief Justice Holmes declared that speculation ‘by competent men is the self-adjustment of society to the probable’. This debate still centred on agricultural goods, however, and although Holmes recognised the speculators’ practice of setting off, or settling deals in advance, the point remained that the goods could be delivered if so desired. This legal distinction separated legitimate, legal speculation from illegitimate, and criminal, speculation in the future prices of financial securities. Such things could never be delivered, containing nothing more tangible than the promise of future cash streams. Moreover, financial futures had been implicated among the causes of the disastrous financial crisis of 1929, still very much in the mind of American legislators. But times were hard in the late 1960s with regulated commodity prices leaving little opportunity for speculation: traders left sitting on the steps of the pit, reading the paper. The Board of Trade – alongside its junior counterpart the Chicago Board of Options Exchange, or CBOE – worked hard to make financial futures legal. Donald MacKenzie and Yuvall Millo trace this story. The CBOE employed lobbyists, lawyers and enrolled the new science of financial economics. This posited that stock prices moved in a random walk in response to news, the basis for today’s efficient market hypothesis. Such randomness could only mean uncertainty, and financial options could be deployed as a means of protection against this, just as they were in dealing with future weather changes and market conditions for agricultural products. None other than Milton Friedman wrote an account of the benefits of a currency futures exchange, for which he received $5000 from the CBOE, perhaps forty-thousand in today’s money.

At the same time  a small group of academic economists – Fisher Black, Myron Scholes and Robert Merton – made a startling innovation, producing ‘options pricings theory’, one of the  most important contributions of twentieth century economics and for which Merton and Scholes scooped the Nobel Prize in 1997. I can’t explain it any better than MacKenzie and Millo, so I’m going to borrow their words, trimmed slightly. If one assumed that

‘the price of a stock followed a… random walk in continuous time… it was possible to construct a continuously adjusted portfolio of underlying stock and government bonds or cash that would “replicate” the option: that would have the same return as it under all possible states of the world. Black, Scholes, and Merton then reasoned that the price of the option must equal the cost of the replicating portfolio: if their prices diverged, arbitrageurs would buy the cheaper and short sell the dearer, and this would drive their prices together.[6]

Simple! Or maybe not. But that doesn’t really matter for our story because, as MacKenzie and Millo point out, the new maths played an important part in legitimising the new kind of trading:

Black, Scholes, and Merton’s fellow economists quickly recognized their work as a tour de force. It was more than a solution of a difficult technical problem: it showed how to approach a host of situations that had “optionlike” features; and it linked options to the heartland theoretical portrayal of capital markets as efficient and permitting no arbitrage opportunities. The whole weight of orthodox modern economics could now be deployed against anyone still claiming options to be disreputable.[7]

With the advent of options pricing theory, the yield curve, and other such mathematically complex methods of valuing trades, the barrow boys of Essex and street traders of New Jersey were no longer equipped to deal in the market. This bond trading was the province of young Turks, as Lewis calls them:

‘After the first CMO (writes Lewis), the young Turks of mortgage research and trading found a seemingly limitless number of ways to slice and dice home mortgages. They created CMOs with five tranches, and CMOs with ten tranches. They split a pool of home mortgages into a pool of interest payments and a pool of principal payments, then sold the rights to the cash flows from each pool (known as IOs and POs, after interest only and principal only) as separate investments. The homeowner didn’t know it, but his interest payments might be destined for a French speculator, and his principal repayments for an insurance company in Milwaukee. In perhaps the strangest alchemy, Wall Street shuffled the IOs and POs around and glued them back together to create home mortgages that could never exist in the real world.’[8]

These kinds of deals were only possible due to increasingly powerful methods of calculation. The new mechanisms of financial engineering, options pricing theory, implied volatility, various copula and log-normal distributions, none of which I can claim to understand, transformed financial markets. The confluence of entrepreneurial ambition, politics, and theoretical innovation backed up by advances in computing power and technical modelling takes us to a place where existing restrictions seem outmoded and regulation is swiftly changed. Economists, regulators and traders alike began to look towards free-market utopia where a proliferation of financial contracts could cover every conceivable trade and outcome. The road led, inexorably, to the crisis of 2008. But I want to emphasise the process by which our individual financial arrangements – and the terms on which they are offered – became of interest to, and then subject to the discipline of, high finance. The mortgage moved from being a policy tool designed to expand the reach of homeownership to being a financial instrument crucial in the construction of investment banks’ profits. This, in turn, makes the interests of homeowners and financiers widely divergent, a problem that underwrote the global crash. We might call this process, by which ever more of our everyday interests become subject to the purview of financial markets, financialization.


