Tag Archives: stock exchange

Episode 12. ‘The High Temple of Capitalism’



Some stories incarcerate, others emancipate. This episode explores the founding of the London Stock Exchange’s junior market, AIM. It follows the narrative of UK plc, exploring how it shapes the Exchange’s actions. We hear how the story slowly changes into something different, a vision of the market as the high temple of capitalism. We find out how the market makers and advisors lobbied successfully to maintain their advantages in the market. Despite all this, I suggests that we might find in the AIM story some germ of emancipation: a new way of understanding how a financial market could look.

Transcription

‘Some stories,’ says philosopher Richard Kearney, ‘congeal and incarcerate, others loosen and emancipate.’[1] But what does what? The task confronting the critically-minded citizen is precisely this, discovering which stories fall into which category; coming to know, as Kearney more colourfully puts it, whether ‘the voice I hear in my tent is that of the love of God or of some monster’. Perhaps we needn’t go that far, but Kearney has a point: stories are powerful and power-filled. They have a life of their own. They break free of their originators and travel, enrolling networks of support through which they might confront and dispatch lesser adversaries. It’s too much of a stretch, perhaps, to claim that stories have agency, but they certainly do things. Just look at the stories circulating in contemporary British politics: narratives of heroism, plucky Britain, a nation defined by a pugnacious smallness, continually punching above its weight. Every time you see someone dressed as Richard the Lionheart, stood outside Parliament and clutching a placard, you recognize the story at play. Does it incarcerate or emancipate? I’ll leave that up to you…

For a professional social scientist, this is just part of the job. Setting out to collect oral histories is setting out to deal with such a problem. As Kearney says, it’s hard to tell, and perhaps it’s best not to try. One cannot hope to provide an absolutely objective history: better to give the voices space to speak, and guide the listener through the result. We must look beyond the surface, catch hints and glimpses. When I investigated the 1995 formation of London’s junior market, AIM, I encountered the same story over and over: how European regulations forced the closure of London’s Unlisted securities market, pointing a knife at the beating heart of UK plc; how a plucky band of campaigners forced the Exchange to the negotiating table and demanded a replacement; how AIM arrived and has been the champion of British business ever since. This story is a fairy tale, as I showed in the last episode. The LSE was provoked by innovations from elsewhere, moving to shut down a rival market that was taking hold in the shelter of its own regulatory umbrella. The received story made no mention of this rival, dismissing its founder as a peripheral player, too small a fry for the big fish to worry about.

Some stories congeal and incarcerate, others loosen and emancipate; a story might provide access and shelter for some, yet slam the door against others. We must be alert not only to the facticity of a story, but also to its consequences.  When I probed further, I found in the accounts given by these men the faint traces of a woman. Named Theresa Wallis, she had been at the centre of things, she had got matters sorted, and then slipped quietly away out of the narrative. I’m sure she won’t mind me saying that she had something I suspect the men didn’t. She had faith: she believed in UK plc, she believed in the story, and that belief allowed her, in the words of one interviewee, ‘to walk through walls’. For Theresa Wallis did manage to start a stock exchange, and her design has become the model for a generation of imitators worldwide.

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. If you’ve been following this podcast – and if so thank you – you’ll know that I’ve been talking about how financial markets really work, and how they became so important. I’ve been deconstructing markets: the wires, and screens, the buildings, the politics, the relationships, the historical entanglements that make them go, all in the hope of helping you understand how and why finance works as it does. In the second part of this podcast series, I’ll be looking at the stories we tell about the stock market. You might be surprised how much power stories have had on the shape and influence of financial markets, from Daniel Defoe to Ayn Rand. I’m trying to grasp the almost post-modern nature of finance, post-modern long before the term was invented, the fact that finance is, most of all, a story. Start-ups are stories, narratives of future possibility; shares and bonds are promises based on narratives of stability and growth. Even money is a story, circulating relations of trust written into banknotes, credit cards and accounts. Stories set the tone, make the rules, determine what counts and what does not. A good stock market needs a good story, so if we’re serious about rebuilding financial institutions then we need to take control of those stories.

I began the last episode with a bit of nostalgia, looking back to the late 1990s and the wild excitement of the dot-com era in a London that had yet to be gentrified. That was on the way, of course. Financialization, the steady drift of profit-making into the financial sector that took everything else with it, transforming the capital into the steel and glass metropolis we know today, began in the 1980s. For many critics, it hinges on the Big Bang of 1986, when the City’s floodgates were thrown open to global capital flows. But the game certainly wasn’t over all at once, for the 1990s began with a valiant and genuine attempt to use financial markets for their stated purpose: the raising of capital for small and growing businesses. That was the remit of AIM. Like almost everything in this story it worked out in an accidental fashion. AIM created the world I had stepped into, and if we going to understand how that world took shape, we need to step back in time a little and investigate the formation of the market itself. If we want to know how to build a stock exchange, we should look how others have done it already.[2]

Just to remind you, AIM – or The Alternative Investment Market – is the London Stock Exchange’s junior market. Junior means that it is aimed at smaller, younger companies, and that it is easier for firms to get onto. The taxman treats companies listed on AIM as if they were still privately held, conferring certain tax advantages on shareholders. That is a reward, in theory, for risking their money in earlier stage ventures. You will remember from the last episode how a similar market called the USM had operated successfully throughout the 1980s but had been closed when the recession of the early 1990s stripped away demand and the Exchange’s bureaucrats tired of the administrative burden. Remember how a gang of important players within the USM world got together and founded a lobby group to pressure the LSE into establishing a replacement market.

The venerable London Stock Exchange was, by 1993, looking a little bit directionless. Big bang had broken up the trading floor and the LSE’s physical monopoly on the profitable business of market making. The jobbers, specialised traders who had evolved alongside the Exchange over 200 years, were suddenly gone. The LSE had been embarrassed by a huge and expensive IT fiasco, which resulted in the loss of its settlement function and the resignation of its chief executive. It had long operated as a membership organisation, owned by its members – a mutual – but this structure  had become deeply unfashionable and often gave rise to unacceptable conservatism in the Exchange’s rules and management decisions._

Its business proposition was moving from regulation towards the more nebulous provision of exchange services and data sales, but any firm could do this. The LSE was a national institution, but why? What made the LSE special?

Michael Lawrence, the new chief executive, clutched the lifeline that he had been inadvertently thrown by those campaigners touting the interests of UK plc. This was exactly what the Exchange was for: growing Britain as an entrepreneurial nation, not just in London but across the English regions, in Scotland and Northern Ireland! It would be pushing at an open door, for business-folk and policy-makers outside of London had also begun to believe that the financing of entrepreneurial businesses might offer a remedy to the economic collapse that followed the rapid de-industrialisation of the late 1980s. Lawrence saw an opportunity to fill the void left by the closure of regional stock exchange offices in the 1970s and 80s, and reckoned on an nationwide demand. ‘These smaller companies,’ Lawrence would say, ‘these earlier stage companies are not going to be walking about the City of London, you know, they’re going to be in the UK regions.’ There was money in the regions and received wisdom held that local investors preferred local businesses: ‘One of the things I heard and learnt when I first came on with the role,’ says Wallis, ‘was… investors, when it comes to small companies they’d rather invest close to home where they can go and visit the companies and they look them in the eye and all that sort of thing.’ The vision of all this lonely money and all these needy businesses would have set even the most stony hearted of financial middlemen trembling. At the heart of Lawrence’s seven-point plan for the revival of the London Stock Exchange was a proposal to transform the problematic Rule 535 over-the-counter market into a vibrant cash-raising facility for the entrepreneurs of UK plc: a strategic masterpiece dealing with the LSE’s biggest worries in one single movement.

And so began the slow process of talking this new market into being. Lawrence recognized that a new approach to listing would be vital, and that, in the conservative institutional culture of the LSE, this would require an entirely new team. The success of NASDAQ was credited in part to its independence from the New York Stock Exchange – it’s a completely different organisation, of course – but the LSE sought to imitate this independence, and thus NASDAQ’s success, within its own institutional setting. Lockheed – the aeroplane manufacturer – is famous for its ‘Skunk Works’, an autonomous group of engineers given freedom to go and create super-cool new things, notably the Blackbird spy plane.[3]

The model has been trotted out by business school gurus ever since as a successful tactic for developing innovation in big organisations, and Lawrence took a similar approach, though I doubt whether he did so consciously. He put a young and little known executive called Theresa Wallis in charge of a working party with a brief to think about listing in a completely new way. Wallis had already demonstrated her management – and marketing – skills at the Exchange by developing the Eurobond listing activities to match the customer-friendly, turnkey service offered by the Luxembourg Stock Exchange. A pivotal figure in this history, Wallis’ efforts have never been fully recognised, though it is clear she displayed a remarkable energy and competence in making the market happen. She had been instructed to ‘walk through walls,’ said one intervewee, ‘and she did’. Another described her as an ‘incredible leader, a team player, politically aware… phenomenal… it was a blessing to be working with her.’

Wallis was, as I have said, a believer. She was, she says, ‘inspired by the ability to [do] anything that can help the UK economy and can help… helping smaller companies grow, helping the UK economy.’ She was generous in her retelling of the market’s foundation, emphasising how much support the working group received from the rest of the Exchange; she remembers colleagues with deep expertise in listing practices and regulations and the minutiae of running an exchange, while her own team fizzed with excitement and a real commitment towards helping the British economy. Wallis and two colleagues sketching on a flip-chart came up with the ‘Alternative Investment Market’ name, while Lawrence subsequently suggested with the brand abbreviation. At the same time, the new market could make use of the LSE’s expertise, infrastructure, and prestige. ‘The Stock Exchange,’ says Simon Brickles, one of Wallis’ team and subsequently head of AIM,  ‘knew how to operate markets, it had got the facilities, it had got the people, it had got the resources, and it had got the prestige.  On the other hand, I became convinced that AIM could have its separate values, its own separate rules, its own separate problems, opportunities and so on and that was Michael Lawrence’s vision.’

A stock exchange is a bundle of wires and screens. But it is also a community of trust, shared expectations and commitment to certain norms. The LSE already possessed the former, so the team set about building the latter through an extended and iterative conversation with future participants. They sent out a consultation and the responses drove the construction of the new market. As responses were received they were distributed among the small team, reviewed, and discussed at a morning meeting. Megan Butler, then a young lawyer at the LSE (now Director of Supervision at the FCA) advised the group on developing the Rulebook and regulatory compliance. The team had to manage such technical issues, often with the support of the community from beyond the Exchange. But most of all, the new market had to be talked into being. Martin Hughes, a young executive on secondment to the team from Scottish Enterprise with the responsibility of promoting the market north of the border describes the process as, ‘Knowledge building, consensus building, to inform an emergent model…a continuous iterative process….It was all about the market, getting to understand it, and that engagement.  You could tell that the relationship was very close.  You could tell that it was understood why it was important…there was never anyone who was not willing to engage properly, and think about it.’ The consultation documents, responses from the community, follow-up telephone calls, meetings, or conversations over dinner, held to a steady pace by the Exchange’s somewhat pedantic and bureaucratic routines, slowly wove a market from threads of narrative and conversation. As a place of collective trust, recognition and expectation, the market was performed, acted out, spoken into being by the narratives and conversations that underpinned it. These in turn were held together by a shared commitment to the wonderful institution of UK plc.

But there was still battles to be fought, turf wars over who would enjoy the benefits of this new market. Would it be UK plc, really? Within the discourse of entrepreneurial team GB there was still plenty of scope for arranging the trading mechanisms in as comfortable manner as possible. As Brickles says, the LSE already knew how to operate markets. It already had the structures, the trading institutions and the technology. These, as we saw in previous episodes, had developed throughout the previous two decades pushed by reforming technologists and regulatory changes. One of the things that these technologists had achieved, according to the sociologist Juan Pablo Pardo-Guerra, was the institution of electronic order book trading across the LSE. Under this arrangement, buyers and sellers are automatically matched, cutting out the need for the expensive market-making middleman. The technologists saw themselves as visionaries pursuing a better kind of financial market that used technology to deliver efficiency, narrow prices, and to offer the eventual customers (investors) a better deal. Scholars like Pardo Guerra and Donald MacKenzie have shown that motivation at work throughout the technological development of digital markets; in this instance it was a rival firm called TradePoint that forced the LSE to adopt order books and disenfranchise the market-makers.[4] (Much of today’s episode comes from my own research, but as always full references are provided in the transcript on the podcast website.)

The alternative to an order book market is a quote driven market, where market makers offer buy and sell prices and make their money on the difference between the two. The more market-makers competing to offer prices in a single security, the narrower those spreads will be. With only a small handful of market-makers, Winterflood Securities pre-eminent among them, the USM had been a quote driven market and a comfortable one, with ‘spreads wide enough to drive an 18 wheel truck through’. The justification offered was always that that less liquid markets – those with fewer buyers and sellers – required some kind of intermediation in order to make transactions happen. Ironically, for even less liquid stocks order books become useful again, as market makers do not want to hold stock they might not be able to sell. John Jenkins’ notebooks, taking lists of potential buyers and sellers, were a version of order book market, but one that combined intervention as well – will the seller take 990 as opposed to a thousand, will the buyer be able to offer a 990 instead of 980, and so forth. At the more liquid end of Jenkins’ Rule 4.2 operation, however, his firm was offering quotes as a market-maker, and the community could see that this model could form the basis for the new market. There was no need to reinvent the wheel. ‘Here was a group of companies,’ says Andrew Buchanan, a small company-focused fund manager, ‘in which there seemed to be some perfectly reasonable trading activity but no obvious mechanism. And yet the lack of a mechanism didn’t seem to inhibit the liquidity in the stock.  So what was the problem?  They could build on 4.2 to make it a reasonable market, a quote-driven market place…’ Within the LSE, Wallis’ team had arrived at the same conclusion, proposing that they would re-regulate Rule 535.2 (as it now was) to an acceptable level, playing out the strategic objectives of the seven point plan.

