Sources and consequences of structural incoherence in financial markets

(to be published in LSE SU Finance Society Magazine 'The Analyst')

We can highlight three important insights sociological studies bring from financial markets. The first is the importance of social relationships (networks) in sensemaking and price-discovery, which undermines the notion of rational unitary actors capable of collecting and processing data/information on their own (Baker, 1984). The second is the demonstration of origins and effects of social and organisational action that are not necessarily utility maximizing by looking at the role of beliefs and culture pertinent to distinctive groups in financial markets (Abolafia, 1996). Related to this is the insight on how markets and politics interact in shaping markets' legal and cultural foundations and social actions that take place in markets (Fligstein, 2002). The third insight is the demonstration of human and non-human actor interaction which includes application of theories and technology to market exchange, and how these transform cognition, calculation and price-discovery activities in financial markets (Millo and Mackenzie, 2003; Mackenzie 2009). In all the three insights that are mentioned here, there is one common theme, namely reduction of uncertainty concerned with; firstly rights and obligations attached to securities and actors that participate in the issuance and exchange of securities; secondly the social value and legitimacy attached to these essential processes and markets in general; and finally subjective judgements about financial value of securities in relation to risks and returns.

In reference to the third insight, recent research on financial markets demonstrate the growing importance of digital representation and calculation technologies which have undermined the network based and face to face relationships in financial markets (Cetina, 2005; Cetina and Preda 2007). In this new environment, flows of funds and information presented on information and trading screens become text-like representations of aggregate market sentiment which market actors read, classify, interpret and contribute to with their trading actions. In this respect, market actors develop market knowledge via observation of market screens rather than by being in a market place physically. The latter in fact had been a privilege for select few market professionals before the digital revolution. The digital revolution can therefore be argued to have brought a new wave of disintermediation to financial markets and enabled lay investors and smaller investment organisations to be more self-reliant in their observation and trading activities in markets.

The digitization of market places and the automation of trading have therefore transformed the ways in which market actors orient themselves to other market actors. More importantly, they have brought a more democratic access for professionals and public alike to information/data and markets. The improvements in access  however does not necessarily bring an uniformity among market actors in their comprehension and interpretation of market screens. As the nature of representation on market screens are now very much dominated by summary proxy figures on anonymised actors, and risks and returns on financial securities, market actors find themselves in a position to having to decode these figures to be able to gauge the direction of markets and the value of their investments. In that process, one's market identity and epistemic, social and economic resources often become the determining factors in how the decoding is performed and results in trading decisions.

Irrespective of the effects of digitization on the generation and coherence of meanings in digitized financial markets, sociological studies on financial markets have pointed to the origins and consequences of different interpretations in markets in the form of conflicting valuation models on securities (Beunza and Garud 2007) or worse, categorical discounts or total avoidance of securities (Zuckerman 1999) which seem not to fit the prevalent perception frames or knowledge standards in distinctive pockets of a market place (White 2000). The main source behind these structural differences in meanings are the multiple roles actors and entities take on, and the understandings of actors about other actors' and entities' roles and functions in the market place. Within a market, one can therefore talk of a division in terms of not only the concrete functions an actor or entity fulfills but also the perceptions that are held by actors about other actors and entities. Although one would assume that over time there should be a convergence between fact and perception as social order is based on the consensus among actors over meanings attached to actions and entities, financial markets undermine such a need for consensus over meanings, especially about the aspects of market which are not directly concerned with the foundational rules, regulations and mores that are necessary to solve the [social] value, cooperation, and competition problems in markets (Beckert 2009). In that sense, price of a security at any point in time need not reflect consensus about the 'right price' in relation to financial risks and returns among different actors for it to be realized and used as a signifier for the exchange of securities. This is despite the fact that there needs to be a consensus about the legitimacy of price discovery mechanisms in a market for it to be perceived as orderly, stable and fair to all the participating parties irrespective of their market identities.