At the same time as the traders of Wall Street were taking hold of our mortgages, another kind of financier was taking charge of our jobs. The corporate raider, epitomised by Gordon Gecko in Oliver Stone’s film Wall Street (a film premiered at almost the same time as The Bonfire of the Vanities), was a new species of financial practitioner, spawned by the 1980s. Raiders like T Boone Pickens, Sir James Goldsmith, and Tiny Rowland became renowned, even glamorised, as ruthless hunters on the cutting edge of capitalism. Their prey – the conglomerate.

Throughout the 1950s and 60s the conglomerate had become a fashionable organisational form. Companies bought other companies, creating empires of unrelated businesses, wherever managers felt that capital could be productively used. The conglomerate was a creature of its times, a product of managerial capitalism where business invested money in making and selling things, and the skills of managers were to do with organising production and generating effective returns on capital from doing so. Conglomerates benefited from a favourable legal environment and tax relief on debt which made borrowing to buy cash generative businesses a sensible choice. Investment bankers had, of course, been complicit in the growth of these conglomerates, eagerly encouraging chief executives to do deals and pay hefty advisory fees in the process. But now, the era was over. Conglomerates found themselves unfashionable, their share prices depressed. These lower share prices presented the corporate raiders with an opportunity. They could buy the business for a significant premium on existing share prices, and thereby claim that they are returning value to shareholders. But the amount they would pay would still be less than the asset value of the firm, and they could break the firm up, selling businesses and assets and keeping the difference. But how to raise the money for such an enormous purchase? Why, borrow it, of course…

‘In 1978 the firm Kohlberg, Kravis and Roberts’, writes Daniel Souleles, ‘then called an investment bank, now a private equity firm, bought a manufacturing conglomerate, Houdaille for $355 million dollars. Not only was this four times more than KKR had ever bid to buy a company’s stock and manage it privately but KKR only had 1/300th of the total price. The rest of the money they spent, the remaining 99.7% of the price of Houdaille, they made up with borrowed money, either in the form of capital from investors, or loans from banks.’

KKR hit on a winning strategy. ‘It is not often,’ says Souleles, that one can pinpoint and describe a new and durable way people get rich. But KKR’s purchase of Houdaille with very little of their own money, and quite a bit of borrowed money, affords one such moment. KKR’s innovation of the leveraged buyout [LBO] would set the standard the industry still follows today.’ The magic comes in the innovation that the target firm should borrow the money to buy itself. This makes perfect sense. There’s no way that a small investment banking boutique could borrow enough to buy a sprawling conglomerate. But the conglomerate can. It will offer bonds – and Wall Street traders led by Ivan Boesky pioneered low quality ‘junk’ bonds for just this purpose, risky and punitively expensive for the borrower.

The conglomerate’s new managers (or the existing managers who have cut a deal with the raiders, like the hapless protagonist in Wall Street) can, however, offset the exorbitant cost of the debt against profits. As Souleles says, KKR could see value in the firm that the market could not.