The market-makers held onto their turf, for now at least.

A secondary problem concerned the kind of companies that might be listed on this new market, and who would take responsibility for them. An onerous admission process handled by the LSE’s listing office seemed out of step with the UK plc narrative and the entrepreneurial aspirations that it embodied. How could the companies of the future raise funds with some worried regulator peering over the shoulders of potential investors? Again, the new market took the success of Rule 4.2 as a model. It would be a market based on caveat emptor, buyer beware. ‘Private investors,’ said Wallis, ‘investors who are buying on Rule 4.2 don’t seem to mind – it’s very much a caveat emptor market – don’t seem to mind that it’s not regulated. They know what they’re going in for. Maybe this is going to be the solution, [if] we build a market around what was Rule 535.2 dealing.’ And here we begin to see the story changing: no longer simply about UK plc, but also about freedom of choice and the appropriate role of regulation in a capital market. For the neoliberal, of course, the role of regulation is not to protect consumers but allow them to protect themselves through freedom of choice, and that’s exactly how Brickles tells it: ‘I don’t think [heavy regulation] is the business of a Stock Exchange, we should be the high temple of capitalism, we should allow as much choice and freedom as compatible with a reasonable level of investor protection.’ Investor protection here takes the form of making sure that firms disclose all relevant information, so investors can choose properly. And how to do that?

Originally, one of the guiding principles of this new market was ease of access for companies, which in practice meant low costs. As most of the costs of listing on a stock market come from fees paid to advisers it was sensible to suggest that firms didn’t need them. In particular they might not need a sponsor, an expensive corporate finance house whose role it was to scrutinise the firm in the run-up to its public listing. There were squeals from the community: just imagine those poor, unprotected investors! Sotto voce: just imagine those rich fat fees! Most of the investors were institutions who knew their business well enough and would be happy to do without advisers whose fees they eventually would pay, as shareholders, but their voices were outnumbered as the consultation results came in. For decency’s sake, some kind of sponsor must be necessary. Wallis’ team hatched an ingenious compromise, proposing that each firm would employ a Nominated Advisor, or Nomad, with certain guaranteed professional qualifications and experience. These Nomads would police the companies on the market, ensuring full disclosure and certain basic probity, but without needing the Exchange to take on responsibility of oversight.

But who would police the Nomads? Who would guard the guards? Each other, of course! You could call this a reputational market, if you like. Everyone knew everyone else and if you gained a reputation for being somewhat sharp you would find future opportunities rapidly shrinking. Investors sold substandard merchandise have very long memories. This was scarcely a decade after the closure of the LSE’s trading floor, and the new market harnessed the close social networks that persisted in the City, many from before the Big Bang. It relied upon, in Brickles’ words, ‘the tools and instruments of a club’: blackballing and (mostly private) censure. Only in real cases of malfeasance would the Exchange pursue the nuclear option and offer a public reprimand. As one former director of the LSE put it, ‘When you run a stock exchange…you have two rulebooks.  One is the written rulebook and the other is the unwritten rulebook. When it came to AIM, there was a network underneath which says, that company, don’t touch it.  And so an awful lot of this stuff was unwritten, unrecorded…Can’t discuss it publicly, deny all knowledge.’ Some feel that market is not strict enough in dealing with errant Nomads. ‘It was always implicit,’ says the same director, ‘we would shoot one a year pour encourager les autres…I think the Stock Exchange didn’t do that.  They were too obsessed with the marketing, getting companies on.’

Clubs are never quite as strict as they claim to be.

Back to our narratives. The narrative of the market as the engine of an entrepreneurial UK plc has metamorphosed into a narrative of the market as a high temple of capitalism focused on choice and disclosure; but the narrative of UK plc was never, as we saw in the last episode, free from special pleading and the self-interest of one group or another, and so it remained. UK plc proved durable enough to pull participants into the new market and to give rise to an organisational structure where orders are filled through a quote-driven mechanism, preserving a profitable niche for a handful of market-makers, particularly Winterflood Securities (that name again!). And the administrative underpinnings of capitalism’s high temple, the necessity for full disclosure so that investors can take their chances on an informed basis has grown into the requirement that listees retain an advisory firm with its executives drawn from a small and carefully qualifying pool – those who had already conducted a certain number of transactions in the market. The Exchange, as one interviewee put it, didn’t want just anyone turning up and building a reputation on the back of the market they needed to already have a reputation. If you wanted to play, you already had to be in the club.

This sounds like a coup to me. And you won’t be surprised to hear that by the late 1990s Theresa Wallis had slipped quietly away from the market she created, away from the Exchange as a whole, almost out of the story altogether. The chaps were back on top.

Finance scholars describe the Nomad system as ‘private sector regulation’ and there have been long debates about whether it works or not.[5] But there’s no ignoring the fact that AIM’s model has been a success. Hundreds of companies have joined the market and raised funds through it. The combined capitalisation of the market is roughly a hundred billion pounds sterling. The model has been adopted worldwide, especially since the NASDAQ model fell out of favour in the post-dotcom world. The ambition to help growing firms seems stronger now than it did in the market’s second decade, an era of globalisation that I will cover in a future episode. The battle over order books has persisted and the market operates a hybrid system, with electronic matching for larger firms and market-makers still very present among the less-often traded securities. Watching these traders at work is remarkable, in fact, and I’ll pick this up in due course, too.

And I wonder if, after all, AIM’s structure helps us to see new possibilities for the organisation of financial markets. For giant global financial markets, as scholars have repeatedly shown, are modelled on a particular conception of how markets should work, the efficient market hypothesis proposed by the economist Eugene Fama. In essence, Fama’s hypothesis suggests that markets are fundamentally efficient and that all the information you need is in the price. Fama’s theory, as literary scholar Paul Crosthwaite and others have shown, claims an intellectual lineage from Adam Smith’s Invisible Hand through the neoliberalism of Frederick Hayek: a commitment to the market as an all-powerful, computationally supreme mechanism, capable of spontaneous organization, what Hayek calls a ‘catallaxy’. [refs] Financial markets epitomize this all-knowing, self-organizing, quasi-natural phenomenon. Moreover, if markets offer a glimpse of pure knowledge, the proliferation of obscure derivative contracts seems less like a massive increase in knowable risk , and more like an increase in the resources available to future-divining trade-seers.

The role of market operators, then, is to get everything else out of the way to allow a clear, synchronous, global view of that wondrous price, so that buyers and sellers can adjust their behaviour accordingly. AIM’s organisation is more akin to that of a producers market, where those supplying goods keep an eye on each other and work out prices among themselves. It’s more like a farmers market than a Fama market. Sorry, I couldn’t resist.

Does this offer ways forward for rethinking finance? To be honest, I’m not sure, especially in view of the story I’ve just told you. It does certainly offer a means of stepping away from the global, all-knowing, Fama market which some might suspect not to be as efficient as all that, especially in the decade-long wake of the financial crisis. It does seem to offer a way of doing things differently. Despite the capture and social closure, the incarceration, as Kearney would put it, I wonder if there’s a germ of emancipation in here somewhere. Hats off to Theresa Wallis and her gang for figuring this out.

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 philiproscoe@outlook.com. Thank you for listening. Please join me next time, when I’ll be back to 1999 and the moment of dotcom madness.

 

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Sound effects under an attribution licence from freesound.com

Prison door lock https://freesound.org/people/RobertMThomas/sounds/151136/

Footsteps and locks https://freesound.org/people/RobertMThomas/sounds/151120/

Champagne cork https://freesound.org/people/KenRT/sounds/392624/

Champagne pouring https://freesound.org/people/Puniho/sounds/169193/

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[1] Richard Kearney, Strangers, Gods and Monsters (Abingdon: Routledge, 2003), 179.

[2] This episode relies upon my history of London’s smaller company markets: Roscoe, P. (2017) The rise and fall of the penny-share offer: A historical sociology of London’s smaller company markets. University of St Andrews. 120 p. Available https://research-repository.st-andrews.ac.uk/handle/10023/11688

[3] https://en.wikipedia.org/wiki/Skunk_Works

[4] Juan Pablo Pardo-Guerra, Automating Finance: Infrastructures, Engineers, and the Making of Electronic Markets (Oxfoird: Oxford University Press, 2019); Donald MacKenzie and Juan Pablo Pardo-Guerra, “Insurgent Capitalism: Island, Bricolage and the Re-Making of Finance,” Economy and Society 43, no. 2 (2014).

[5] According Gerakos et al., firms listing on AIM underperform peers listed on more regulated exchanges, less regulated exchanges (e.g. the American ‘Pink Sheets’ OTC market) and even private equity, and are more likely to fail than firms on other markets. On the other hand, Nielsson argues that AIM-listed firms are of equivalent quality to those listing in more regulated markets, and simply do not meet the listing criteria of more established markets. Scholars do agree that AIM offers a successful fund-raising venue for smaller companies. Joseph Gerakos, Mark Lang, and Mark Maffett, “Post-Listing Performance and Private Sector Regulation: The Experience of London’s Alternative Investment Market,” Journal of Accounting and Economics 56, no. 2–3, Supplement 1 (2013); Ulf Nielsson, “Do Less Regulated Markets Attract Lower Quality Firms? Evidence from the London Aim Market,” Journal of Financial Intermediation 22, no. 3 (2013).


Episode 10. Where real men make real money



Stories shape our world, and stock markets are no exception. This episode explores the entanglements of fiction and finance, from Robinson Crusoe to American Psycho. We discover how Tom Wolfe cut a deal with Wall Street, making finance male, rich and white, and see how the concept of ‘smartness’ perpetuates elitism and discrimination in Wall Street recruitment. A better stock exchange is going to need a better story; in this second half of my podcast series we’ll be discovering just that.

 

Transcription

Imagine the financier. What does he look like? It’s going to be him, for reasons I’ll come to shortly. He’s white, of course. I wouldn’t be surprised if he has a striped shirt and braces – suspenders if you prefer – a perma-tanned face and slicked back hair. He opens his mouth, and you know what’s coming. Yes, greed is good…

It’s Gordon Gekko, a face and a speech burned into our collective imaginings of finance by Michael Douglas’ spellbinding performance. It’s not even a very good film, but it hit the cinemas just a few weeks after the crash of 1987 – where I wound up the last episode at the beginning of the summer – and captured the popular imagination. Gekko, Master of the Universe. We all know that phrase. It comes from Tom Wolfe and his Bonfire of the Vanities. You remember Wolfe’s description of the trading room at Pierce & Pierce, behind the faux English fireplace and club armchairs:

‘a vast space… 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.’

This is where men made money, where real men made real money, a supercharged, 1980s version of the heavy industry that had defined a previous generation of masculinity: blue collars and half-moons of perspiration seeping through the shirt, but the shirts are Brooks Brothers, and the rivers in the background run with money, not molten steel. The trading room Wolfe visited for his research was none other than that of Salomon Brothers, where the biggest of all ‘big swinging dicks’ hung out. That phrase is from Michael Lewis’s celebrated Liar’s Poker, his first person account of the buccaneering heyday of Salomon trading in the decade of greed.

These icons of finance are fixed in our collective narrative imagination.

Ironically, true greed doesn’t seem nearly as glamorous as Douglas, Wolfe and Lewis make out. A more fitting exemplar of contemporary elite finance would be the lovable, Latin-quoting everyman Jacob Rees Mogg (described by my friend, an actual classicist, as a ‘faux aristocratic, xenophobic, hedge fund… well, I’ll let you guess the last word), a walking self-parody seen lounging on the front bench of the House of Commons as if it were his private sofa.

Or Martin Shkreli, the former fund manager, self-styled bad boy ‘Pharma Bro’, and capitalist provocateur, who shot to notoriety for buying the rights to an essential HIV medicine and putting the price up by 5000%. Shkreli disgraced himself further by refusing to answer questions in a Congressional hearing and instead leering like a teenager given detention at school but determined not to lose face.[1]

Here he is, interviewed by Forbes, explaining what he would have done differently next time.

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Shkreli voice [2]

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That’s right. He would have put the prices up more. It was his fiduciary duty to go to 100% of the profit curve, because that’s what they taught him in MBA class. It’s worth watching the video (and you can find the link via the transcript on the podcast website) to see Shkreli hunched over in his hoodie, unable to make eye contact with anyone in the room. This is a man who spent $2 million at auction to buy a one-off Wu Tang Clan album only to have it repossessed by the Federal Government. Who wound up with a prison sentence for fraud, having swindled his investors, and was then – allegedly – slung in solitary confinement for running his hedge fund from prison using a contraband mobile phone. Master of the Universe he is not.

