Tag Archives: to arrive contracts

Episode 3. On Brexit and borrowing: the entanglements of markets and state.



From King William III’s empty coffers in the eighteenth century to David Cameron’s ‘big, open and comprehensive offer’ in the twenty-first, penniless governments have had to go cap in hand to the markets. Stock exchanges have always been on hand to help out, though not at any price, and states have assisted by settling matters of morality and legality in the expanding domain of finance. This episode unpicks the complex relationship between markets and state and wonders whether there’s anything positive for our building project.

Transcription

I first noticed it in May 2010, on the sixth, to be exact.

If you are listening in the UK you might remember 6 May as the day of a general election, the day when Labour Prime Minister Gordon Brown was voted out of power. It was not a decisive defeat for Brown, nor a victory for anyone else. David Cameron, as leader of the Conservative party, looked set to form a minority government. Stock markets seesawed with anxiety, posting big losses on the morning after the election. Markets like certainty, the pundits said, so Cameron did something else.

Yes, he made Nick Clegg and the Liberal Democrat party a ‘big, open and comprehensive offer’ to share in a coalition government. The rest, as they say, is history and a very distressing one at that. Such moments matter. John Rentoul, writing in the Independent, wonders how things might have gone differently; he sketches out an alternative story where Clegg joins forces with a Labour Party revived by new leadership. ‘If Clegg had made a different choice,’ he writes, ‘we would be living in a different country now: slightly better off, with better public services, and probably still in the EU.[1] I think that’s true. But could Clegg have done so? I’m not sure. My recollection of those moments is the extraordinary prominence given to the sentiments of the financial markets. It seemed that the force driving politicians to set up this bizarre, ideologically incompatible coalition – one that would ultimately destroy the Liberal Democrats as a third party in British politics – was not a concern to properly serve the British electorate and represent its wishes but an overwhelming need to pacify the markets. This was how it was reported during the tense days that followed the election. In the Telegraph, 9 May: ‘The Conservatives and Liberal Democrats last night sought to reassure financial markets that they are close to agreeing an economic deal that would allow David Cameron to take power.’ On 10 May the Financial Times reported that “both the Conservative and Liberal Democrat leaders want to strike a deal as soon as possible to reassure both the public and the financial markets that a stable government can be formed quickly.” It seemed undignified, these leaders scurrying to shake hands to keep the market  happy. Don’t forget, this was not yet two years since the British government had been forced to throw half a billion pounds sterling at the banks to stop them collapsing and taking the infrastructure of global civilisation with them. One might have been forgiven for thinking that financial markets did not know anything about anything, let alone the crucial matters of government…

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 one of the first key ideas for our building project: that stock exchanges are embedded in history and in the material architectures that make them work. The two are related, of course. We saw how Chicago’s great stockyards led to the birth of a market in financial abstractions, and how that market was shaped by new technology in the form of the tickertape, and by the successive buildings that housed it. But today: how did finance become so important?

You’ll have to forgive me. I’ve got Brexit on my mind. As I sit writing this, it is eight days, seven hours, 40 minutes and 14 seconds to Brexit. In the time it took to type that, it’s dropped to 39 minutes. (Between writing and recording, we seemed to have gained a fortnight). In the first episode of this podcast I argued that financial markets should bear their share of responsibility for populist politics and Brexit. I suggested that markets have been used as a mechanism for squeezing labour to give to capital, through shoddy employment practices and an exclusive focus on the claims of shareholders. But these newspaper commentaries – Cameron and Clegg rushing to placate the angry market – suggest a much more direct link. It came down to money, of course. After the financial crisis, Britain was broke: the only source of money was international borrowing accessed through the bond market. Playing to the market was like sucking up to the bank manager to avoid having your house repossessed. Just as old school bank managers were trained to look out for flashy clothes and extravagant spouses as an indicator of financial intemperance and thus poor credit quality, so the British government was forced to promise a financial parsimony that manifested itself in austerity.[2]

Financial markets shaped the run up to that election, the crucial days afterwards, and a long slog through a cruel and wrongheaded economic policy that has taken us to the brink of political self-annihilation.