Raiders cut these conglomerates up and sold the pieces on. They closed down ‘underperforming’ (in scare quotes) firms. They restructured, moved employees around, or simply sacked them. Gecko is pictured threatening to expropriate the employees’ pension fund. Yet these moves were justified by the suddenly fashionable theory that only the interests of shareholders mattered. You will recall from the very first episode how two academics – Jensen and Meckling – posited that managers were the agents of shareholders and should be incentivised to work for them, rather than featherbedding their existences at the expense of profits. In all fairness, conglomerates were renowned for such practices. The classic account of one of these deals, Barbarians at the Gate, paints a picture of RJR Nabisco’s senior management as cocooned in a world of private jets and country club memberships, using the firm’s incredible cash flows to satisfy every whim. Plunging a firm deep into debt could be told as imposing financial discipline on these soft, pampered executives. At the same time those executives were likely to receive substantial holdings of stock as a reward for making such changes; Jensen and Meckling had argued that we can only expect chief executives to work for shareholders if we make them shareholders too. So the soft, pampered executives became wealthy, pampered executives, the corporate raiders became even richer, and the pain of meeting debt repayments was felt in the warehouses and factories, or perhaps in the places where the warehouses and factories used to be. The ethnographer Karen Ho argues that these narratives allow the shareholder to be ‘positioned as the victim, the victim, denied his rightful role in the modern corporation by manager-usurpers. It is partly this notion of the wronged owner reclaiming his just rewards that has fuelled such righteous (and moralistic) activism for shareholder value.’ The focus on shareholder rights helped to deflect scrutiny from the manifestly negative consequences of most LBOs in terms of ‘a decline in shareholder value itself to massive losses in profits, corporate morale, productivity, and jobs.’[9] After all, Milton Friedman had argued that the social obligation of business was to its shareholders, and Wall Street was all too happy to oblige, especially while it made a killing doing so.

Souleles warns that we shouldn’t fall into the trap of presenting wall Street as a homogenous whole. This is true. Even in this episode there are traders and private equity engineers, barrow boys and elite college graduates, people from ethnic minorities and Connecticut wasps. People have varied motivations, even if these all fall within the big tent of making money. Those inflicting great harm on people’s everyday lives can, as Ho shows us, remain convinced that they do so in pursuit of a greater good. It’s complicated. But if we step back to take in the big picture, we can see similar processes at work across the three interconnected domains I have explored: mortgage bonds, financial futures and the leveraged buyout structure. In each new politics, new kinds of deal, new arrangements slowly inverting the relationship between finance and society, so that stock exchanges – or bond or futures exchanges – no longer exist to serve society, but to exploit it. We see capital shaking off its chains and taking flight – a metaphor that is, as the great theorist Frederic Jameson points out – all too literal.[10] When, in the first episode, I described stock markets as pivotal in the mechanisms of contemporary wealth distribution, I was thinking of just this state of affairs. The young, privileged traders of the forty-first floor, baying for money, became masters of the universe through the sheer dislocated power of finance capital. Last week we saw the battles between the newly propertied Sierra men and women and the older forces of organized labour There’s the beginnings of another class war here, between the very rich and everyone else. This is with us today, in a world of offshore banking and fluid, stateless capital. The transition to a truly borderless, global capitalism, however, could only come about as a result of one final change that swept through markets in the 1980s: the transition from pit to screen, the automation and digitization of the exchanges. That’s the subject of our next episode.

I’m Philip Roscoe, and you’ve been listening to How to Build a Stock Exchange. If you’ve enjoyed this episode, please share it. If you’d like to get in touch and join the conversation, you can find me on Twitter @philip_roscoe or email me on Thank you for listening, and see you next time.




[1] Sound recording from ‘touchassembly’ via, under a creative commons attribution licence

[2] Quoted in Donald MacKenzie, “The Credit Crisis as a Problem in the Sociology of Knowledge,” American Journal of Sociology 116, no. 6 (2011): 1792.

[3] M Lewis, Liar’s Poker (London: Coronet, 1989), 99-100.

[4] From www.freesound .org under a creative commons licence.

[5] At the risk of an overcomplicated citation, this is Zaloom quoting Nicholas Farrell, writing in the Sunday Telegraph, 10 November 1991, himself quoting a Member of Parliament. It is a comment made nearly ten years since the event, but still a great line. Caitlin Zaloom, Out of the Pits: Traders and Technology from Chicago to London (Chicago: University of Chicago Press, 2006), 77.

[6] Donald MacKenzie and Yuval Millo, “Constructing a Market, Performing Theory: The Historical Sociology of a Financial Derivatives Exchange,” American Journal of Sociology 109, no. 1 (2003): 120.

[7] Ibid.:121

[8] Lewis, Liar’s Poker, 163.

[9] Karen Ho, Liquidated (Durham: Duke University Press, 2009), 190 and 128.

[10] Fredric Jameson, “Culture and Finance Capital,” Critical Inquiry 24, no. 1 (1997).