How did Chicago’s stockhouses lead to one of the greatest financial markets on earth? This episode explores how commerce and technology shaped the founding of the Chicago Board of Trade and gave birth to financial derivatives. It tells how the telegraph transformed trading, how the pits functioned as human computers turning pigs into prices, and how when we come to build our stock exchange we’ll have to get a building to fit.
‘They went into a room from which there is no returning for hogs. It was a long, narrow room, with a gallery along it for visitors. At the head there was a great iron wheel, about twenty feet in circumference, with rings here and there along its edge…it began slowly to revolve, and then the men upon each side of it sprang to work. They had chains which they fastened about the leg of the nearest hog, and the other end of the chain they hooked into one of the rings upon the wheel. So, as the wheel turned, a hog was suddenly jerked off his feet and borne aloft.’
This, I should say, comes from Upton Sinclair’s novel ‘The Jungle’, published in 1906. He continues:
‘At the top of the wheel he was shunted off upon a trolley, and went sailing down the room. And meantime another was swung up, and then another, and another, until there was a double line of them, each dangling by a foot and kicking in frenzy—and squealing.
…Heedless of all these things, the men upon the floor were going about their work. Neither squeals of hogs nor tears of visitors made any difference to them; one by one they hooked up the hogs, and one by one with a swift stroke they slit their throats. There was a long line of hogs, with squeals and lifeblood ebbing away together; until at last each started again, and vanished with a splash into a huge vat of boiling water.
It was all so very businesslike that one watched it fascinated. It was porkmaking by machinery, porkmaking by applied mathematics…’
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. In the last episode, I spent some time explaining why finance matters, and why we should take stock markets seriously, both as engines for inequality – which they surely are – and visions of possibility, which I hope they might be. Over the coming episodes 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?
Well, from one happy animal to another less so…
You may be wondering why I began this episode with a graphic bit of hog slaughter. My apologies if you found that a little strong, and I hope you are not listening over your bacon and eggs. I said before that markets – not just stock markets – have places, histories and politics and are shaped by the customs and beliefs of their participants. In the last episode, for example, we saw how “agency theory”, a little bit of academic vogue from the 1980s has come to dominate the relationship between companies and their stakeholders. But bricks and mortar – or chips and bits – also matter. The material architecture of a market has a great deal to do with the way it works. That is what I will be focusing on today. Think about it: Ebay and a car boot sale are both full of householders selling second-hand items to other householders, but inhabit different spatial structures. Those structures cause them to work in different ways. Ebay works out prices through an automated bidding system built into the site, while the car boot uses trestle tables and empty car parks to help buyers and sellers see the market and work out prices. Politics, history, and place are written into eBay as a textbook economic market; into the car boot as, well, just that…
Which takes us back to those poor piggies. Upton Sinclair’s muckraking expose of industrial pork production and exploited labour takes us to the beginnings of a new kind of market, a distinctively modern, technological, Chicago affair. The hogs are going to their doom in the stockyards. By the early twentieth century, Chicago was the biggest railway hub in the United States and the gateway to the agrarian West and. At its peak this heartless pork-making by applied mathematics chewed its way through 13 million animals every year. Caitlin Zaloom, an anthropologist who has studied the growth of Chicago’s financial markets, writes that the ‘disassembly line’ was ‘an important inspiration for a later industrialist, Henry Ford, who mimicked this orderly model of death and dismemberment in his automobile plants. His admiration focused particularly on the meatpacking industry’s refined division of labour, the intricate order behind the foaming rivers of blood that ran through the slaughterhouses.’ (I should say, by the way, that full references for all of these works are footnoted in the transcript which is available on the podcast website.) The stockyards supplied canned products across the continent and gave rise to appalling environmental conditions closer to home:
‘…the residents’ – and this is Sinclair again – ‘would explain, quietly, that all this was “made” land, and that it had been “made” by using it as a dumping ground for the city garbage. After a few years the unpleasant effect of this would pass away, it was said; but meantime, in hot weather—and especially when it rained—the flies were apt to be annoying. Was it not unhealthful? the stranger would ask, and the residents would answer, “Perhaps; but there is no telling.”’
The stockyards created immense wealth. So much money, so much energy, so much stench. All called for civic action, and 1848 saw the foundation of the Chicago Board of Trade. Of course, Chicago has always been Chicago and the Board of trade was hardly a grassroots, democratic organisation. Its members were prominent businessmen and politicians and it was set up as a platform to enhance the city’s stature, cementing Chicago’s position as a national centre for trade. They built a headquarters in the centre of the city and sought to shape the urban architecture in such a way that products could flow in and out more easily; one still cannot visit Chicago without the sense that it was not built as a city for people. Nonetheless, as the Board’s influence spread, and with it the volume of trade, members encountered a problem. America is big, the Midwest vast. Even with modern communications it takes a while to get around, and in the late 19th century things travelled much more slowly. Agricultural goods are heavy, bulky and perishable, not easily taken in the sweltering summer heat to a market hundreds of miles away, thence to be sent off to a new buyer. To deal with this problem, a new kind of contract appeared. In 1857 members began trading ‘to arrive’ contracts, settled in cash.
