READING…MARKETS AS CULTURES: AN ETHNOGRAPHIC APPROACH/MARKET CROWDS BETWEEN IMITATION AND CONTROL/WHO’S AFRAID OF FINANCIAL MARKETS?

Markets as cultures: an ethnographic approach (Abolafia, 1998)

I will focus on markets as cultures. J The phrase ‘markets as cultures’ is meant to denote that as loci of repeated interaction/transaction, markets exhibit their own distinct set of mutual understandings. The markets as cultures approach focuses on three areas of research: constitutive rules and roles, local rationality, and the dynamics of power and change. This view, express the author, allows the analyst to explore the consequence of repeated transaction, ie, the construction of institutionalized relationships and systems of meaning.Through repeated interaction market participants develop expectations about appropriate behaviour and scripts for the performance of roles.

It is through these rules and roles that participants constitute the market.In this view markets are not created at the moment of interaction, nor are existing rules and roles the only ones that could have developed in efficient markets. Rather, these constitutive rules and roles are produced by the repeated interaction of powerful interests competing for control. The market is a reflection of this ongoing competition. Shifts in the balance of power within a market determine who may design or redesign the rules and role relationships. Market makers, those actors who buy and sell in a market on a continuous and frequent basis, are guided by numerous informal and formal rules. Many of these rules are regulative rules designed to govern the pursuit of self-interest.  (See Scott (1995) for a discussion of the distinction between regulative and cognitive (constitutive) rules. My use of the term differs from Scott’s in that the mechanism of compliance in constitutive rule sis not just cognitive, but may also be normative.)

The question then is what is a constitutive rule in the Chilean case? Other…how are constitutive rules enforced by external regulators like the Chilean SVS? How are constitutive rules enforced by internal Bank regulations and codes of conduct?

Another interesting Abolafia’s example is: traders’ assumption that this is the only appropriate (fair) way to constitute a market  is reflected in the following quotes from market makers on the floor. ‘Fair pricing is exposing all bids and offers to the market. The method of price discovery, which is what we do for a living, has created a price that has more integrity than those prices created anywhere else in the world.’  Another said, ‘The value that the Stock Exchange brings is to have all the fairness of execution, where all the orders are competing with each other. The best price.’ The normative, proud, and righteous tone is unmistakable. ‘You have an actual two-legged buyer meeting an actual two-legged legitimate seller. And that has to be fair by the nature of the beast.’ Traders are often indignant that this constitutive rule is not shared by traders in competing over-the-counter markets. New recruits learn them by imitating
what is already common practice. These are the scripts by which the market is reproduced on a daily basis. To members of the culture, these assumptions are beyond question. There is little fear of rule
violation because everyone agrees that this is how the market is made.

CONSTITUTIVE ROLES: In addition to the rules that constitute the market, the cultural analyst will find that market makers have constructed rich social identities that have come to define the behaviour and interaction of role incumbents. Rather than the calculative unit actor described by economists, we see an astute participant suing a toolkit of strategies that is culturally available in the market. These strategies are learned by recruits for successful role performance. As new recruits are socialized by veterans, the scripts begin to define what is valued and to have a taken-for-granted character. Like police, physicians, and gangsters, market-makers employ these identity tools to reduce uncertainty and risk in their environment and to maximize survival. EXAMPLE: In what sense were these people entrepreneurs? Over the ensuing weeks I came to understand that ‘entrepreneur’ was an identity through which they constituted their role performance. It defined how traders related to each other in their transactions and how they thought of themselves.

“unabashed materialism” as a status indicator. Bond traders are very clear about what constitutes a skilled role performance. ‘Money is everything in this business. Whatever money you make is what you’re worth.’ Unlike high tech markets where market makers tie their identity to innovation, or service industries, such as restaurants, where it is tied to customer satisfaction, bond traders sanctify heightened materialism.

BUT…What kind of materialism is this? Is it an ontological materialism or a sort of showing off that I have enough money from the ‘business’ of trading…Money, and what it can be used to acquire, provide an identity that prevails over charisma, physical attractiveness, or sociability as the arbiter of success and power on the bond trading floor. But it is not the money itself that is important, rather it is the status and approval it brings among peers that is at the heart of the identity. As a result, the unfettered pursuit of wealth is deemed appropriate and scruples which might deter market makers in other industries are unnecessary.