I found that countdown timer, in case you are wondering, on a trade-the-markets website – even in adversity there’s opportunity. At least, for some of us.

—– Timer noise[3]

It would seem reasonable to ask, then: how did financial markets get so important? That’s what I’ll be looking at today, and is a second key theme of this podcast – the relationship between markets and states.

We saw last week how the Chicago Board of Trade grew out of agricultural wealth as a political project among the city’s elite. While we might think of stock exchanges as dislocated and global, the truth is quite the reverse. As the statues in the Board of Trade’s old trading room suggested, the interests of politics, state and commerce have always been intertwined in the stock exchange. Take London, for example.

London’s market is much older than that of Chicago. The journalist and historian Elizabeth Hennessy suggests that in January 1698 one John Castaing began publishing a list of commodity and foreign exchange prices, from what he quaintly described as his ‘office at Jonathan’s Coffee House.’[4] Not so different from those techno-start-ups grandly headquartered in the local Starbucks, I suppose.

Jonathan’s Coffee House was located on the city’s Exchange Alley. Garraway’s was another such in the same street. Exchange Alley was a dangerous place, full of pickpockets and unscrupulous brokers as well as honest ones. One took one’s money, and possibly more, in one’s hands when venturing into London’s fledgling stock-market. Stock market traders had been settling themselves in these spaces after spilling out of the Royal Exchange, the City’s new commodities market. They may have been more thrown out than spilled out: they were numerous, noisy and disruptive, and trading in stocks did not have the cache of trade in the more visible commodities of the Exchange. Someone who traded stocks purely for speculation became known as a jobber (a title that lasted until October 1986!), snarkily described by Dr Johnson as “a low wretch who makes money by buying and selling in the funds.” So how did it become respectable?

A great deal happened in a short space of time. According to Ranald Michie, the definitive expert on the history of the London Stock Exchange, there was at the end of the seventeenth century a massive increase in the popularity of tradable stocks. ‘Before 1689,’ he writes, ‘there were only around 15 major joint‐stock companies in Britain, with a capital of £0.9m., and their activities were focused on overseas trade, as with the Hudson’s Bay Company or the Royal African Company. In contrast, by 1695 the number had risen to around 150 with a capital of £4.3m.’ (As always, full references for the sources quoted are in the transcript on the podcast webpage). Twenty five years later, during the boom that became known as the South Sea Bubble, a further 190 entities were proposed, hoping to raise £220 million from overexcited shareholders. That’s a five-fold increase in capital over as many years, and an expected two-hundred and twenty fold increase over three decades.

A joint-stock company, by the way, is simply what we would call a corporation, a legal entity with shares that can be traded independently of the firm. Among the earliest was the now-notorious East India Company, set up by Queen Elizabeth I’s Royal Charter on New Year’s Eve of the year 1600. As Michie points out, the financial structure of these firms suited risky endeavours in overseas trade or finance rather than steady investment at home, and the stocks remained specialist investments. There were legal problems, too. Financial assets were still construed as a kind of debt and therefore understood as ‘choses in action’, a legal category attached to the person of the debtor and not easily transferable; the sociologists Bruce Carruthers and Arthur Stinchcombe, who have written on the topic, identify a John Bull, who traded 13 times between 1672 and 1679 as the most active trader in Royal Africa Company stock.[5] Dutch merchants had found ways round these obstacles already, however, and when a Dutch king, William of Orange, ascended to the English throne in 1689 laws and practices swiftly changed. The absorption of Lex Mercatoria, or medieval merchant law, into English law accompanied by specific regulatory changes – Carruthers and Stinchcombe cite the 1704 Promissory Note Act – made financial contracts freely tradable. Brokers and jobbers began to use standardised contracts, making the business of trading more straightforward. But the problem remained that few would actually want to buy these securities: they were too illiquid, exotic, too risky.