The point of these contracts was that, despite their name, goods never actually had to arrive. These new contracts – or securities – could be traded in the absence of the physical commodities to which they referred. They were therefore ‘derivatives’ – a kind of security derived, or based, on something else. As soon as the financial contracts were unhitched from the commodities that they represented, a speculative market could begin to develop. What do I mean? Well, alongside those who need to buy and sell pork bellies, are those who have no interest in supplying the commodity or consuming it but are seeking to make a living purely from the fluctuating price of the goods. They might seek to turn a profit by purchasing next year’s harvest from a farmer seeking to secure a reasonable price, gambling that the summer will be wet and prices will be high; while the farmer is protecting himself against a change in the weather, the speculator is chancing on risk itself.
Speculation is tricky if you have actual commodities to deal with, and almost impossible if those commodities are heavy, perishable or in need of feed and water. The new security, made up of legal contracts rather than bristle and oink, could be passed around much more easily. It is the same with any kind of financial abstraction, the company shares we talked about in the last episode, or the derivative products that underpinned the credit crisis and which will be revisiting soon enough. The market can bring a thousand bushels of wheat into Chicago without moving them from Kansas, can sell them to a man in New York, to another in Baltimore, and to a third back in Kansas who actually intends to use the grain. Markets bend space by transacting in the simulacra of commodities. They compress time, too, selling the summer’s harvest while it is still under the snow of the plains.
The Board flourished and speculators, unconcerned with the hard business of raising pigs or growing wheat, soon come to dominate the market, their capital making them far more influential than simple buyers and sellers. Frank Norris’ classic Chicago novel The Pit, published in 1902, concerns one such and his attempt to corner the wheat market – that is, to own every bushel of wheat in the entire nation. I will not spoil the ending, but Norris portrays the battle of man versus market as an elemental affair, the swashbuckling trader against the forces of nature herself.
These derivatives required regulations of quality and standardised weights, so that one bushel of grade A winter wheat could easily replace another, and in 1851 a rule made the provision of misleading information an offence worthy of expulsion from the Board. The new market also required a material infrastructure that spilled out throughout the western plains, and this took the form of the telegraph, its cables laid alongside the spreading railways and corralling a whole nation’s agriculture into a single trading room. Chicago became a national market not just because goods arrived on railways. Information followed the same tracks.
In fact, it was the new technology of the telegraph that made the market possible, just one of many market transformations driven by technological progress. This new technology gives a market something previously missing: time. And time makes all sorts of things possible.
Alex Preda has investigated how developing methods of communication shaped and then reshaped markets. You see, 19th century markets were all jumbled up. Preda quotes a letter, from a Richard Irvine, of New York, to J. A. Wiggins, in London, 1872. The author slips a few choice stock quotations into a communication concerning equally choice apples, peaches and oysters:
‘We have shipped to you care of Messrs Lampard and Holt, by this steamer, the apples you ordered in your favour of the 20th September last. We are assured that peaches and oysters are of the best quality, and trust they will prove so. Below we give you memo of their cost to your debit.’ – so, here’s some fruit, some fish, here’s the bill…
‘We think it is well to mention that First Mortgage 6% Gold Chesapeake and Ohio Railroad bonds can now be bought here to a limited amount at 86% and accrued interest. They are well thought of by investors, and were originally marketed by the company’s agents as high as 14% and interest. We enclose today’s stock quotations’.
The letter, and many like it, holds the market together and at the same time tangles it up with all sorts of extraneous material. Our apples and peaches are good, says the merchant, so try our railroad bonds.
The jumble didn’t stop there. Irvine would have purchased the bonds at the New York Stock Exchange, an institution that ran two different markets simultaneously, one formal and one informal, one regular and the other chaotic. Traders of the formal market – called the Regular Board – sat in inside the exchange, wearing top hats and tail coats, and called out prices in a prescribed order. Those in the informal market – the Open Board – stood in the street, where they mingled with the general public. Most of the business was done in the street. Messenger boys carried news on paper slips, marking a time that was full of holes, disrupted and discontinuous. As Preda makes clear, letters and chaos worked surprisingly well, or at least were fit for purpose, if that purpose was hanging on to clients and keeping business going.
