Tag Archives: trading pit

Episode 8. Wires!



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

Transcription

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

—– trading pit —–[1]

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

——– ‘singing servers’—–[2]

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

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

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

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

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

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

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

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

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

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

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

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

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

—-

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

 

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

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

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

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

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

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

[7] Sounds from freesound.org. Keyboard sound https://freesound.org/people/imagery2/sounds/456906/

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

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

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

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

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

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

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

[14] for more detail on this history see my booklet, downloadable at https://research-repository.st-andrews.ac.uk/handle/10023/11688

[15] Brown interview

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

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


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



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

Transcript

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

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

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

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

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

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

——Trading pit and bell—-[2]

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

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

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

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

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

——

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

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

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

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

‘What are XYZ?’ Answer: ‘125.8’

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

Jobber: ‘I could deal one way’

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

Jobber: ‘Give you ½p’

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

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

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

——— Market traders——[9]

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

One of the first women on the trading floor, 1973

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

——

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

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

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

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

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

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

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

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

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

[7] Juan Pablo Pardo-Guerra, “Creating Flows of Interpersonal Bits: The Automation of the London Stock Exchange, C. 1955–90,” Economy and Society 39, no. 1 (2010): 90.

[8] Eric K. Clemons and Bruce W. Weber, “London’s Big Bang: A Case Study of Information Technology, Competitive Impact, and Organizational Change,” Journal of Management Information Systems 6, no. 4 (1990): 50.

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

[10] From my own interview notes.

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

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

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

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

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


Episode 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).