Rees Mogg and Shkreli are characters that you couldn’t make up, or at least you wouldn’t bother doing so. The real stories here are something else, the narratives working in the background, a dream of buccaneering Britain in an ocean of free trade, or the fiducary duty to shareholders, right to the end of the profit curve, no matter what cost. These are the fictions that shape our world. Stories matter.

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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.

If you’ve been following this podcast – and if so thank you – you’ll know that I’ve been talking about how financial markets really work, and how they became so important. I’ve been deconstructing markets: the wires, and screens, the buildings, the politics, the relationships, the historical entanglements that make them go, all in the hope of helping you understand how and why finance works as it does. In the second part of this podcast series, I’ll be looking at the stories we tell about the stock market. You might be surprised how much influence stories have had on the shape and influence of financial markets from Daniel Defoe to Ayn Rand. I’m trying to grasp the almost post-modern nature of finance, post-modern long before the term was invented, the fact that finance is, most of all, a story. Start-ups are stories, narratives of future possibility; shares and bonds are promises based on narratives of stability and growth. Even money is a story, circulating relations of trust written into banknotes, credit cards and accounts. Stories set the tone, make the rules, determine what counts and what does not. A good stock market needs a good story, so if we’re serious about rebuilding financial institutions then we need to take control of those stories.

Stories matter.

In previous episodes I have suggested that the evolution of finance was driven by erratically developing technologies and political struggles and alliances. This is true, and helps us understand the chaotic history of stock markets and undo neat linear histories of economic and technological progress that lead inexorably to the world of digital high finance, as though there were no other possibility. A sort of Francis Fukuyama does finance, if you will. But it underplays the enormous role played by writing in the development of finance we know today. The literary scholar Mary Poovey has written extensively on the topic, and her 2008 book Genres of the Credit Economy is undoubtedly a masterpiece. Her basic claim is that from the seventeenth century onwards imaginative writing – and there was not, back then, stark demarcation between fact and fiction – helped people to understand the new credit economy and the kinds of value that operated within it. Financial markets are underpinned by styles of writing, and a primary function of writing was to help people get used to the idea of finance. For example, take such mundane financial objects as banknotes and cheques, ledgers and contracts. These are things we use every day. They are written things, but we don’t see that. Money has been so thoroughly naturalised that its identity as writing has disappeared, embedded instead in social processes. Even the written promise to pay is disappearing from banknotes – you can still find it on Bank of England notes but the euro carries only a serial number.

In the seventeenth century, however, these kinds of abstractions were problematic for a population that had always dealt in coinage, in specie. The developing genre of fiction, says Poovey, helps readers to practice trust, tolerate deferral, evaluate character and believe in things that were immaterial, all essential skills for negotiating this market world.

Three hundred years ago, Defoe published Robinson Crusoe. I read this for the first time just a few weeks ago, and cor-blimey, it is not the tame story we learned in primary school: there’s slavery and cannibalism, white supremacism and European-Christian expansionism. Even here we see a pecking order – though Crusoe is not too keen on Catholics, he has no time for them being eaten by heathens. Crusoe gets religion in a big way. And he just shoots everything! No sooner does an endangered beast lumber or roar into view than Crusoe has bagged its hide as a trophy, or as the story progresses, perhaps a hat. He is a model industrious citizen, an archetype of the petty bourgeoisie. He etches a calendar on a post and keeps books of account in a ledger scavenged from his shipwreck. In sum, Crusoe imposes the worldview of any good seventeenth century Englishman on his tiny island dominion, where he eventually becomes king over a growing and hard-working population. No wonder Marx had such fun with him!

Daniel Defoe did not just write Robinson Crusoe. Defoe was a central figure in an era sometimes called the ‘Age of Projects’. A prolific author of fiction and non-fiction, one of the first to earn a living from his pen and shape the world as he did so. Valerie Hamilton and Martin Parker, scholars who work in my own field, have drawn attention to the parallels between Defoe’s fictions and the rash of corporations that emerged in the same period.

‘The figure of Daniel Defoe,’ they write, ‘inventor, businessman, writer, politician and secret agent, characterises the age. His first published work, An Essay upon Projects (1697) bottles this energy. It is a series of proposals for the social and economic improvement of the nation – on banks, lotteries, women’s education and many other topics. Defoe explains that the richness of ideas at this time was generated from ‘the humour of invention’, which produced ‘new contrivances, engines, and projects to get money’’. Defoe defined a project as a vast undertaking, too big to be managed, and therefore likely to come to nothing.  Crusoe’s task is a project, the unlikely, implausible but ultimately fruitful endeavour of turning brute nature into a well-disciplined, productive domain.

For Hamilton and Parker the project is epitomised by corporations, and particularly the Bank of England, which grew from the chatter of a few traders in Jonathan’s coffee house, as we saw in episode three, into a building of, as they put it, ‘timeless rusticated stone’, solid and substantial in the heart of the City of London.[3] I should say, by the way, that you will find full references in the transcript on the podcast webpage.

For Poovey, Defoe’s project was nothing less than the attempt to incite belief through print. ‘In the realm of fiction,’ she writes, ‘the negative connotations associated with invalid money were neutralised by the claim that imaginative writing did not have to refer to anything in the actual world; in the realm of economic theory, the fictive elements intrinsic to credit instruments were neutralised by the introduction of abstractions, which would claim simultaneously to be true and not to be referential.’[4] More plainly, as novelists like Defoe sought to distinguish themselves by refusing to be held to account for the factual content of their stories, so money rode on their tail-coats. A growing cadre of financial journalists aimed ‘to demystify the operations of the city and make even the arcane language of finance familiar to ordinary Britons helped make economic theory seem relevant to everyday life and, not incidentally, make investing in shares in acceptable thing to do with money.’ Walter Bageshot (pronounced badshot) was the exemplar of these men, an early and influential editor of the Economist magazine. Last of all came the experts, the economic theorists, like Stanley Jevons (a distant cousin of mine) whose flights of marginalist fancy and economic scientism, depended both on the existence of dispassionate, factual writing and the availability of abstraction, even the suspension of disbelief, tools assiduously cultivated by the novelists.

We can push the argument further. Marieke de Goede argues that the very existence of the economy, or ‘finance’, as a zone separate from the political and amenable to scientific analysis, is the result of enormous storytelling, narrative work. For her, finance is ‘a discursive domain made possible through performative practices which have to be articulated and re-articulated on a daily basis’. Her examples include the construction of the Dow Jones index, a process that took considerable narrative work. The Dow Jones, or the FTSE, or any other such index, give us a way of talking about stock markets as if they were cut off from the rest of society, distilling them down to a single number, abstracted from all other concerns. As we saw in episode eight, these new narratives – these new numbers – are quickly wrapped up in the wires and screens of the market, forming a sealed, self-contained and self-referential whole.

Or even further: Max Haiven, the Canadian cultural critic, has written about the fictitious nature of money and the role of finance as ‘capital’s imagination’: ‘we are already making a mistake when we take umbrage at the staggering gap between the imaginary world of financial values and what we imagine to be a more real monetary economy. Finance is only a more complicated moment of the capitalist extraction of value. But this abstraction of value is always already at work whenever we speak about resources, social processes, and society in monetary terms.’ [5]

—–

So we can start to see why this all matters. Stories persuade us that some things are normal, and that others are not; that some things matter and that some things do not. They can even persuade us that certain things are inevitable, when they need not be. The cultural critic Mark Fisher quipped that it is easier to imagine the end of the world than it is the end of capitalism. You only have to watch Spielberg’s Ready Player One to see such a vision in action: society collapsed, but the online retail of high-tech goods amazingly unaffected.

As you might have gathered, much of this cultural criticism has a Marxist bent, but it has been equally perceptive on gender and race. When Michael Lewis talks about the big swinging dicks of the forty-first floor, he does more than make us laugh. Lewis’ book is one of those all too common morality tales that end up eulogising the thing they set out to censure. It is no surprise that scores of undergraduates, keen to make their way into the ritzy world of investment banking, took up Liar’s Poker as a kind of how-to guide; even though, as Lewis makes plainly and comically clear, his own intro into that world comes entirely through personal connection and lucky chance. At the beginning of this episode I suggested that the financier we imagined would almost certainly be a he, and there is a reason for this. In the stories, it’s always he: from those Big Swinging you-know-whats, to the well-educated young men of Pierce & Pierce, baying for money in the bond market.

——

Traders shouting[6]

—–

Tom Wolfe is a particularly bad offender here. Literary scholar Leigh La Berge argues that Bonfire of the Vanities, released days before Black Monday, helped to ‘cement an aesthetic mode that captured the way a new financial class was beginning to identify itself and its economic object.’ The book’s historical realism self-consciously mimics the great realist novels of an earlier era, of Dickens or Balzac: a new city, a new age, with all its vanities and perils, needing a new chronicler.

Wolfe paints finance as complex, a world of leverage buyouts, bond yields, and other such exotic, risky, dangerous creatures; a world accessible only to the ‘masters of the universe’ who inhabited it, and needing the intermediation of a white-suited literary giant to make it legible to the rest of us.

Wolfe makes clear the difficulties involved in representing an exclusive, elite financial world. And yet, says La Berge, ‘Bonfire includes a careful cataloguing of the difference between styles of town cars, codes of cordiality and comportment on the bond trading floor, rules for private school kindergarten admission, and how to hold the Wall Street Journal in public space… What those who had allowed Wolf to observe them received as compensation was a conception of finance as complicated, difficult, hard to define, and reserved for wealthy white men.’ La Berge suggests that Wolfe made a pact with Wall Street. In return for the access he needed, he would take their performances of finance at face value. his prose is littered with exclamation marks, onomatopoeic grunts and groans: ‘Wolfe records sensations of speed, sexual excitement, anxiety and pleasure. In this world of masculine sensation, finance finds its form. Men understand it. As he glares at his wife across the table, alternately planning a bond sale and justifying his affair to himself, Sherman thinks: “Judy understood none of this, did she? No none of it”.’[7]

Wolfe got his ‘masters of the universe’ slogan, from Michael Lewis, and the two wink at each other in their texts: the great interpreters of the excesses of 1980s finance capitalism. Two decades on, and Lewis is still banging the same drum: another crisis, another translation needed, another reproduction of finance as gendered and complicated. The film version of Lewis’ The Big Short, directed by Adam McKay, is even more overt in its presentation of men as cool, rational and in command, and women as distracting and dangerous. Think of the scene where the leading short seller interrogates a topless dancer in a private room as to the viability of her mortgage payments. By the end of the conversation she has stopped dancing, her voice cracked with panic, while our hero calls the office to strike a deal. ‘There’s a bubble’, he says. Gavin Benke, who points this out, notes the very old conceptions of who should and should not participate in the market, concerning not just gender but also class and smartness, all circulating under the surface of the narrative.[8]

The problem is that life imitates art. Literature is too clever, too self-aware to fall into the trap. It tears apart such realist simplicity – think American Psycho’s gruelling banality as non-descript bankers chat about consumer goods and endlessly re-articulate the social mores of which Wolfe is so proud – how to wear a pocket square, for example – interspersed with almost unutterable depictions of depravity and murder. Who could write realist fiction on finance now? But finance self-consciously reproduces these tropes: meetings conducted in strip joints and clients entertained by prostitutes, foul mouthed masculinity and a repertoire of bodily metaphors involving penetration, the steely disposition of the screen trader who pukes in the bin after taking a particularly bad loss and goes on scalping without further pause. All these are examples collected by empirical sociologists, things observed or stories heard in the field. Such narratives police who and who may not enter the market: ‘The stories that they tell and the heroes that they consequently install recreate a world where risk remains unruly and untamed, and stewards’ dreams of stability are there to be exploited,’ write Simon Lilley and Geoff Lightfoot, ‘The steward is seemingly driven to the market by a desire to minimise the potential disruption resulting from the market’s movements. The speculator, however, chooses to go there and to go only there, making their living through better understanding their home than visitors.’[9] Remember, from episode two, Jadwin, the buccaneering speculator in Norris’ great Chicago novel, locked in combat with the market as monster, all maw and tendrils; such metaphors tell how we place ourselves in relation to the world around us. Perhaps financiers better conceive of themselves as hunters, the aboriginal inhabitants of the stock markets. After all, a common expression for those working on a commission basis is ‘eat what you kill’.

Whichever way, no girls allowed here.

These norms are inculcated in financiers before they even get hired. The anthropologist Karen Ho documents the Wall Street recruitment process on the Princeton university campus, seen from her peculiar insider-outsider perspective of Princetonian, but postgraduate student, female and Asian American. She finds these old ideas of who should and who should not participate in the market very much alive. They fasten around the notion of ‘smartness’. Potential recruits are constantly reminded that they are the smartest of the smart, but Ho sees through any claim to intellectual resources. Instead, it means something quite specific:

‘such characteristics as being impeccable and smartly dressed, dashing appearance, mental and physical quickness, aggressiveness and vigour reference the upper-classness, maleness, whiteness and heteronormativity of ideal investment bankers…the specific elitism that is the key valence of smartness…’

And it helps to have been educated at Harvard or Princeton too. Being British, I don’t recognise the fine distinctions between elite American institutions, but Wall Street recruiters do. If you go to Yale, for example, you need to be studying economics; at Penn State it has to be the Wharton School of Business.