RATIONALITY: Observation and interviews reveal that market makers in stock, bond, and futures markets construct local forms of rationality out of the resources and conditions in which they are embedded. Even in the highly rationalized world of financial markets, conditions of uncertainty, ambiguity, and institutionalization elicit adaptations. “Decision tools are the scripts created by decision makers for coping with the uncertainty and ambiguity in their environment (see Abolafia, 1996b, for a more detailed discussion).” OK BUT…what kind of tools are these tools? What about the tool mediation? I mean, to produce a materialist analysis of trading…are these tools market devices? What kind of devices are these tools? Maybe risk generation devices or in other words…uncertainty organizing devices?…The most important decision tools in the bond market involve stylized versions of vigilance and intuitive judgment.

The first step in vigilance is sorting. The volume of information available is so overwhelming that a subsidiary industry has grown up to supply information and analysis of market trends to traders. Every trader must sort through both the numbers and their multiple interpretations. Traders often favour a particular brand or fashion in interpretation and become ‘chartists’,” ‘fundamentalists’? or followers of some other interpretation. Most develop a routinized sorting procedure to cover their favoured sources of information. This procedure is enacted daily prior to the start of trading and continues throughout the day.

THEREFORE…Crowd thought in its actual technical analysis form it is a form of vigilance by sorting…Once information has been gathered and sorted, traders employ a networking routine to see how others are perceiving the same or different information. They are in contact with a network of brokers, traders, salespeople, economists, and informants in government agencies. Traders are generally aware that it is not the correctness of the interpretation that counts, but rather the degree to which others will read the same information the same way. Establishing value is the final step in the script for vigilance. It is the local term for making an estimate of where a bond ‘ought to be’ in terms of price.

HERE I can of remember the work of Beunza and Stark about a sort of distributed knowledge of the Traders and their ways of communicating each other…Are these last authors reading Abolafia on this point? I don’t think so…because they could be reading Cognition in the Wild…I’m not sure about this point…The scripts for vigilance reflect the analytic inclinations of market makers. Sorting, networking, and establishing value is common strategies which each market maker can describe in some detail because of their habitual repetition. In practice, these tools orient the traders toward each other, creating competing or shared interpretations of where the market has been and where it is going. On the basis of their understanding of these interpretations, individual traders decide when and how to transact in the market. Sometimes this leads to herd-like behaviour or a contrarian reaction to the herd, but more often the data are equivocal and the interpretations’ predictive ability uncertain. As a result, analytic routines do not complete the repertoire of decision tools used by market makers. As my subjects were quick to tell me, ‘(trading) is not a science, it’s an art’. No prescription exists. Rather, it is learned, usually during a lengthy apprenticeship. As another subject said, ‘Traders cannot put into words what they’ve done … They have a knack’. That knack is intuitive judgment. The market-maker develops an abstract sense of how the market reacts under various conditions. These abstractions or images are developed through watching others transact by transacting and by relying on market folklore.

Dynamics of power and change
Constitutive rules and local rationalities are created by market makers and, in turn, come to shape their behavior. In the process, stable and orderly markets are enacted. But rules, roles, and even rationalities are not immutable. Abolafia demonstrates, by the use of the market makers at the New York Stock Exchange case, that market culture can resist and change historically. In this particular case, as Specialists lost their power at the transnational level, they were no longer able to fight rules and regulation. Then, the reign of Institutional Investors has begun since 1962. However, the pre-change period runs from the 1930s to the 1960s. During this period, specialists, ie, market-makers on the floor of the New York Stock Exchange, continued the floor culture that had existed prior to the crash of 1929. Even after the establishment of the Securities and Exchange Commission (SEC) in 1934, specialists still frequently traded ahead of their customers and used the information available to them for personal advantage.

Market Crowds between Imitation and Control (Jakob Arnoldi and Christian Borch, 2007)

The question which this article discusses is the relationship between individual agency and crowd behavior. With crowd behavior we mean above all unconscious, non-rational imitation in the sense of instinctive and affective behavior. One of the prominent suggestions of classical crowd theory (partly adapted by behavioral finance theory) is that people are hypnotized to behave irrationally and affectively when they become part of a crowd. In
financial markets this would mean that market participants imitate others, hence not only moving with the flow of the market, but also reinforcing it.However, it is important not to reduce market behavior to mere unconscious imitation. The conscious behavior, which also exists, is however not as individual or atomistic as economic theorists want us tobelieve. We will show that there also are social rules, social hierarchies and social strategies in play in market crowds.