—– Ticker sound —–
But time – regular, ordered, bounded time – is something we associate with stock-markets, and for this we have to thank the tickertape. Invented by an engineer named Edward Callahan who had himself started out as a market messenger boy, the tickertape used the telegraph network to transmit prices, tapping them out on a long roll of paper, those same paper streamers thrown onto returning astronauts and sporting heroes in the heydays of the twentieth century. Despite technological difficulties – jammed wheels and batteries comprising large jars of sulphuric acid, the ticker quickly caught on. By 1905 23,000 brokers’ offices subscribed to the ticker. These brokers provided a space for investors to gather, and to consult the code books necessary to decipher the orders transmitted across the tape: Preda gives one example, ‘army event bandit calmly’, which somehow translates as ‘Cannot sell Canada Southern at your limit, reduce limit to 23.’ Brokers rooms became part of the market’s place and remained a feature of stockbrokers’ offices until relatively recently – my colleague Yu-Hsiang Chen visited Taiwanese brokers rooms just a few years ago, a social technology slowly being displaced by electronic messenger services and the Internet. Back in 1902, Norris gives a sharp, unflattering description of one such room. It is a place of ruin, filled with nondescript, shabbily dressed men with tired eyes and unhealthy complexions, as the telegraph key clicks unsteady and incessant in the background.
The ticker brings the market to life in a completely new way. It chatters as the market buzzes and falls silent as trading slows. It moves relationships away from people and into machines. We no longer need to trust that our apple and peach seller is giving us good investment information when we can simply read the tape. It provides a new space for market thinking and market action. The stock market classic Reminiscences of a Stock Operator by Edwin Lefevre talks at length about learning to read the tape, a task Lefevre regards as being the necessary basis for any success. Often, the tape is Lefevre’s metaphor for the market as a whole. The tape does not care why, he says, or the business of the tape is today not tomorrow.
The stock-picking strategy of technical analysis, or ‘charting’, still popular today, has its roots in the regularly-timed series of prices emerging from the tape. The ticker controls – no, imposes – time. It brings speed and direction into the market. It is suddenly possible to say that a stock is going up or down, even if the stock is traded in New York and the broker’s office is in San Francisco. It transcends space, turning a chaotic, confused cluster of marketplaces into a single, orderly, measured market. Its regular patterns live on in the scrolling horizontal stock price displays that one sees outside buildings, or rolling across the bottom of television screens. In our present time, when market trades are completed in microseconds, the gently rolling ticker is an epistemological absurdity but it has become a universal representation of the stock market.
So in those miserable hogs, and the (almost) equally miserable workforce that hacked and scraped in a systematised division of labour that would have horrified Adam Smith’s impartial spectator, we see the beginnings of the Chicago Board of Trade, then and now one of the mightiest financial markets on the globe. We have seen how new rules, measures and contracts have made possible a speculative trade in financial instruments only indirectly related to the underlying commodities. We have seen how advances in technology, the new telegraph system and the automated, chattering tickertape brought the economic world into Chicago. It is not without coincidence that the telegraph ran alongside the same railway system that brought the pigs to market. The ticker made time regular and became a new site for market action; speed and direction are suddenly visible, and with them profit. So connected, the market becomes a single, homogenous entity, the tendrils of its network running out from the great metropolitan centre like spokes from a wheel. It was, wrote Norris, a global affair,
‘A great whirlpool, a pit of roaring waters spun and thundered, sucking in the life tides of the city, sucking them in as into the mouth of some tremendous cloaca, the maw of some colossal sewer; then vomiting them forth again, spewing them up and out, only to catch them in the return eddy and suck them in afresh… Because of some sudden eddy spinning outwards from the middle of its turmoil, a dozen bourses of continental Europe clamoured with panic, a dozen old world banks firm as the established hills trembled and vibrated…’
At the centre of this whirlpool there lay the pit, the monstrous, gaping creature that gave Norris’ book its name. I prefer a more prosaic metaphor: the pit was the processing unit of the humming human computer that made the market work. Its signals were pure information: orders went into the pit, and prices came out.
The pit was a simple structure, an octagonal, stepped ring in which traders could stand. At first they just stood in crowds in the Board’s trading room. But it was hard to see over the heads of the crowd so they took to moving furniture and climbing on desks to get a better view. In 1870 this workaround was formalized and the octagonal pits were first introduced. The pits formed the heart of a new building in 1885, a monument to the civic power of finance with figures of Agriculture, Commerce, Fortune, and Order decorating the trading room. Soon, trade outgrew the architecture and the Board commissioned a new building, the art deco monolith that still looms over LaSalle Street. In this building too the pit-powered trading room dominated the design. It was a vast, open room, for designers by now understood that uninterrupted lines of sight were crucial to the functioning of the market. The world poured into the room through the newest communication technologies imaginable: the telegraph, pneumatic tubes, even telephones. Agriculture and her fellows were absent, though. The new building, completed in 1930, manifests the industrial modernity and bling of Art Deco: as Zaloom cannily notes, machined-finished, stylized images of plants and flowers bear the same relation to nature as the futures contracts, one step removed from the real thing. We might say that the building’s form represents the existential presuppositions of the business at hand; its architectural imagery is far more concerned with the mechanical processes of agriculture and transport than it is the natural underpinnings of commodity production. It’s no surprise that stock markets can be implicated in environmental degradation as well as inequality. When we come to build our stock exchange, if we want justice and sustainability, we’ll have to make sure the building backs us up.
