Tag Archives: stories

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]

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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.

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Traders shouting[6]

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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.

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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.