It may seem that our endeavor concerns the question of structure and agency but we think not. Observing a market crowd, the question is not whether individuals act intentionally or as prescribed by general norms or
institutional structures. The question is rather whether they act atomistically or as members of a particular crowd. There is no doubt about selfinterest in market crowds; yet the reason why crowd and network theory make sense in the context of markets is the fact that every single market player competes against every single other (tries to exert control). This competition may lead to crowd behavior because all compete to come first or because all become obsessed with greed or ridden by fear.

We subsequently relate our discussion of crowd theory to the network theory of Harrison C. White. White’s theory contains two fundamental premises that are valuable in the present context and which we can relate to crowd theory: first, economic actors are embedded in social networks and they intentionally accustom their actions to these networks. Second, agents seek to exert control over (their relations with) the network, and each member of the network is a discrete entity with a particular identity, ideas which cast new light on the notion of the crowd. Drawing on crowd and network theory, we will therefore end up describing the abovementioned oscillation as one between imitation and control efforts.

Market makers (also called ‘locals’) do not take long-term positions in the market. Their (for the exchange absolutely vital) role is to secure liquidity in the market. Only rarely do they hold positions for more than day and mostly for much shorter periods of time. Market makers make quick decisions constantly. They do not seek out specific assets based on analysis which they then hold (in fact, often they are obliged to trade the assets being traded, the question is just at what price). Often members of one crowd can hear, and may respond to the sounds
of other pits, so information is not confined to a given crowd. But generally, at least, the market makers belong to one particular market crowd, and are much less connected to other crowds, not to mention the outside world, than
brokers and the market players the brokers represent.

Watching the Crowd
Let us start out with a well-documented fact: people trading in financial markets constantly orient themselves to ‘the market’, or, to use a term with less denotational range, to the crowd. Both consciously and subconsciously,
traders follow ‘the market’, try to catch the ‘mood of the crowd’, etc. The exact meaning attributed to ‘market’ and ‘crowd’ is often unclear and ‘the market’ may indeed signify almost everything to market participants (Knorr
Cetina and Bruegger, 2002a) -Knorr Cetina, K. and U. Bruegger (2002a) ‘Global Microstructures: The Virtual
Societies of Financial Markets’, American Journal of Sociology 107(4): 905–50.- Traders use both terms as conceptual tools, as framing devices (Arnoldi, 2006) Arnoldi, J. (2006) ‘Frames and Screens: The Reduction of Uncertainty in Electronic Derivatives Trading’, Economy and Society 35(3): 381–99., in the sense that considering the mood of ‘the market’ or ‘the crowd’ is a way in which the traders gain (or feel they gain) some sort of footing that enables them to make decisions.

Market activity is in this sense reflexive, in that the result of the activities in the market crowd, the price, is constantly being fed back into the market. Similarly Knorr Cetina and Bruegger talk of the computer screen as being ‘a mirror that reflects market participants’ activities to one another in real time’ (2002a: 925). But this may not suffice; traders also glean information about the market crowd from gossip, from the visual and audio input coming from the trading floor, etc. Such continuous self-monitoring is a form of imitation. There is a substantial body of literature on the crowd in (behavioral) finance theory and in more popular literature on finance and trading. A prominent example of this is the so-called contrarian speculation theories, developed in the USA during the 1920s and 1930s (Stäheli, 2006; see also Borch, 2007; Neill, 1967). This branch of investment theory is based on two crucial observations.

1) ‘the crowd is always intellectually inferior to the isolated individual’ (Le Bon, 2002: 9).

2) Second, it suggests that crowd theory explains the fundamental traits of financial markets.

Smith, C.W. (1999) Success and Survival on Wall Street: Understanding the Mind of the Market. Laham, MD: Rowman and Littlefield. Here Smith argues for a refined contrarian position, where the individual
cuts him or herself loose from the market crowd. Smith’s analysis suggests that the notion of the crowd is more than a heuristic concept and more than a label which traders use to describe themselves. As a theoretical concept, ‘the crowd’ is also applied to explain how markets actually work, and as Smith’s case illustrates, this theoretical approach to market crowds even appears in contemporary sociological theorizing.