That changed in 1693 when the government launched its national debt, a permanent but transferable, relatively safe, interest-bearing security. Until this time, government debt had been short-term, borrowed when the need arose and paid off when it fell due; it took the form of lottery tickets and annuities, none of which could easily circulate on a market. This new kind of debt allowed the English government to finance its ongoing series of wars in Europe and the colonies and led to a massive expansion in the amount of securities available to trade. Some of the biggest joint-stock corporations, notably the Bank of England – formed in 1694 – the East India Company, and the South Sea Company, started to recycle this debt through their own shareholdings. The corporations lent their entire paid-up capital to the government – huge sums at the time. That capital came from shareholders, so you can think of money going through the corporations like a pipe – from private shareholders into the firm and out the other side to the government, with interest payments flowing back the other way. Where the government stock remained relatively illiquid, the shares of the corporations could now be easily traded in Exchange Alley. Volume grew. To give an idea of the expansion in trade, 1720 – the height of the stock market boom – saw 22,000 transactions. Compare that to Mr John Bull and his 13 trades, just 50 years earlier. Investors understood that these stocks were effectively government backed, making them a much safer bet. New financial organisations such as insurance companies and banks, which needed to generate returns on capital held but at the same time remain able to draw on it, started to buy and sell the stocks, as did merchants holding cash between adventures. According to Michie, tradable securities made possible a secondary market in rights to payment abroad. One such right might be created, for example if a British owner sold the stock overseas to a foreign investor, and the right could be sold in Britain to a merchant needing to make a payment in that same country. These bills of exchange thereby formed the basis of a growing global monetary system and which was in return inextricably linked to the activities of the market traders. The joint-stock companies had formed an essential conduit between the needy Exchequer and the fat purses of the English merchant classes. The national debt was born, and the London’s market emerged as an essential adjunct to government policy, a sort of primitive money laundering device for the bellicose national government throughout the eighteenth century. Markets and states have been inextricably linked since the beginning.

—– Crowd trading sound[6]

Carruthers and Stinchcombe have shown that liquidity – the basic precondition of a functioning market – is a considerable organisational achievement. It depends, they argue, on the existence of three mechanisms: continuous trade of some kind, the presence of market-makers who are willing to maintain prices in whatever is being traded, and the presence of legally specific, standardised commodities. We have seen the last of these three conditions met: the creation of securities, the trade in which was both legal and desirable. And, as we have seen, with bureaucratic obstacles out of the way, merchants began to gather in Exchange Alley. These jobbers were the first ‘market-makers’, merchants who took risks in buying and selling stock in return for profits and in doing so made it possible for those who wish to trade on an occasional basis to do so. Traders came from all over Britain and even from Holland to set up in the market. It wasn’t just Dr Johnson who disliked them. Michie makes clear that contemporaries simply could not understand a market that traded continuously in these abstractions. He quotes an anonymous diatribe from 1716:

‘the vermin called stockjobbers, who prey upon, destroy, and discourage all Industry and honest gain, for no sooner is any Trading Company erected, or any villainous project to cheat the public set up, but immediately it is divided into shares, and then traded for in Exchange Alley, before it is known whether the project has any intrinsic value in it, or no…’[7]

The 1697 Act to limit their numbers had not achieved much, so Parliament tried again. The Barnard Act – promoted by Sir John Barnard and passed in 1734 aimed to ‘prevent the infamous practice of stock jobbing’. Though the act was almost entirely ineffective it did have the consequence of rendering “time bargains” as illegal. Classed as gambling debts, they were now unenforceable through the courts and this meant that the traders themselves had to develop a code of self-protection.

A first attempt at shutting out undesirables came in the form of a subscription-based club that, in 1761, took over Jonathan’s Coffee House as their sole place of business and excluded non-members. One such non-member successfully pleaded in court that he had been unfairly shut out of the market, and the clique was broken open. In 1773 another group of brokers opened a building on Threadneedle Street on more legally favourable terms. Michie notes that ‘admission to this building was on payment of 6d. per day, so that all could participate if they wished… a broker attended six days a week all year the cost would be £7.80 per annum, which was remarkably similar to the £8 which was to be paid to Jonathan’s. Clearly,’ he writes, ‘that offer had made a group of the wealthier stockbrokers realize that they could personally profit by setting up an establishment for the use of their fellow intermediaries and then charging them a fee for its use’. Ironically, the same circumstances that had made the Threadneedle Street site available challenged its dominance: the Bank of England, which expanded hugely throughout the century due to its role in managing the government debt, was developing its own buildings and buying up land around the site, partly to control the risk of fire. At the centre of this development was the Bank’s Rotunda, which rapidly became a popular venue for the trading of stock. According to historian Anne Murphy the market took over and disrupted the bank’s space, filling it not just with jobbers but also pickpockets, street sellers, and prostitutes. Would-be customers were enjoined to walk into the melee and call out ‘lustily’ what they want, and they will immediately be surrounded by brokers.[8]