‘It is precisely these differentiations between ‘always already smart’ and ‘smart with qualifications,’ between unquestioned, generic and naturalized smartness and smartness that must be proved, that enact and solidify the hierarchies on which elitism is necessarily based.’[10]

Nothing is without purpose in these stories. Ho suggests that this endless recruitment of the smartest of the smart, even when more established employees are being laid off in shrinking markets, serves to bolster the position of Wall Street relative to its clients in corporate America. For if the smartest of the smart are hired by investment banks – even if they do arrive to a drudgery of all-night shifts in rundown and non-descript offices – by definition those hired by corporate America must be less smart. By an easy logical extension, they must do what they’re told and pay the bankers fees. More than this, the stringent selection process, combined with toxic and insecure working conditions persuades bankers that such macho environments need to be spread elsewhere. This, argues Ho, offers a moral justification for the endless corporate manoeuvres, takeovers, and restructurings that Wall Street imposes on its clients across the nation. Paired with the notion of shareholder value, the ‘origin myth of Wall Street’, these fictions licence investment banks to do what they do best: make money. As we saw from Shkreli’s self-justification, the fiduciary duty to shareholders mandates any course of action, however morally despicable.

—–

Stories shape the way we see the world. They underpin stock markets and everything that flows from them. Many of the problems we face, from populist politics to environmental degradation to the structural inequalities that beset the developed world today, flow from the stories of markets. They flow, for example, from the astonishingly persistent and corrosive narrative of shareholder value that we have just seen at work, taking medicines out of the reach of those who need them and creating insecurity, unhappiness and unemployment worldwide. We desperately need a new narrative of finance and markets: a narrative of building, mending, and making. We need institutions able to support this kind of activity, to pursue new modes of organisation that are not quite so wantonly destructive as the global corporation beholden only to its shareholders. So let me tell you another story, a set of stories in which I am myself caught up. They’re not exemplary, but they might be illuminating and even amusing. It’s a project, as Defoe might have said: a vast, uncertain, unmanageable and even foolhardy endeavour. I’m sure you’ll let me know what you think, but be kind: it’s a risky business, sharing.

I’m going to tell you the story of two stock exchanges, started in 1995, and how they did so much to create the world into which I tumbled as a naïve, cub reporter: the grimy underbelly of one of the greatest financial centres on earth.

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 philiproscoe@outlook.com. Thank you for listening, and see you next time.

 

 

 

[1] https://time.com/4207931/martin-shkreli-congress-turing-pharmaceuticals-hearing/

[2] https://www.youtube.com/watch?v=NS9blbLrKv4

[3] Valerie Hamilton and Martin Parker, Daniel Defoe and the Bank of England: The Dark Arts of Projectors (Zero Books, 2016), 11.

[4] Mary Poovey, Genres of the Credit Economy (Chicago: University of Chicago Press, 2008), 89.

[5] Max Haiven, “Finance as Capital’s Imagination? Reimagining Value and Culture in an Age of Fictitious Capital and Crisis,” Social Text 29, no. 3 (108) (2011): 94.

[6] Traders shouting, under creative commons licence from https://freesound.org/people/touchassembly/sounds/146320/

[7] Leigh Claire La Berge, Scandals and Abstraction: Financial Fiction of the Long 1980s (Oxford: Oxford University Press, 2015), 88f.

[8] Gavin Benke, “Humor and Heuristics: Culture, Genre, and Economic Thought in the Big Short,” Journal of Cultural Economy 11, no. 4 (2018).

[9] S Lilley and G Lightfoot, “Trading Narratives,” Organization 13, no. 3 (2006): 371.

[10] Karen Ho, Liquidated (Durham: Duke University Press, 2009), 41, 66.


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.

Transcription

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 philiproscoe@outlook.com. 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 freesound.org, under a creative commons attribution licence https://freesound.org/people/touchassembly/sounds/146268/

[2] Recorded by Cinemafia, https://freesound.org/people/cinemafia/sounds/24080/

[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 freesound.org. Keyboard sound https://freesound.org/people/imagery2/sounds/456906/

Typewriter sound https://freesound.org/people/videog/sounds/240839/

[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 https://research-repository.st-andrews.ac.uk/handle/10023/11688

[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.

Transcript

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 philiproscoe@outlook.com. Thank you for listening, and see you next time.

 

 

 

[1] Sound recording from ‘touchassembly’ via freesound.org, under a creative commons attribution licence https://freesound.org/people/touchassembly/sounds/146268/

[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. https://freesound.org/people/deleted_user_1116756/sounds/74460/

[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).


Episode 5. ‘Mind your eye!’ Rules and rituals in the markets



Social interactions – rules and rituals, norms and codes of practice – are the glue that holds a stock market together. This was especially so in the open outcry markets of the twentieth century. The episode looks at the strange societies of Chicago’s pits and London’s ‘Old House’. What did it feel like to cram into a trading pit or inch your way up the Exchange’s social ladder, where cockney sparrows rubbed shoulders with the old elite? A meritocracy of sorts, so long as you were a man. This episode contains some strong language.

Transcript

Let’s step back to a different time. Imagine an enormous room, capped by a vast dome measuring 100 feet high and 70 feet in diameter, said to be on a par with those of the cathedrals of St Peter in Rome and St Paul in London. This was the great trading room of the London Stock Exchange, known as the Old House. A mottled marble faced its walls and pillars and the wags called it ‘Gorgonzola Hall’ after the blue cheese. There was not much furniture, just ramshackle chalkboards covered in figures. Each firm of traders – or jobbers – occupied a particular spot on the Exchange floor, where the chalkboards marked their ‘pitch’, while the brokers spent market hours in their ‘boxes’ at the edge of the floor. Business stayed in the family, and these pitches and boxes were often passed from father to son. During trading hours as many as 3000 people jostled under the dome, manning these pitches or circulating through the crowds.  The room was jammed with bodies, all male; women were not allowed even to set foot on the floor.

There were games. One etching shows young jobbers, wearing proto-hipster beards and frock coats, competing to throw a roll of ticker tape over a bar fixed high up in the dome. And there were pranks. Ehatever the weather, every self-respecting member of the Exchange would come to work with bowler hat and rolled umbrella. On a rainy day it was entertaining to unfurl a brolly, fill it with a confetti of shredded paper and roll it back up again. There were nicknames as sophisticated as the japes: one man was named the Chicken, another the Lighthouse because he was ‘always moving his head around and it reminded people of the light flashing on the top of a lighthouse’. Then there was ‘the Tortoise…he was a little bit round-shouldered, he always wore a bowler hat, brown suit, carried his umbrella and his nose would remind anybody that he was a tortoise. And he used to walk very slowly through the market.’ One short, very ugly man in the mining market was affectionately named Don’t Tread in It. When business was slow, on a Friday afternoon, songs would burst out: the jobbers would sing the Marseillaise to a supposedly French colleague and slam their desk lids – the clerks had old fashioned schoolroom desks – as cannon. A thousand male voices raised in song together, echoing under the dome: noise, camaraderie and the dreaded ‘banter’. A bygone age, a different world.[1]

And when was this? Oh, not so long ago: the Old House closed in 1966, the same year that England won the football World Cup and still very much living memory for some.

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?

Let’s take stock for a moment. In the last episode I poked fun at charmless Sixtus as we explored how equity can finance all kinds of new venture. We looked at the Ponzi scheme of valuation that underpins the Silicon Valley model and more prosaic efforts nearer to home, seeking to use novel subscription methods to develop new, worthwhile and socially productive kinds of venture. That is beginning to look like a worthwhile ambition for our project of building a stock exchange, and we recognised that exchanges can come in all shapes and sizes: Sixtus’ magazine was just one end of the spectrum that stretches all the way to the global, blue-chip providers of exchange services that we know today. We recognised, though, that stock exchanges all have something in common – at least as we know them now. They are all businesses. In the second episode we explored the birth of the Chicago Board of Trade, seeing how agricultural markets and a confluence of railways, telegraphs and civic ambition led to the formation of early derivatives markets. From the beginning, these were economic entities driven by commercial concerns; it is only later, when Justice Holmes opines that speculation ‘by competent men is the self-adjustment of society to the probable’, that such matters achieve a moral mandate too. In London, as the early market coalesced from the disorganised trading in the coffee shops of Exchange Alley, the exchange took a physical form as more prominent stockjobbers purchased a space and began to charge for entry. London’s market, like that of Chicago, flourished at the intersection of commercial and political concerns. Where the Chicago Board of Trade was linked to the city’s prominence, the London exchange gathered momentum as a vehicle through which the new national debt could be bought and sold, often churned through the shareholdings of the new joint-stock companies: the Bank of England and the East India company in particular. London’s traders became the point of passage between the nation’s Exchequer, greedy for funds to fight foreign wars, and the bulging pockets of merchants looking for a reliable and safe return on their capital.

We have, in other words, begun to sketch out the material, political, and historical entanglements that go into the making of a stock exchange, and of which we must be cognisant when we seek to build our own. In this episode I will pick up a final important aspect of the function and organisation of stock exchanges: the role of the social.

——Trading pit and bell—-[2]

Exchanges, it is clear, depend upon social interactions, habits, relationships and customs. They are, or have been until very recently, filled with bodies. You remember how I described the trading pit as a human powered computer, taking the information that flowed into the exchange as buy and sell orders and turning it into prices. This computer works quite literally by the power of voice. Every bid or offer – every attempt to buy or sell – had by law to be shouted out into the pit. In the din the accompanying hand signals did most of the work. A trader buying would turn his palms to his body, while palms out signalled a sale. Fingers could denote the final unit of the price – as everybody knew the rest of the number there was no need to count it out each time.

The anthropologist Caitlin Zaloom records these details. She visited the Chicago pits in the final years of their operation, during the late 1990s. Zaloom notes the sheer size of some of these men, some big enough to be American football players, others with built up soles to give them extra height. Traders talked about learning to control their voices, sharp enough to carry across the pit yet not sharp enough to show panic, and coordinate their shouts with jumps and looks. ‘The body,’ she writes, ‘is a key interpretive instrument for the pit trader’. The rhythms of the pit signify rising prices or falling ones, and the ambient noise shows the depth of trade. Trading must be immediate, intuitive: ‘In training their bodies as instruments of both reception and delivery of the underlying information of market numbers, the first step is learning not to calculate.’[3] Such essential connectedness with the rhythms of the markets had always been the sine qua non of the pit trader, captured by Frank Norris’s turn-of-the-century novel, where one protagonist would

‘feel—almost at his very finger tips—how this market moved, how it strengthened, how it weakened. He knew just when to nurse it, to humor it, to let it settle, and when to crowd it, when to hustle it, when it would stand rough handling’.[4]

Of course, such primal, embodied trading demands a personality to match and Zaloom found the traders constructing for themselves hyper-masculine, profane, even debauched behaviours. She notes the ubiquity of the Sun tabloid newspaper which at the time carried topless photographs on page 3; I too can remember the traders’ myth that the gradient between the model’s nipples was a sure indicator of the direction of travel for that day’s market.

Zaloom records arguments and even physical fights, as does the sociologist Donald MacKenzie, who visited Chicago’s pits in 2000. One trader showed MacKenzie his spectacles, covered with flecks of spittle after the close of trading; another recalled that he could lift his feet off the ground and be suspended between the bodies of those pressed against him. Traders may not have been friends, but they worked together day after day, year after year, and got to know each other’s habits and tactics. ‘In the pits, social information is founded in deep knowledge of the local environment. Traders organise trading strategies with the situations and motivations of their particular competitors and compatriots in mind.’[5] (That’s Zaloom again, and as always full references are provided in the transcript on the podcast website.) Both Zaloom and MacKenzie caution us not to romanticise the pits: ruined voices and worn out bodies, financial ruin and even tragic stories of suicide, all these form the background hum to the in-your-face noise of the pit itself. Moreover, it is not clear how cleanly the human computer worked. ‘The subtle webs of reciprocity and trust needed to keep open outcry trading flowing smoothly,’ writes MacKenzie, ‘could turn into informal cartels that operated to the disadvantage of other pit traders or external customers.’ Social relationships, the very things that kept the market running, might all too easily lead it away from the longed for – though never achieved – goal of efficient market function. [6]

——

That was Chicago. London’s trading, though every bit as ruthless, had a more gentlemanly exterior. In Chicago those trading for speculative profit were known as scalpers. In London, they were jobbers, an occupation that had evolved alongside the exchange itself – as we saw in episode three – and whose name dates back to the seventeenth century stockjobbers of Exchange Alley, those low wretches so despised by Dr Johnson. Where the Chicago men crammed into a stepped pit and yelled orders at each other, London’s jobbers strolled across the floor of the house and chatted to their counterparts, eye to eye as they squeezed their rivals into the toughest bargains possible. Specialisation was tied, not to individual pits, but to areas on the floor which serviced different sectors. There was the Government broker, trading gilts in the smartest part of the house, or the mining market, and the now-offensively-named Kaffir market, trading the stocks of Southern Africa. Jobbers stood at pitches comprising little more than notice boards. Larger firms might carve out an established pitch by a wall or a pillar, furnishing it with makeshift shelves and even a seat; smaller firms simply had to stand among the crowds.