—- Trading bell and pit noise —-
These stepped, octagonal spaces were soon found across the world. Their basic organisation had changed little by the time Zaloom, and other social scientists, visited them in the 1980s and 1990s. A bell sounded to open trading, and to close it, deepening liquidity by compressing orders into a short period of time. Runners brought orders into the pit and carried trade records out to be stamped, recorded and filed, while traders did battle to outwit their fellows and take home a profit. A pit trader did not need to know economics or commodity forecasts. Those things were translated into the orders pouring in from outside. They simply knew how to trade. They read faces and sought fear or weakness in the shouts of their rivals. It was enormously physical work, pushing, shouting and gesticulating, using a complicated system of hand gestures that had evolved over the previous century. Size mattered, so a cobbler in the building’s basement fitted high heels to the shoes of shorter traders. More senior traders, often those prepared to commit to bigger, more risky trades, worked their way to the front of the pit where they enjoyed better visibility and the advantages that came with it. It would be a mistake, however, think of this scrum as anarchic. The trading pits were organised and governed by complex social norms and procedures. Traders had to be prepared to take losses, transacting with brokers or fellow market-makers struggling to unload a position, a favour that would be reciprocated another day. Trades would be made in quarters, not eighths, thereby guaranteeing a certain minimum commission. Those in the pit would respect its politics and status organising themselves according to its invisible hierarchies. But most of all, those in the pit would honour their bargains even though these were simple spoken agreements. Failure to do so, or indeed to comply with any of these routines, would result in exclusion from future trades. In a now classic study the sociologist Wayne Baker showed how these behavioural patterns governed the ideal size of a pit; while economic theory would suggest that a bigger crowd would provide more liquidity and better prices, Baker showed that social controls failed if the crowd became too large and the whole pit suffered. Such social controls were necessary to protect the integrity of the central characteristic of the market, unchanged for a century and from which all else follows: the acceptance of a spoken trade as a solid contract.
You can see this world, perhaps a caricature but still well observed, at work in the finale of the 1980s comedy ‘Trading Places’. The verbal deals made by the heroes are concrete enough to bankrupt the villains after a failed corner in frozen concentrated orange juice, of all things.
But progress marches on, and the pits have all gone. While they help us understand the evolution of finance, it is unlikely that we would build our stock exchange around the human computers of old. Things change. As Sinclair said of those unfortunate piggies, we ‘could not stand and watch very long without becoming philosophical, without beginning to deal in symbols and similes, and to hear the hog squeal of the universe…’
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 email@example.com. Thank you for listening, and see you next time, when we’ll find out how London’s new stock market helped the King of England out of a sticky problem…
References and credits
 Upton Sinclair (1906) The Jungle, Ch3. I have edited the passage.
 An elegant primer is found in Donald MacKenzie, Material Markets: How Economic Agents Are Constructed (Oxford: Oxford University Press, 2009). MacKenzie is the undisputed leader in this field of study.
 Caitlin Zaloom, Out of the Pits: Traders and Technology from Chicago to London (Chicago: University of Chicago Press, 2006). This quotation from p16.
 This and below, Alex Preda, “Socio-Technical Agency in Financial Markets: The Case of the Stock Ticker,” Social Studies of Science 36, no. 5 (2006).
 Ticker: recording from ‘Timbre’ via freesound.org, under a non-commercial creative commons licence
 Frank Norris, The Pit (London: Penguin Classics), 72-73.
 Sound recording from ‘touchassembly’ via freesound.org, under a creative commons attribution licence
 Caitlin Zaloom, “Ambiguous Numbers: Trading Technologies and Interpretation in Financial Markets,” American Ethnologist 30, no. 2 (2003).
 MacKenzie, Material Markets: How Economic Agents Are Constructed.
 M Abolafia, “Markets as Cultures: An Ethnographic Approach,” in The Laws of the Markets, ed. M Callon (Oxford: Oxford University Press, 1998).
 Wayne E Baker, “The Social Structure of a National Securities Market,” American Journal of Sociology 89, no. 4 (1984).