Does crowd theory provide an adequate picture of financial markets? And do related positions, such as contrarian thinking, offer satisfactory models of how market makers behave vis-à-vis the market crowd?

The Individual vs the Crowd
One of the major puzzles of contrarian speculation theory is how to retain one’s individuality vis-à-vis the de-individualizing and de-individualized market crowd. Here the authors express that this idea came from a direct use of Gustave LeBon, The Crowd. Individuality therefore seems to be purely negated in crowds. It is, according to the contrarians, this de-individualizing tendency which the clever investor must avoid. However, Le Bon’s fellow crowd theorist, Gabriel Tarde, destabilizes the clear-cut distinction between the conscious and autonomous singular individual, on the one hand, and the unconscious crowd member, on the other. This follows from Tarde’s claim that ‘Society is imitation and imitation is a kind of somnambulism’ (1962: 87, original emphasis)-Tarde, G. (1962) The Laws of Imitation, trans. E.C. Parsons. Gloucester, MA: Peter Smith.- , implying that the hypnotic power of the crowd is a basic trait of every social phenomenon – although everyday imitations are not as intense as those induced by crowds.

Maybe we need a much more complex Crowd Theory!

If the difference between imitation in normal life and in crowds is only a matter of intensity, then what explains this intensity? Why are crowds particularly susceptible to blind, unconscious imitation?This is the conclusion of Teresa Brennan’s (2004) – Brennan, T. (2004) The Transmission of Affect. Ithaca, NY: Cornell University Press.- recent discussion of crowd theory. Brennan seeks to explain the contagious nature of crowds and argues, on the basis of studies of hormonal transmission, that physical proximity stimulates entrainment, i.e. ‘the process whereby human affective responses are linked and repeated’ (2004: 52). Indeed, she argues, ‘the transmission of affect can mean that individuals are affected by a feeling in a group, even though their own histories might not lead them to the same feeling, left to themselves’ (2004: 73). This implies, in our context, that the physical gathering of market makers in open-outcry financial markets, where bodies are in proximity to other bodies, generates a social environment that is highly susceptible to blind and intense imitation (see also MacKenzie, 2004). -MacKenzie, D. (2004) ‘Social Connectivities in Global Financial Markets’, Environment and Planning D: Society and Space 22: 83–101.-  PLUS According to Canetti, it is only in the crowd that individuals suspend their fear of being touched by others. The crowd annuls the difference between bodies: ‘Suddenly it is as though everything were happening in one and the same body’ (Canetti, 1984: 16). -Canetti, E. (1984) Crowds and Power, trans. C. Stewart. New York: Farrar, Straus and Giroux.-  ‘Only together can humans free themselves from their burdens of distance; and this, precisely, is what happens in a crowd. During the discharge distinctions are thrown off and all feel equal’, he says, which creates a ‘blessed moment’ (1984: 18).

Each market maker faces a multitude of counterparts who may or may not possess better and more valuable information than he or she does him or herself. With each quoted price, there is a demand to override this uncertainty and make a decision. It is this uncertainty, this pressure, that makes it attractive for the individual investor to follow the crowd (see Smith, 1999). -Smith, C.W. (1999) Success and Survival on Wall Street: Understanding the Mind of the Market. Laham, MD: Rowman and Littlefield.- In the
market crowd, the individual market maker obtains a ‘blessed moment’ (1984: 18) where no-one has less information than the others. In other words, the informational uncertainty makes it attractive for market makers to form a crowd where everyone imitates the others blindly. Due to the informational burdens of distance, every market maker is prone to react instinctively to the gestures, voices and actions of other market makers.

From Crowds to Networks
We have argued so far that a closer look at crowd theory produces a much more complex image of the relation between individual and crowd than classical adaptations of crowd psychology suggest. But this is still only half the story. In the following we examine how recent network theory may contribute to the discussion of individual versus crowd. One of the most, if not the most, sophisticated network theories is that of Harrison C. White. For decades he has developed a highly complex general theory of networks which he has often applied to markets (e.g. White, 1992, 2002). -White, H.C. (1992) Identity and Control: A Structural Theory of Social Action. Princeton, NJ: Princeton University Press. White, H.C. (2002) Markets from Networks: Socioeconomic Models of Production. Princeton, NJ: Princeton University Press.-

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