The boards listed the stocks traded, names engraved onto magnetic strips, an attempt to give some sense of permanence to the otherwise ramshackle stalls.  A junior trader, a blue-button, would be in charge of marking up prices in red or blue crayon, next to the opening price, lettered in black. The boards themselves might be put to strategic use, updated a little more slowly than prices moved, obscuring market action and helping jobbers take a turn.

Communications on the floor were rudimentary, to say the least. The Exchange retained a staff of top-hatted ‘waiters’ whose function was to ensure the smooth running of trading. One of the many problems was keeping track of people in this great crowd, especially the brokers who stalked the floor in search of the best price for their clients. Waiters used speaking tubes like the ones found on old ships to speak to brokers, blowing through them first of all to make a whistle that summoned someone to the other end. If a broker could not be found a number would be illuminated, and it was up to the individual to spot their number and raise their hand. A waiter would point them to the telephone room or the meeting room where they were required: telephone booths were located around the outside of the hall and had a movable floor that sunk down when the user stepped in, flicking out a marker to show that the booth was occupied. Waiters managed the circulation of bodies around the room, preserving the rules of conduct in the seeming chaos. They even conducted the dreaded hammerings, when firms that could not meet their obligations were shut down by the blow of two gavels and the partners’ assets turned over to the administrators.

Business was conducted buying and selling according to a complicated verbal etiquette set out at length in the Stock Exchange’s Code of Dealing. Here’s an example, from the sociologist Juan Pablo Pardo Guerra’s study:

‘What are XYZ?’ Answer: ‘125.8’

Broker: ‘I am limited I’m ½p out in 250’

Jobber: ‘I could deal one way’

Broker [hoping for the one which will suit him]: ‘Very well, you may open me’

Jobber: ‘Give you ½p’

Broker: ‘Sorry, I’m a buyer at 127½’ [7]

It’s unintelligible to us, but perfectly clear to the jobber. No agreement has been reached, and no deal done. Traders had to use a particular form of language to avoid being snared in an accidental bargain: one might say ‘I’m only quoting’ to make this clear, just as a lawyer might raise a point ‘without prejudice’.

Jargon apart, both London and Chicago worked on the principle of the spoken deal. The entire social infrastructure served to reinforce the primacy of this bargain, epitomised in the London Stock Exchange’s motto, my word is my bond. Prices were continually in flux. Written reports flowed long behind the deals made by jobbers, spilling first onto the boards and then the settlement clerks located beneath the trading floor. Throughout the day, Exchange officers came to the pitches and collected prices, which hardened overnight into the print of the Stock Exchange’s Daily Official List and the Financial Times; by the time these printed records were made the verbal transactions of market itself had left them far behind. The slowness of any record keeping made ‘my word is my bond’ of paramount importance, for the market could only function if spoken agreements were honoured, even if the deal caused one counterparty considerable financial pain. Sanctions were informal and effective, and anyone who defaulted on a bargain would have great difficulty making another. Everyone knew one another. Like the traders in the pits, jobbers did not need to know the prospects for a company or the long-term economic forecasts for the nation. They simply needed to know who wanted to buy, and who wanted to sell. All the information was ‘on the floor,’ says one jobber, ‘eye contact, sweat, movement. You could always tell from the eyes of the junior trader whether his boss was long or short, and how badly they wanted to get out of their position’.[8]

——— Market traders——[9]

The Exchange was strangely meritocratic, with an apprentice-based career system that welcomed cockney sparrows as well as the dim-witted younger sons of the old elite. Although it preserved in microcosm the nuances of the British class system, it had an egalitarian demeanour where boys from the East End rubbed shoulders with graduates of august Oxbridge colleges: ‘I like talking to you,’ an old jobber told one young Balliol graduate, ‘‘cos you’re the only bloke in the market, wot I talk to, wot talks proper.’[10] The old Etonians drifted towards the posher firms, the gilt-edged brokers, while the lads from Hackney and Islington sought out opportunities in the less grand stretches of the market. That meritocracy did not extend to women though, and Ranald Michie, historian, records the details of the struggle to secure equality of access to the institution.[11] In 1966 – the same year that the Old House was closed – a Miss Muriel Bailey, highly commended brokers clerk, sought membership of the Exchange, in order to apply for position as partner in her firm.

One of the first women on the trading floor, 1973

To be a partner, one had to be a member, and to be a member one had to be a man. Miss Bailey, who had run her broker’s office throughout the war and in the intervening years had built a substantial client list, naturally felt that obstacles were being unnecessarily placed in her way. The Council of the Stock Exchange agreed to support her application so long as she promised not to set her profanely female foot upon the sacred mancave of the trading floor, but the membership resoundingly rejected this proposal. That was in 1967. At least the membership proved to be consistent in its bigotry, in 1969 rejecting the membership of foreigners, defined as those not born in Britain, and voting against the admittance of women again in 1971. Nor should the Exchange itself be entirely exempt from scrutiny: in 1962 it had refused to accept a listing application from automotive firm FIAT, presumably on the grounds of being too Italian.[12] Only in January 1973 did the membership consent to allowing female clerks to become members, and even then it took until the summer of that year before rules banning them from the trading floor were abandoned. Miss Bailey, by now Mrs Wood, was elected to the membership in January 1973, aged 66.

To become a member, even if you were a man, you had to serve a lengthy apprenticeship, joining as a youngster and working through clerical and junior status until eventually you became a dealer, then partner. Brian Winterflood – a central character in our story – was one such lad. Now in his eighties, he is a short, jovial man, still full of energy. He is known for his anecdotes, as well as his opinions – he is an outspoken supporter of Brexit – and is unerringly generous to the press. They treat him well in return, filling diary columns with stories about his long career. Sometimes these verge on the shameless, like Winterflood passing off a recent finger amputation as frostbite sustained on an arctic cruise. Despite his pleas, the paper reported, the ship’s doctor refused to operate and Winterflood had to be treated on terra firma. I noticed that Winterflood doesn’t eat dessert and suspect another later-life explanation. Luxury arctic cruises would be much less popular if one paid in digits as well as dollars, but it makes for good copy all the same.[13]

My lunch with Winterflood was a spontaneous affair. We were supposed to be meeting in the office, but he didn’t show up. Instead Stacey, from the front of house, appeared. But Brian had called: he couldn’t find a parking place near the office, so he was going to pick me up instead. The lads on the trading desks – gender roles are still very much alive in the city, as you see – joked about the gaffer keeping a picnic hamper in the back of his Rolls, but neither materialised.

Instead Winterflood took me to a favourite spot – a stripped down Italian restaurant in Southwark – where he could chat to the staff like an old friend, sip a blend of angostura bitters and ginger beer he called ‘Gunner’, and park his modest executive runabout on the disabled-badge space right outside. On a second meeting he recounted a recent encounter with an unknown item on a cruise ship menu – poivron. He can read most French menus, he told me, but was stumped by that – still, he didn’t believe the Philippine waiter who claimed ‘Poivron’ was a region of France. The secret ingredient turned out to be leeks. Brian Winterflood, arch-Brexiter, is a most amusing man.

Winterflood is  a legendary figure in the smaller-company market world. His career has tracked the markets’ ups and down more closely than anyone; in fact, his name is almost synonymous with small company trading. Growing up in a suburban household in Uxbridge, West London, his arrival in the City was the gift of a generous school teacher, who asked him what he intended to do for a living.

‘I said I don’t want to drive a bus – because my father was a tram driver,’ he recalls, ‘what I would like to do is to make some money.’

‘Well,’ replied the schoolmaster, ‘if you want to make money you should go to where money is made. I have a friend who is a partner in a stockbroking firm and I wonder if you would want to go up the City.’

‘Yes, I would’, replied Winterflood, without thinking more. And so one of the most influential men in the small company world began his career as a messenger at the very bottom of the heap.

‘Thank God I did start there,’ says Winterflood, ‘running round the City, getting to know the City, getting to know the people. It was magical, absolutely magical.’

Would-be jobbers like the young Winterflood served a lengthy apprenticeship, first as messengers, then ‘red buttons’ and ‘blue buttons’, each colour of badge denoting an increased level of seniority and certain powers and responsibilities. Established jobbers wore no buttons and junior employees would have to remember who was who, lest they disgraced themselves by speaking out of turn to a senior member. Blue buttons ran messages between jobbers and brokers, as well as marking up prices on the boards. They asked questions and learned from their employers who doubled as tutors and mentors, sponsoring the careers of juniors and preserving the future of the Exchange.

Eventually, after several years of long hours and low pay, checking bargains with longhand arithmetic and slide rules, balancing the books, and learning the etiquette of the House, the lucky ones were promoted to ‘dealer’, able to trade for the first time.

The moment of appointment was a theatrical Stock Exchange ritual, the young dealer sent up from the floor to the partners’ office to be given a badge. Another East End blue button, Tommy, whose memoires were captured by historian Bernard Attard, recalls his transition to ‘authorised clerk’ with awe:

‘I was called into the partner’s room and they said, ‘How would you like to become a dealer?’ I said, ‘I don’t know’.  I was absolutely dumbfounded. Where I come from I couldn’t have anticipated anything like this. So ‘I said I’d love to, I’d love to have a try.’ So I was authorised, and I’ll never forget the first morning…’[14]

Winterflood’s first day was quite different; not for him the stately induction in the upstairs office:

‘I had a particularly nasty senior partner,’ he remembers. ‘He was a moody so-and-so and he used to gamble everyday on the horses, his life was terrible, he ran off with another woman. The day that I got authorised to go on to the floor of the Exchange, he puts his hand in his pocket…and he says, ‘All right Winterflood, now you are authorised’, and he took his hand out like that and he gave it to me, it was my badge, my authorised badge. And he said, ‘Mind your fucking eye.’

Mind your eye – an old expression meaning ‘take care’, often translated into comic dog Latin: mens tuum ego. Winterflood remembers the sudden responsibility of holding a trading book as an authorised dealer in a partnership, trading with the partners’ own money and, moreover, their unlimited liability. Partners took a keen interest in their own property and the menacing presence of the waiters’ gavels:

‘It was good looking over everybody’s shoulder when they were [trading], but when the senior partner says, ‘Mind your fucking eye’, I mean you are terrified…I remember when he came back from a bad day at the races, which was the bookie outside the Exchange, he would sit in the pitch and say, ‘What have you done?’ I would say, ‘Well not a lot Sir, but there are one or two things that you might like,’ and he goes across and looks at the page, I say ‘Have you noticed sir, so and so,’ and he said, ‘It only pays for the bad ones.’’

This process of apprenticeship served to reproduce the social structures that held the exchange together, years spent learning who was who and what was what before being allowed anywhere near the money. Eventually it was possible to buy a ‘nomination’, a seat on the Exchange, and become a member. You could then embark on your career proper, building a reputation in a particular sector or for a particular strategy: a specialist in Tanganyika concessions, a specialist in insurance, an expert in arbitrage, in contango, a bull or a bear, depending on one’s personality, skills and good fortune.

It was the process of apprenticeship, as well as the distributed structure of the London Stock Exchange’s membership, that made the institution so extraordinarily durable and yet simultaneously so conservative and resistant to change.

So that is one last thing to add to our mix of key ideas when we come to build our stock exchange. Social relationships, webs of reciprocity and trust, and bodies – up close and personal,  mostly male, I’m afraid  – are  just as much  part of the  structure and function of stock exchanges as their material architectures and political alliances. As I pointed out in the last episode, Aditya Chakrabortty identifies the alternative economic projects he has reported on as being ‘thickly neighboured’. That’s true of any exchange – even, as we shall see, those contemporary digital structures that seem to have banished bodies altogether – and will be something to which we must look if we are going to succeed. But, and as this episode has shown, stock exchanges are constitutive of community as well, forming engines through which people can be bought together in cooperative activity. Once again, we just have to choose the shape we wish that cooperation to take.

——

Times were hard for the London Stock Exchange during the 1960s and the depression of the early 1970s. Members held other jobs and scrabbled to make ends meet. Winterflood and his wife ran a small bric-a-brac shop named Fludds in Valance Road, at the end of Petticoat Lane. Others did worse: Winterflood recalls meeting a colleague selling carpet squares – ‘not even whole carpets, carpet squares!’ It is hard, now, to believe that finance could have been so impoverished a profession. Jobbers would talk about making their daily ‘two and six’, the cost of the train journey to work and home again.

In January 2017, just after his 80th birthday, Brian Winterflood rang the Stock Exchange bell to call time on his career. The man who ran a bric-a-brac shop to make ends meet is now a multi-millionaire, able to charter a private jet to his holiday home in Corsica or spend the winter in a Floridian holiday village where there is line dancing every evening. Winterflood Securities – Wins – the firm that he founded and sold in the early 1990s, but ran for many years after, is reported to have made £100m in 2000.[15] How did such a change in fortunes come about? How did these impoverished market-makers go from metaphorical rags to very real riches in the space of two decades? To answer those questions we must explore the extraordinary transformation in finance in the 1980s.

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 philiproscoe@outlook.com. Thank you for listening, and see you next time, when we get to grips with the decade of greed.