——

It was the war with France at the end of the  18th-century that finally  secured  London’s dominance as a financial centre, both through the damage done to European bourses and the enormous demand for money on the part of the British government. So if we’re wondering why Messrs Cameron and Clegg could be seen whispering about what the market demanded like schoolboys hiding from the playground bully, we can see at least that this is nothing new. The stock exchange evolved as an instrument to support government, but on its own terms – like the useful sidekick in a drama who end up pulling all the levers. As the London example shows, however, some contemporaries found these new trading practices hard to swallow. That hasn’t changed, and the relationship between markets and states is also a struggle over the accepted norms of market practice. From Aristotle onwards, thinkers have tried to distinguish between legitimate trade in things we need and the pursuit of profit for its own sake. We see this in characterizations of jobbers as wretches, vermin and villains, and in the Barnard Act’s attempt to ban ‘time bargains’. Eventually that can only be settled by rule of law – although as the experience of London’s lawmakers shows, attempts to stand simultaneously in the way of economic and social pressure will be futile. It is always complicated.

You will recall from the last episode how the concentration of agricultural power and communication networks on Chicago led to the formation of the Board of Trade, and then rapidly to the advent of ‘to arrive’ contracts, trading in financial abstractions of agricultural commodities and in doing so offering farmers the chance to protect themselves against changes in the price and the weather. As in London, where jobbers had been trading in time – those bills of exchange – since the seventeenth century, the market depended on a class of professional speculators. Trade in financial abstractions exploded at the end of the nineteenth century. Jonathan Levy, the University of Chicago historian who has chronicled the legal wrangling over derivatives trading, states that 8.5 billion bushels of wheat were sold at the New York exchange between 1885 and 1889. During the same four years, the city consumed only 162 million. Levy shows how derivatives trading only became morally – and legally – acceptable after a long dispute – a culture war over the soul of the market.

While it’s impossible to do justice to the subtleties of Levy’s study, a broad brush picture is still illuminating – and my thanks also go to Andrea Lagna of Loughborough University for suggesting this trajectory.[9]

At root, the dispute came down to a few core principles. The first was the question of gambling. Traders – known as scalpers – had developed a technique called ‘setting off’, allowing them to settle a deal at any point before the agreed delivery date; they did so, of course, when the price moved in their favour. Setting off was just another step in an evolution of contracts that had begun with abandoning physical exchange and instead swapping ‘elevator receipts’, tickets representing grain in one of the city’s many silos, or elevators. Soon enough the traders abandoned all pretence of a physical commodity. This begged the question of what they were trading: the winds of Minnesota, rather than its wheat, according to one grain handler. Court cases pursuing settlement hinged on just this point – a transaction could only be legitimate if there was a genuine intention to transfer the goods. Speculation for its own sake was too close to gambling, and the courts sought to distinguish between those who had a legitimate interest in risk management and those who simply sought to make money from trade. But this wasn’t just a moral issue. It was also a dispute between those involved in the growing and shipping of physical commodities, and the pit traders. It was about the very nature of work. According to the farmers, the ability to set prices for crops grown on the land was a right ‘as old as civilisation’, a right of which they were now being cheated. They sought to contrast the toil of cultivation and the heft of their products with the ephemeral, speculative abstractions that circulated in the pit. Theirs was a labour, while the work of the pit was a game of chance. The speculators responded by stressing the mental efforts involved in their work, and emphasising its role as a responsible risk-management practice. Here they echoed the promoters of life assurance in the United States who had faced similar moral objections to wagers on time, life and death.[10] The traders also offered a more pragmatic defence: the genie was out of its box, and the abstractions could not be un-thought. If the pits were closed by American legislators these ghosts of commodities would simply circulate elsewhere. The futures market had forever uncoupled the productive and financial circuits of the economy. ‘In the pits,’ writes Levy, ‘speculative trade in incorporeal things stood newly naked before the wider public’.[11]