[1] The background detail in this chapter comes from varied sources, my own research into London’s markets, see https://research-repository.st-andrews.ac.uk/handle/10023/11688, and Ranald C. Michie, The London Stock Exchange: A History (Oxford: Oxford University Press, 2001). In 1990 Dr Bernard Attard of Leicester University conducted a series of oral history interviews with former jobbers, capturing the details of what was by then a vanished world. Transcripts and recordings can be found https://sas-space.sas.ac.uk/view/collections/lseoh.html

[2] Sound recording from ‘touchassembly’ via freesound.org, under a creative commons attribution licence https://freesound.org/people/touchassembly/sounds/146268/

[3] Caitlin Zaloom, “Ambiguous Numbers: Trading Technologies and Interpretation in Financial Markets,” American Ethnologist 30, no. 2 (2003): 264.

[4] Norris, p.90, quoted in Christian Borch, Kristian Bondo Hansen, and Ann-Christina Lange, “Markets, Bodies, and Rhythms: A Rhythmanalysis of Financial Markets from Open-Outcry Trading to High-Frequency Trading,” Environment and Planning D: Society and Space 33, no. 6 (2015).

[5] Donald MacKenzie, “Mechanizing the Merc: The Chicago Mercantile Exchange and the Rise of High-Frequency Trading,” Technology and culture 56, no. 3 (2015). Zaloom, “Ambiguous Numbers: Trading Technologies and Interpretation in Financial Markets,” 261.

[6] MacKenzie, “Mechanizing the Merc: The Chicago Mercantile Exchange and the Rise of High-Frequency Trading.”

[7] 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): 90.

[8] 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): 50.

[9] From www.freesound .org under a creative commons licence. https://freesound.org/people/deleted_user_1116756/sounds/74460/

[10] From my own interview notes.

[11] Michie, The London Stock Exchange: A History, 453f.

[12] To be precise, the application was rejected on the basis that the firm’s accounts did not meet UK standards. Ibid., 477.

[13] http://www.cityam.com/226688/how-the-winterflood-founder-went-from-freemason-to-gangster [accessed April 2017]

[14] Bernard Attard, “The Jobbers of the London Stock Exchange an Oral History,” Oral History 22, no. 1 (1994): 45.

[15] Financial Times, 30 April 2017, ‘Winterflood’, by Chloe Cornish. https://www.ft.com/content/42764c22-29c6-11e7-9ec8-168383da43b7?mhq5j=e3


Episode 4. Pickles, public schoolboys, and the business of financing start-ups



This episode takes an anecdotal wander through the business of financing start-ups. Our guide is Sixtus, an old-Etonian who imported ‘business angel’ investing to the UK. Along the way, I’m waspish about public schoolboys, perceptive about pickles, explore the difference between equity and debt, and wonder whether stock markets must always be about those billion dollar valuations.

Transcription  

I have long harboured a prejudice against old Etonians.  You can drink with them, or listen to their stories, or watch them on television – they’re everywhere when you start to look – but just don’t let them hold your wallet or take your significant other for coffee. I’m almost prepared to make an exception on that point for our present Archbishop of Canterbury, but no, I think not. And God forbid, don’t let them run your country. I used to try and sneak this snippet of wisdom into lectures. If you learn anything from me, I would intone, let it be this…Unfortunately, the spectacle of British politics over the last few years has made such warnings redundant. Cameron, Boris, Rees Mogg… I am almost speechless with rage when I see the damage done to our nation in pursuit of petty self-advancement.

Another deeply held prejudice involves the wearing of velvet collars, so when I spotted a photograph of JRM sporting one such, well, I felt like ‘some watcher of the skies when a new planet swims into his ken’. But this is beginning to sound like one of Rees-Mogg’s own man in the street moments so I am reluctantly forced to concede that I am unfairly singling out that great educational establishment. It would be more simple and accurate to say that one should never trust a former English public schoolboy. For those listening beyond the UK, a public school is – inexplicably – a private one. It’s an educational system built for empire, modelled on Sparta; the ancient world offered two models for a state, one based on democracy and philosophy, the other on military might and hierarchical caste segregation, and the Victorians chose…

Well, enough said. Back to its products. We are mendacious and unreliable. All we can do is talk. There’s James Dyson, the engineer who persuaded us all that vacuum cleaners should look like spaceships and campaigned for Brexit before shifting his factory to Singapore. Or youth icon, gangsta rapper and YouTube phenomenon KSI, who learned his vowels at the same school that I did. We are long on patter and short on substance. Have a look at the KSI youtube fight night if you doubt me on that.

On the other hand, that mixture of assured self-presentation and a natural economy with the actualité – in the words of the late Right Honourable Alan Clark, old Etonian, confessing to lying to Parliament – does suit us well for some occupations outside of politics. We make good actors, acerbic columnists, and amusing enough podcasters, I hope. And financiers. ‘There is,’ writes Michael Lewis in Liar’s Poker, ‘a genus of European, species English, to whom slick financial practice comes naturally. The word for them in the Euromarkets is spivs.’ And then, unusually, Lewis makes a wrong call. ‘Oddly,’ he writes, ‘we had no spivs. Our Europeans-especially our Englishmen-tended to be the refined products of the right schools.’ They, dear Michael, are the spivviest of all.

It seems appropriate, then, that the next step in our journey through stock-market skulduggery is guided by an old Etonian. His name is Sixtus (or something equally silly) and he invented ‘venture capital’ investing.

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 the last episode, I opened up another key idea for our building project: that stock exchanges are – and have always been – entangled with states. We saw how countries and markets have formed an uneasy alliance since the beginning, one with the laws and the other with the money. I explored how London’s fledgling stock-market exploded at the end of the seventeenth century when the English government issued its first national debt, a tradable, interest-bearing security. The early corporations recycled this debt through their own shareholdings, forming the basis for a liquid market in stocks. The demand for trade attracted professional speculators, known as jobbers and generally disliked by the population. Their instruments, trading on time, may have been morally questionable but formed the basis for a global mercantile economy. We saw too how moral questions sometimes have to be settled by the state. Chicago – whose dominance as a centre for financial derivatives we explored in the second episode – wrestled with the limits of permissibility in trading financial abstractions. The matter came before Justice Holmes of the Supreme Court, who declared that speculation ‘by competent men is the self-adjustment of society to the probable’. The judge was influenced by Henry James and fashionable pragmatist philosophy to make such a probabilistic argument; in doing so he made a link between stock exchanges and risk management that persisted until, and arguably underpinned, the credit crisis of 2008.

Is this really what stock markets should be doing? Remember that they started out as a means of raising money for struggling exchequers. Remember too that the narratives of shareholder obligation, which I discussed in the very first episode, hinge on the claim that stock exchanges have funded business from the beginning. So it sounds as if raising capital for organizations of all kinds might be one of the primary obligations of exchanges, but the reality is that stock markets don’t do nearly enough of this kind of thing. Raising money for new ventures is risky and a specialist occupation. Let’s re-join Sixtus to find out more…

The son of an esteemed civil servant, Sixtus grew up in the days when esteemed civil servants could afford a rambling pile in near the Thames, a flat in a smart part of town and still have small change left over to push several children through Eton. Oxford followed. But being possessed of a maverick bent Sixtus eschewed a job in the City and instead, in 1969, headed for graduate business school at Harvard. He returned to Britain in 1971 and after an unhappy year consulting for Hanson – Sixtus knew by then he was a ‘doer’, not an ‘adviser’ – he determined to start a business. But doing what, exactly?

‘The problem,’ he says, ‘was that not only did I have no idea of what business to start, but that I also had no money… Also I had no track record of any kind, being then only nine months into my first job, and that not a success, so that the prospects of persuading someone to back me did not seem bright. On the other hand, I had little to lose by trying.’[1]

Only an Old Etonian would muster this level of sangfroid in the face of such appalling odds. On the other hand, being an Old Etonian does seem to shorten the odds considerably.

So Sixtus wrote a business plan to set up a chain of American-style hamburger joints in the provinces. He raised some half a million in today’s money, from a friend made at Harvard, another friend from back home, and a few high risk investors recruited via a small-ad in the Daily Telegraph. He set up his own outfit in a former truckers’ café in Bristol, mopping floors, making milkshakes and flipping burgers. By 1977, he had three restaurants, fifty staff and a manager. He sold the restaurants off in the early 1980s, just before the golden arches arrived in Britain and did to Sixtus’ burger joints what they had done to just about every other burger bar in the USA. He even made his investors a profit.

Then, in 1978, Sixtus did something truly maverick. In the same era that that the UK government was waking up to the galvanizing potential of small company investment and converting the sleepy government venture capital house ICFC into the dynamic behemoth 3i, and Ronnie (now Sir Ronald) Cohen was importing US-style venture capital through his legendary Apax Partners, Sixtus launched a magazine. It featured write-ups of small companies seeking to raise equity investment from business angels. He would charge subscribers £350 a year, charge the companies for a write-up, and take a percentage of any investment completed by means of an article in the magazine. His thought honed along classic business school lines, Sixtus sought to put together the pent-up demand for investment and for investment opportunity by a means more elegant than small ads in national newspapers. He would become an intermediary: a broker of information.

The magazine was never more than moderately successful. It had black and white photos and a small circulation and was sustained by successive investors whose business school training inclined them to see its potential and overlook its profit and loss account. The company was staffed by cheery, sporty doers who had never quite managed to make the break from their alma mater. Sixtus would invite them to the crumbling mansion, which he now occupied, and persuade them to play croquet. Anyone mistaking him for a harmless eccentric in a threadbare white school shirt and knee high socks would soon be caught out by the competitive malice with which he wielded his mallet, sending opponents’ balls hurtling into the flowerbeds at the slightest opportunity.

As a proto-spiv – worse still a proto failed spiv – I’m in this story too. I joined the magazine in the summer of 1998, fresh from a Masters’ degree. The firm occupied two small office suites in a science park outside the city. The room I worked in was small and filled by piles of boxes containing unsold copies of Sixtus’ self-published book. There were three of us in that office, while Sixtus and his assistant had a room adjacent, from which he ran his newly-launched investment funds. It was a hot summer, and the first thing a new employee noticed was the smell. A sewage farm lay on the other side of the science park, and when the wind blew in the right direction, as it did most afternoons, a heavy, foetid pall would settle on the office. Of course, one could brave the lack of air conditioning and close the window, but there lurked a Scylla to the sewage farm’s Charybdis. Sixtus had been forged in a time when real men did not wash, and belonged to a class that regarded personal hygiene as the surest sign of the petit bourgeoisie. An office legend held that many years previously the staff had drawn straws as to who would tell Sixtus that his musk was making their lives a misery.

The short straw fell to one of the firm’s few female employees. She tarried for a while, planning her strategy, and eventually sidled up to the boss:

‘Sixtus,’ she said, ‘I must say, you’re smelling very manly today’.

‘Thank you very much’, he replied.

And that was that.

Despite his eccentricities and his absurd, frontiersman do-it-yourself-sufficiency –Sixtus did, in his way, contribute something to British business. He had imported another concept beside hamburgers. What he grandly called venture capital wasn’t really venture capital in the established sense of the word today. Modern day ‘venture capitalists’ put much more emphasis on the second word than the first: they prefer low risk deals like takeovers and management buyouts where margins can be squeezed and quick profits returned to investors. What Sixtus had in mind were informal venture capitalists, happily known as ‘business angels’, who are prepared to put up moderate sums in return for a share of the ownership of a firm. They are often successful business people in their own right. These angels have been glamorised as the Dragons in the BBC’s reality TV show Dragons Den, but the principle is much the same as it was when Sixtus first brought it into town: a tough negotiation, a stake, a partnership.

—–

Let’s go back to basics. This kind of investing is a variety of equity financing. The distinction between equity and debt is important. Someone who buys equity buys an actual stake in the firm; the firm takes the money into its legal body and issues more shares in return. Debt is just a loan. It has to be repaid while equity does not. Debt incurs interest, while equity does not. If debt repayments fail the creditor can go to court and perhaps even wind the company up; if the company goes bust creditors stand at the front of the queue while equity holders (shareholders) kick their heels at the back. But debt only earns interest, and never more, whereas equity holders have a stake in the company. If it all goes to plan, the sky is the limit.

This asymmetry gives rise to a structural problem. Because lenders can never earn more than their interest they dread losing the money loaned, or ‘principal’. Even if one were to charge absurd interest rates it would take several years to recover from a default. Lenders tend to cope with this in two ways.

The first is only to make investments in rock-solid businesses. Assuming for a moment that risk and reward increase hand-in-hand, it follows that anyone who believes that their business will be able to repay a loan at 20% is a riskier proposition than someone who can only pay 5% on dull-as-dishwasher trading. For this reason ‘better safe than sorry’ was the collective motto of the banking industry for the second half of the 20th century. It is also the reason that the less in need of money you are, the more cheaply you can borrow, while the truly needy seek out loan sharks and payday lenders. Lending is an industry hard-hearted to its DNA. The bankers’ caution is another variant on George Akerlov’s Nobel prize-winning ‘markets for lemons’ thesis. Akerlov demonstrates that in a market where buyers cannot distinguish quality they will protect themselves by offering low prices. Sellers of high quality goods will react by leaving the market and soon only the problematic ‘lemons’ will be left. He is talking about the used car market – hence the lemons – but he could be talking about banking too. If you offer bad enough terms, only rogues will take them; better to offer good terms and be very selective about the loans you make. [2]

The second thing bankers do, having assured themselves that you are respectable, reliable, that your business is solid and that they will absolutely get their money back under all circumstances, is to ask you to personally guarantee the loan, just in case.

I am not suggesting that commercial banks should not be lending money to high-risk businesses. The money that they lend belongs to us and we do not want the banks losing it. When, periodically, banks get carried away and make excessively aggressive loans, as happened with sub-prime lending in the run-up to 2008, the result is catastrophic. Depositors queue up to withdraw their money and banks suddenly go bust and have to be rescued by the taxpayer. Nonetheless, the lack of lending does deter anyone from contemplating starting a risky venture, which really includes anyone considering any kind of entrepreneurial venture at all. Slow-growing, traditional business start-ups may be able to get by on debt, but more capital intensive start-ups will struggle. Anything truly innovative has no chance.

There is a second, more insidious, consequence, in that a culture of careful lending creates a culture of perverse distrust in equity investment. Those entrepreneurs who have somehow managed to start a business, who have put their house down as a deposit to satisfy the bank manager, who have been under all kinds of stresses as a result, can console themselves with the fact that they own every single share, and that when the business finally does well it will all be theirs. Given the choice between expanding further by letting go of a stake in the company and pedalling along very comfortably where they are, entrepreneurs will take the second option.

Equity investors are seen as greedy outsiders, ‘vulture capitalists’, stepping in to profit from the business when the hard work has been done. The economic theory elaborating this line of thought is called the ‘Pecking Order’ of financing, and it gives an intellectual framing to what entrepreneurs intuitively know: they are often better off not pursuing a worthwhile project if they have to sell shares in order to fund it.[3]

Equity investing also conceals a kind of financial alchemy, one that makes much of today’s world go round. Let’s say that I start a firm and persuade you to invest. You propose to take a 33 percent stake in the firm – Sixtus’ rule of thumb said one third for the management, one third for the idea and one third for the money. I believe I need £500,000. You are an easy negotiator, and I get my way. You pay the money into the firm, and it issues new shares in return. The firm is now worth £1.5 million: if things are worth what the market says, and we did a deal at that level, who is to claim otherwise? My stake is worth £1 million, and I am now a millionaire, on paper at least. It all goes well, and a year later the prototype widget does what it is supposed to do. Now I need to build a factory, and that is going to cost £5 million. An investor putting in serious money is going to demand 50 percent (for the sake of easy numbers) of the firm, valuing the whole at £10 million. You and I have seen our percentage holdings diluted by half, so now I have just one third of the firm, and you one sixth. But my third is worth £3.3 million, and you are holding £1.65 million. And so the process goes, so long as we can sustain momentum. But notice that the money is always coming from somewhere, especially if we want to cash out: the valuations are sustained by the influx of new capital at every round.

At some point people will start to use other methods for valuing the venture, for example asking what the eventual profits might be. We have an answer for that in the shape of a business plan that begins with baby steps and culminates in our widget being on every desk in the known world. So long as we keep hitting the short-term targets – and these are well specified and achievable – so we can justify all kinds of wonderful figures. We might even be a unicorn – an unlisted, loss making business worth over a billion dollars. We have lots of money and can court journalists and give lectures about the future too, just in case anyone doubts us. In fact, making a profit might seem quite a bad idea, because suddenly all the analysts’ models will start to work and it will become apparent that the valuation is much higher than the profit should support. Better to keep focused on the horizon and let the shares float towards it.

This is the Silicon Valley model and a testament to the power of well aligned incentives. It never quite made it to our office, though.

The magazine claimed a few successes. There was, for example, an engineer who had invented a gadget to be fitted at the bottom of grain silos, a vibrating cone that kept the contents flowing, and whose firm grew large and profitable. More usually, a succession of peculiar would-be entrepreneurs came through the door. I worked alongside a man named Charles, a gentle, cultured former financier. At home Charles had three small children, a grand piano, and a picture of his father shaking hands with the Pope. We would sit, listen to eccentric pitches and decide whether to help them or not. Our decision invariably hinged on whether the would-be entrepreneurs were prepared to write a cheque for £275. You would be surprised how many were not, but perhaps they were assessing us in reverse. Our success rates were very low indeed.

My first write-up involved a tough North Sea diver with a project to expand a hard hat diving operation. It was not funded. I remember a high-end pickle company, though I never saw the pickles on the supermarket shelves and I wasn’t impressed by the firm’s do-it-yourself marketing posters featuring stock photos of the Andes draped in gherkins. There was the ageing Harvard MBA who complained the course had gone soft and not enough people committed suicide these days, and the property-spiv who moaned about having to eat his own shoe leather in lean years. He refused to write the cheque before hopping into an enormous Jaguar. Charles and I used to peer down into the car park after meetings, and it was amazing how many penurious entrepreneurs still had much nicer cars than we did. Then there was the neuro-linguistically programmed former bond trader, a tall and unfeasibly energetic young American who claimed to have been a presidential adviser and waved his arms like windmills as he pitched to us. His project involved a life-size cardboard cut-out of a policeman. He was accompanied by a hard-as-nails sidekick who had been in the South African Special Forces and stood glowering in the corner throughout. They didn’t write a cheque either, though the bond trader was courteous enough to telephone the next day and tell us why not: he thought we were crap.

—-

The problem the magazine faced was that most of the businesses, even the good ones, were simply the wrong kind for equity investment. You need a business model that, in the unlikely event of it paying out at all, pays out like crazy. It’s no good hitting one jackpot out of ten if the jackpot is only 5% a year. Hard hat diving and fancy pickles were just never going to deliver.

I say the businesses were of the wrong kind for equity investment, but what if things were different, what if investors did not demand their 20% a year return from every single business? What is the subjects weren’t business at all, but a diverse range of start-up ventures delivering social good? It doesn’t all have to be financial alchemy, chasing ever higher valuations in pursuit of the unicorn pay-out. Surely, in what I have sketched out – equity fundraising, collective subscription, a tolerance for risk – we have the bare bones of a mechanism that could actually do something useful?

Throughout 2018, Guardian columnist Aditya Chakrabortty toured Britain looking at what he called alternatives, spaces and places where local people had taken control of their economic destiny, perhaps to build social housing or a shopping centre, or to operate the bus services. One such makes children decent school meals: Chakrabortty’s report should make your blood boil. It details the daily indignity and grinding hardship of food poverty in one of the world’s richest countries – where children half-starve during school holidays, deprived of their only daily meal. These enterprises have many things in common. For a start, all are short of cash. The availability of capital is an ongoing problem. Those who have it at their fingertips, Chakrabortty writes, ‘have no place on their spreadsheets for social purpose’. Instead money is begged from grant funders or somehow borrowed.

Could we build a stock exchange to help here? It seems so. There’s something called community shares, a novel subscription method signed off by the financial regulator. Community Shares Scotland, located in Edinburgh, has run offers to support a harbour and a community school, while Chakrabortty mentions a Plymouth housebuilder that has raised £200000 this way.

So this is a private sector solution to social problems, but it’s not one that recognises the logics of high finance: profits are not at the top of the agenda.[4]

My point here is simple enough. The stock exchanges I have talked about so far have been global giants. They’ve been formed by accident by the confluence of capital and political power. They have been shaped by technology, and as we’ll see, that continues throughout their histories. Ever since the regulars at Jonathan’s Coffee House hatched a plan to charge subscriptions stock exchanges have been first and foremost commercial organisations. But they don’t have to be, and if they are they don’t have to be the global providers of data and exchange services that we know today. Sixtus’s magazine was a stock exchange of the most rudimentary variety, and we could see that model working for a different purpose. If the ventures didn’t have the upside for high-risk investors, they might have done for more socially minded.

Between a magazine and the Chicago Board of trade lie an infinity of possible social and material combinations. We just have to decide what we want them to do.

Chakraborrty notes something else that these alternative schemes have in common. They are, he says, ‘thickly neighboured’, depending on social networks for their success. Alas, that is true of any economic venture. Too often, these arrangements are cliques. Poor Sixtus has taken a bit of a kicking here, a stand-in for the privilege and incompetence of the elite. But his story shows the power of social networks and  their ability to channel opportunity and capital. The bitter truth is that getting into such networks depends little on aptitude or talent, and greatly on brass neck and connections. And, of course, where you went to school.

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 philiproscoe@outlook.com. Thank you for listening, and see you next time, when we try and understand the markets’ social networks a little better.

 

[1] I am quoting from Sixtus’ own account of this start-up. Sixtus is a pseudonym.

[2] Banking economics has given us a library of studies of lending decisions, mostly following two articles: G Akerlov, “The Market for Lemons: Quality Uncertainty and Market Mechanisms,” Quarterly Journal of Economics 84 (1970); JG Stiglitz and A Weiss, “Credit Rationing in Markets with Imperfect Information,” American Economic Review 71 (1981).

[3] SC Myers, “The Capital Structure Puzzle,” Journal of Finance 3 (1984).

[4] You can find Chakrabortty’s series here https://www.theguardian.com/commentisfree/series/the-alternatives


Episode 2. From pigs to prices: a Chicago story



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.

Transcript

‘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…[1]

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.[2] 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.’[3] (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.[4] 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[5] —–

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…’[6]

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[7] —-

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.[8] 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.[9] 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.[10] 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.[11] 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 philiproscoe@outlook.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

[1] Upton Sinclair (1906) The Jungle, Ch3. I have edited the passage.

[2] 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.

[3]  Caitlin Zaloom, Out of the Pits: Traders and Technology from Chicago to London (Chicago: University of Chicago Press, 2006). This quotation from p16.

[4] 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).

[5] Ticker: recording from ‘Timbre’ via freesound.org, under a non-commercial creative commons licence

https://freesound.org/people/Timbre/sounds/148893/

[6] Frank Norris, The Pit (London: Penguin Classics), 72-73.

[7] Sound recording from ‘touchassembly’ via freesound.org, under a creative commons attribution licence

https://freesound.org/people/touchassembly/sounds/146268/

[8] Caitlin Zaloom, “Ambiguous Numbers: Trading Technologies and Interpretation in Financial Markets,” American Ethnologist 30, no. 2 (2003).

[9] MacKenzie, Material Markets: How Economic Agents Are Constructed.

[10] M Abolafia, “Markets as Cultures: An Ethnographic Approach,” in The Laws of the Markets, ed. M Callon (Oxford: Oxford University Press, 1998).

[11] Wayne E Baker, “The Social Structure of a National Securities Market,” American Journal of Sociology 89, no. 4 (1984).


Episode 1. Finance matters



Finance matters. We’re off to build a stock exchange, but first of all I’ll spend a little time explaining why financial markets matter. This episode explores how financial markets – a crucial mechanism for the distribution of wealth – are implicated in our present political malaise and looks at some of the ways that finance has squeezed us over the last three decades.

Transcription

A famous philosopher once said – ‘It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest.’ It was Adam Smith, of course, born not far down the road from me in Kirkcaldy, Scotland, and the father of modern economics. He once walked to neighbouring Dunfermline in his dressing gown, apparently, so deep was he in thoughts, musings like this, and ‘Nobody but a beggar chuses to depend chiefly upon the benevolence of his fellow-citizens.’

From those words, published in 1776, a whole global order has sprung. We can call it capitalism, and at its centre lies a strange entity, so much part of our lives that we simply take it for granted.

I’m talking about the stock exchange.

Hello, and welcome to this podcast.

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. Over the coming episodes I will be revealing finance as you have never thought of it before. 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 will see that stock markets have places, and histories and politics. And we will come to understand just how influential stock-markets are in our everyday lives.

In this first episode I’m not going to do much building. Instead, I’m going to talk to you about why the world of finance really matters. I want to step back from the nitty-gritty of the project – we’ll see enough of that as we move along – and think about the role that financial markets play in society. You see, we can’t help noticing that things have changed in the last decade. Britain has fallen into disrepair. In the regions jobs have evaporated. In the cities casual work and portfolio careers have become the norm and it’s impossible to buy a house. Food banks are rife and one in five children lives below the poverty line. Brexit is looming, a howl of rage – as one commentator put it – against the state of the nation. I daresay swathes of North America and Europe feel much the same. But what has this to do with financial markets?

Well, the world has changed and financial markets stand at the heart of these transformations. They are not the only problem of course – but it is fair to say that finance is the mechanism on which global inequality pivots. Take risk. It’s everywhere in business, the other side of the coin from profits. The big question is who should carry it, and at the moment the answer seems to be the poor. Risk has been outsourced. It’s experienced as precarious employment, social exclusion, or plain, old-fashioned poverty, while financial markets – institutions that exist solely to manage risk – have pronounced themselves risk free. You can buy a bond rated triple A – as safe as the debt of the strongest governments – and still expect a return. Short-termism has prevented sustainable, long-term investment. At the same time, the rewards that supposedly come from taking risk – future profits – have been privatised among the financial elite, and they have done so through those same mechanisms that have shifted the risk itself: financial markets.

Sometimes finance goes stupendously and calamitously wrong, as in the financial crisis of 2008 – celebrating its tenth anniversary and still trailing a wake of austerity, Brexit and Trump. But here’s the rub: financial markets had sold us out anyway.