—— Ticker sound[12]

Ironically, it was the public’s involvement that led to an eventual settlement of the dispute. The growth in futures trading had been accompanied by the rise of so-called ‘bucket shops’, betting establishments where the public could trade on the fluctuations in commodity prices. Like the brokers rooms, the bucket shops were also connected to the market by ticker machines, but no orders were fed back to the pits, and the public betted against the proprietor’s book on the outcome of market moves. The shops also catered to small farmers seeking to insure themselves against changes in prices or failures in the weather and whose orders would have been far too small for the scalpers to take seriously. I’ll come back to the bucket shops in a later episode. What matters here is a court action taken by CC Christie – a bucket shop magnate – against the Board of Trade, which was seeking to close down its upstart competitor. The shops had been so successful that they were draining business from LaSalle Street, and the board cut a deal with Western Union Telegraph Co to prohibit the distribution of prices. Christie sued, and in 1905 the case arrived in front of Justice Holmes of the Supreme Court. Holmes’ decision went against the shops. He held that they were sites for speculation, while the pit traders were legitimate dealers and ‘setting off’ constituted a legal delivery. Moreover, he said, this kind of speculation, ‘by competent men is the self-adjustment of society to the probable’. At a stroke, derivative trading had become not only legitimate but desirable in the eyes of the law, and Holmes had articulated a new role for the markets – managing risk – that becomes increasingly important as the twentieth century draws to a close. That’s for another episode.

Where does that leave us? The clock ticking down to Brexit, and at least a portion of the blame going back to a few fateful days a decade ago, when politicians trembled before the mighty financial markets. Would they have acted otherwise without this need to placate the bully, to oil up to the bank manager? I can’t say. But what we can see is that stock exchanges and states have since the very beginning enjoyed a queasy co-existence, one with the money, the other with the laws. And we can also see what there isn’t: no guiding hand, no purposive action, just the summing up of endless squabbles, power plays and battles for mutual advantage. That’s not a very optimistic thought for our building project, I have to say.

But let’s press on. Next week we’ll be back to the present day, and thinking about some of the things that a stock exchange could be doing, if we don’t agree with justice Holmes: what are they actually for?

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://www.independent.co.uk/news/long_reads/nick-clegg-coalition-lib-dems-2010-labour-gordon-brown-conservative-david-cameron-a8586046.html

[2] For the lending criteria of old school bankers, see Ingrid Jeacle and Eamonn Walsh, “From Moral Evaluation to Rationalization: Accounting and the Shifting Technologies of Credit,” Accounting, Organizations and Society 27 (2002).

[3] Sound recording from ‘Ancorapazzo’ via freesound.org, under an creative commons attribution licence from https://freesound.org/people/ancorapazzo/sounds/181630/

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

[5] BG Carruthers and AL Stinchcombe, “The Social Structure of Liquidity: Flexibility, Markets and States,” Theory and Society 28 (1999).

[6] Sound recording from ‘touchassembly’ via freesound.org, under a creative commons attribution licence https://freesound.org/people/touchassembly/sounds/146267/

[7] Ranald C. Michie, The London Stock Exchange: A History (Oxford: Oxford University Press, 2001), 23.

[8] Anne Murphy, “Building trust in the financial market”, Critical Finance Studies, University of Leicester, June 2017.

[9] Jonathan Ira Levy, “Contemplating Delivery: Futures Trading and the Problem of Commodity Exchange in the United States, 1875–1905,” The American Historical Review 111, no. 2 (2006).

[10] Viviana A. Zelizer, The Social Meaning of Money (New York: Harper Collins, 1994).

[11] Levy, “Contemplating Delivery: Futures Trading and the Problem of Commodity Exchange in the United States, 1875–1905,” 316.

[12] Sound recording from ‘Timbre’ via freesound.org, under a non-commercial creative commons licence https://freesound.org/people/Timbre/sounds/148893/


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).