Global finance has transformed itself during the last three decades. During much of the 20th century financial markets were built around nation states and an economy that made tangible, concrete things. Their primary purpose was to allow investors to buy and sell stock, separating ownership of the firm from its day to day management by creating a new kind of product – the stock – and a market in which it can be traded – the stock-market. These markets evolved alongside the corporations of the twentieth century, their history overlapping but also self-contained. Financial markets supplied capital for companies and traded the bonds of governments that needed to raise money, whether to build hospitals or wage wars.

By the end of the 1990s, however, all this was slipping away, to be replaced by a global financial market that dealt in the knowledge economy and capital flows. I remember a glorious few years in the late 1990s when it looked as if the Internet could be the final democratising force in a decade of change. The Berlin Wall had fallen and we had enjoyed a decade of economic growth. The twin towers still stood, and the dotcom bull market promised that everyone could have a piece of the action.

This turned out to be an illusion. The Internet didn’t go the way we expected, for sure, but finance went even further off track. A utopian project sought to act out a vision of universal markets with every possible contract imagined and existent. This was free market thinking as a religion and the pointy-head, hedge fund quants with their Gaussian copulas were its apostles. Put simply, financial markets stopped trading in things we could, if not see, at least understand and imagine, and instead began to engineer new products so complex that even start traders couldn’t comprehend them.  For a decade fortunes were made until with a crash and a bang, the whole thing came unravelled, and governments were forced to bail out these colossal banks lest they destroyed the basic economic structures that we need to live. I’ll spend some time talking about the crash later in this series, but for now let’s focus on its consequences. Ten years of austerity followed, and I think it’s fair to draw a straight line of cause and effect between those moments and the nasty, broken world we seem to be living in now. It hasn’t been bad for everyone, of course. Ironically, the more liquid and immaterial capital has become, the more solid and tangible its bridgehead cities must be. So London, New York, Frankfurt and Tokyo have become crowded with the towering glass cathedrals of global finance, visible anchors for the imaginary products they sell. No wonder you can’t buy a house there. Financial markets, as I keep saying, really matter.

We may remember the crisis of 2008 as spectacularly destructive, but in fact it is only one of a number. Markets imploded on ‘Black Monday’, 19 October 1987. The global financial order nearly collapsed in 1998 when Russia’s troubles with the rouble caused a melt-down among overstretched investors, and then the spring of 2000 saw the dot-com bubble burst. There is something in the genes of financial markets that leads to ‘excessive exuberance’, in the words of Alan Greenspan, the former Chairman of the Federal Reserve and free-market apostle whose own economic policy was responsible for much of that overexcitement. Going further back there was a prolonged downturn in the 70s, and the great crash of 1929. There was even a boom – and bust – trading the shares of dog tracks in post-war London.

These regular crises are just a spectacular manifestation of an more general trend towards inequality and exploitation. Thomas Piketty, rock-star economist, has shown that the gap between the haves and the have-nots is steadily growing.[i] His claim, that returns on capital are greater than growth, is an update on Marx’s classic insight that there is an inherent conflict between those who have to work for a living and those who generate income from investment in that work. For investors to gain a bigger share of the pie they must find ways of squeezing workers and for two decades financial markets have been at the centre of this process. This has involved a collective forgetting of the separation between stock ownership and management, and in its place the construction of new narratives of shareholder value and control. The idea that stock markets have single-handedly funded global corporations from the beginning and are therefore entitled to a disproportionate share of rewards and control is, in the words of anthropologist Karen Ho, a ‘neoliberal fairy story’.[ii] But it is persuasive enough. Short termism and a collective attempt to eradicate risk from investment has seen innovation decline and uncertainty – in classical terms the source of profits for any business – shipped out to employees. Uber is the most perfect example of this process: underneath the bluster and talk of disruptive, technological innovation is an attempt to drive every other taxi firm into bankruptcy through sheer force of capital and then use its monopoly to impose high prices on customers and harsh conditions on its workers.

Okay, let’s backtrack a little. The fundamental purpose of stock markets is to provide a market in the instruments of investment, be they stocks or bonds. Stocks are tiny fractions of a corporation, and owning them entitles you to a share of the profits distributed as dividends. Bonds are a kind of debt issued by governments and companies. They pay interest and at the end of the term you get your money back. We’ll revisit these in due course. But the very existence of these instruments shows that the secondary, related purpose of financial markets is to provide new capital for growth, or to facilitate this process by allowing investors to realise some of their profits and reinvest elsewhere. Stock markets are the interface between capital and firms; that makes them the link between the owners of firms and the people who work for those firms.

Money can flow both ways. It pours into companies to fund their growth, expanding into new markets, buying expensive assets, or developing new technology. Shareholders support growing firms through rounds of financing often known as ‘placings’, where new shares in the firm are issued to investors. Once firms mature, cash flows out again as dividends. Assuming that firms have a life-cycle and are truly profitable only in their comfortable but short-lived middle age, this pattern should repeat itself over and over, everyone benefiting in the process.

You might think this sounds like a generally beneficial process. How can these markets serve as instruments of inequality? In several ways. Towards the end of the 20th century capital –if you do not like this term you could say Wall Street, or investment funds, or the one percent – decided it wanted a bigger share of the pie. When that happens, stock-markets are the mechanism for putting on the squeeze. Money starts to flow out. Investment declines and executives will be pressured to increase dividends year on year, by squeezing employees and holding back from long-term investments or risky research and development. Stock markets mediate this pressure through aggressive shareholding tactics and short-term reporting cycles that force managers to deliver regular increases in pay-outs. Strategies such as takeovers and buyouts, while almost always destructive in the long term, are justified by the rhetoric of offering value to shareholders. Companies might use surplus cash to buy back their own shares, driving up the price and concentrating any future returns in the hands of remaining owners – those, of course, who can afford to pass up on a short-term bounty.

WE academics are culpable too. Sometime in the 1980s, a piece of academic know-how called ‘agency theory’ has passed into the common domain. I mentioned just now that stock exchanges are the interface between capital and firms, and therefore between the owners of firms – the shareholders – and the people who work for those firms. Note that I didn’t say ‘work for those shareholders’, because that isn’t the case, but that distinction is often overlooked. In 1976 two professors, from the Simon Business School at University of Rochester – Michael Jensen and William Meckling, suggested that owner-managed firms performed better than firms with salaried managers, and that they did so because in the case of owner-managers the interests of capital and management were neatly aligned. They therefore proposed that managers should be made owners – given a share in the firm. Fourteen years later, as these ideas were entering the mainstream, they penned an influential Harvard Business Review article subtitled ‘It’s not how much you pay but how’, suggesting how this might be done: chief executives should be granted the option to buy shares at knockdown prices if certain targets were reached. ‘On average, corporate America pays its most important leaders like bureaucrats,’ they blustered.

The complaint about being paid ‘like a bureaucrat’ is not a gripe that executives are paid as badly as bureaucrats, for by 1990 chief executives were paid vastly more than public servants; it is that bureaucrats are paid irrespective of the performance of their organisation. Max Weber, the father of sociology, saw this security of tenure as crucial to the disinterested performance of bureaucratic responsibility, but it did not cut it for Jensen and Meckling. ‘Is it any wonder then,’ they continued, ‘that so many CEOs act like bureaucrats rather than the value-maximizing entrepreneurs companies need to enhance their standing in world markets?’ This was just what investment bankers, already committed to the maxim of “shareholder value’, needed to hear and the principle rushed into practice. [iii]

Agency theory provided the intellectual underpinning for a new class of super-chief executive, whose incentives are all too well aligned with those of their shareholding paymasters, committed to the ‘tough choices’ that will increase short-term earnings, often at the expense of long-term performance. Tough choices is a euphemism that too often means redundancies, squeezing suppliers and passing on uncertainty to outsiders; stock markets are the mechanisms through which these modern regimes of power are transmitted. Chief executives have become grossly overpaid, too, though without the compensatory effects that Jensen and Meckling promised when they lobbied so hard for a pay rise:

Are we arguing that CEOs are underpaid? If by this we mean “Would average levels of CEO pay be higher if the relation between pay and performance were stronger?” the answer is yes. More aggressive pay-for-performance systems (and a higher probability of dismissal for poor performance) would produce sharply lower compensation for less talented managers. Over time, these managers would be replaced by more able and more highly motivated executives who would, on average, perform better and earn higher levels of pay.’[iv]

I’ll read that again, missing out all but the crucial words:

Are CEOs underpaid? The answer is Yes. More able and more highly motivated executives would [assuming aggressive pay-for-performance systems] earn higher levels of pay.’

So there you have it.

But isn’t all this a means to an end – making more money for shareholders – that’s us – and thereby making the world a richer and better place? Don’t forget what I said before, though. It’s distribution that really matters. It turns out that not all shareholders are equal and future gains don’t get shared out equally. Take Silicon Valley’s ‘unicorns’ – startup firms worth over a billion dollars. Their extraordinary value comes not from profits but repeated rounds of financing at ever higher levels (again, I will explain this process later). If the everyday investor is only allowed in at a late stage, buying on the hype and paying accordingly, they will simply be funding the rewards already enjoyed by those already in the network who have been able to invest earlier on. It is an elaborate financial game of pass the parcel. At some point the music will stop and those left holding the parcel will unwrap it to find nothing inside, but by then the others will be long gone, their pockets stuffed with cash. Our contemporary economy is a chimera, a mirage, make believe. It’s a collective convention whereby everyone is better off if we agree that, yes, a loss-making online taxi-firm could be worth nearly a hundred billion dollars. A cynic might even see some kind of Ponzi scheme in the colossal valuations of the tech unicorns, and suspect that some entrepreneurs are more committed to capitalizing – cashing in – on a rhetorical strategy of global supremacy than actually squaring up to the Sisyphean labour of becoming the only taxi operator in the entire world.

Global finance is a con.

It’s not all bad news. There are green shoots of possibility emerging that may carry us into a better, fairer economy for the future. There is talk of ‘patient finance’ with connotations of fairness and long-term engagement. We see new market start-ups – there’s one near me in Scotland that’s talking about social impact and regional development, and I hope it comes to fruition. Perhaps I’ll be able to tell you more about it as this series progresses. Such moves seek to recover stock markets as mechanisms for social transformation, funding new ventures of all kinds. I think this is an endeavour worth pursuing.

In this podcast we’ll be working towards that goal, trying to imagine a finance fit for all. We need a new language to tell new stories of markets, to imagine designer markets that can offer us all kinds of future possibility, from radical technological innovation to new understandings of social organisation. We need markets that can facilitate growth, but growth of a kind fitted for the future.

And most of all, we need, as citizens, to really understand how finance works. We need to understand why markets have so much influence over politics and state. We should try and understand what those people sitting in skyscrapers in Canary Wharf or quiet offices in Mayfair actually do all day. We should think about the stuff that markets are made of: buildings, screens and wires. We need to understand the stories of markets; I’ve already sketched out some – the rights of shareholders and the laziness of bureaucratic managers and the myth of business as funded, even founded, on the efforts of finance – but there are others, about how finance is male, white and complicated, and out of bounds to the rest of us.

We could even think about prices. If prices contain information, as financial economists believe they do, how does it get there? Are some prices better than others? Why is it headline news if Apple’s share price goes down? What can we price, and when does it stop being okay to do so? As the philosopher Michael Sandel has asked, what can’t money buy?

So that’s where we are. In a society that’s broken, divided and unequal, financial markets are mechanisms absolutely at the root the trouble. But let’s hold onto them a little longer; let’s try and capture a little bit of that old, Enlightenment optimism about markets and their possibility. Maybe it’s misguided. Maybe we’ll discover that the best kind of market is no market at all. I don’t know. Let’s think of ourselves as twenty-first century financial engineers, examining this strange cyborg thing of people and wires and screens, stripping it down to figure out how it works and why it’s broken. Only when we have done that can we start to work out how to fix it.

That’s what this podcast is all about, working to build a finance that’s fit for purpose and fair for everyone.

I’m Philip Roscoe, and you’ve been listening to How to Build a Stock Exchange. If you’ve enjoyed this episode, please share! Tell your friends! If you’d like to get in touch and join the conversation, you can find me on Twitter @philip_roscoe or email me on philiproscoe@outlook.com. Details are on the website. Please join me next time when we explore how stock exchanges telescope time and space, and wonder how you’d build one if you didn’t have computers…

Notes

[i] Thomas Piketty, Capital in the Twenty-First Century (Harvard University Press, 2017).

[ii] Karen Ho, Liquidated (Durham: Duke University Press, 2009).

[iii] The original paper is MC Jensen and WH Meckling, “Theory of the Firm: Managerial Behaviour, Agency Costs, and Ownership Structure,” Journal of Financial Economics 3 (1976). The ideas reached a broader audience through MC Jensen and WH Meckling, ‘CEO Incentives—It’s Not How Much You Pay, But How,’ Harvard Business Review (1990 May-June). For an account of Wall Street’s preoccupation with shareholder value see Ho, Liquidated.

[iv] Again, from MC Jensen and WH Meckling, ‘CEO Incentives—It’s Not How Much You Pay, But How,’ Harvard Business Review (1990 May-June)