We can therefore identify two planes of order in financial markets. The primary plane of order is comprised of the ground rules and norms about what constitutes a security, how it can be exchanged in a given market, the rights and obligations attached to owning a security, who can own it, who can issue it, and so on. The primary plane gives purpose and role to the constituting elements of a market. It draws the boundaries of competition and cooperation among the participating actors in that market. The secondary plane accommodates the actual practices by market actors as they are informed by the first plane and the theoretical or vernacular constructs about financial valuation. However, the knowledge and value outcomes generated in the second plane may not necessarily conform to the categorical or a priori facts generated in the first plane. Simply put, shares of company A despite being categorically the same entity in the first plane, namely a security that allows investors to become shareholders in a company, may not take on the same meaning in relation to the subjective financial valuations and/or reappraisal of their social worth and legitimacy by different market actors who have distinctive market roles and identities. Consequently, the actual financial and social value and legitimacy evaluations of various market actors may undermine the legitimacy and social value of a given security and nullify a priori truth claims that are made about it. Similar mismatches between a priori truth claims about other components of a market and a posteriori perceptions held by different market participants and the public are probable and prone to create a structural incoherence in the meanings attached to markets and their components. This probability has been exacerbated by the democratisation of access to market data/information and knowledge, which has diluted the network-based and restricted mode of presence in market places. Therefore both planes of social order in a financial market are closely connected to each other in a spectrum of mutually constituting to mutually undermining relationships. The dynamism created by the multitude of actors and entities with diverse social and market identities in constant market interaction leads to reappraisals of a priori and a posteriori claims on securities and markets, and provides the internal and external stimuli for reform and change in financial markets.

References

ABOLAFIA, M. (1996) Making Markets. Opportunism and Restraint on Wall Street. Cambridge, MA: Harvard University Press.

BAKER, W. (1984) ‘The Social Structure of a National Securities Market,’ American Journal of Sociology, Vol. 89, No 4, pp. 775-811.

BECKERT, J. (2009) 'The Social Order of Markets,' Theory and Society, Vol. 38, No. 3, pp. 245-269

BEUNZA, D. and R. Garud (2007) ‘Calculators, Lemmings or Frame-Makers? The Intermediary Role of Securities Analysts,’ Sociological Review, Vol. 55, No.2, pp. 13-39.

CETINA, K.K. (2005) ‘How Are Global Markets Global? The Architecture of a Flow World,’ in K.K. Cetina & A. Preda (editors), The Sociology of Financial Markets. Oxford: Oxford University Press.

CETINA, K.K. and Preda, A. (2007), ‘The Temporalisation of Financial Markets: From Network to Flow,’ Theory, Culture, and Society, Vol. 24, No 7–8, pp. 116–138.

FLIGSTEIN, N. (2002) The Architecture of Markets. Princeton: Princeton University Press.

MACKENZIE D. and Y. Millo (2003) ‘Negotiating a Market, Performing Theory: The Historical Sociology of a Financial Derivatives Exchange,’ American Journal of Sociology, Vol. 109, No. 1, pp. 107-145.

MACKENZIE, D. (2009) Material Markets: How Economic Agents are Constructed. Oxford: Oxford University Press.

WHITE, H (2000) “Modeling Discourse in and around Markets,' Poetics, Vol. 27, No. 2, pp. 117-133

ZUCKERMAN, E. (1999) 'The Categorical Imperative: Securities Analysts and the Illegitimacy Discount,' American Journal of Sociology, Vol. 104, No. 5, pp. 1398-1438

Küresel Kriz ve Finans Piyasalarının Sosyal Yüzü

Küresel finans piyasalarındaki çalkantı hem yatırımcılar hem de sıradan vatandaşı etkilemeye devam ediyor. 2008’e kadar yaşanan yedi senelik emlak ve hisse senedi balonun patlamasıyla dünyanın dört bir yanındaki vergi mükellefleri trilyonlarca dolarklık temizlik faturasını yüklenmeye zorlandı. Avrupa ve Amerika’daki politikacılar yaptıkları kurtarma operasyonunu resesyonun etkilerini azaltacak umuduyla meşru hale getirmeye çalışıyorlar. Yaşanan krizin sorumlularının aranmasına devam ediliyor. Baş şüpheliler senelerden beri on milyonlarca dolarlık maaş ve bonus alan küresel yatırım bankalarının üst yöneticileri. Bu cömert maaş politikasının arkasında ise bu sihirbazların yarattıkları ve küresel yatırımcılara pazarladıkları toksik finansal paket ürünler yatıyor. Serbest yatırım fonları ise krizin küçük sorumluları arasında gösteriliyor. Hızlı kar arayışı ve kompleks al-sat modelleri ve yüksek kaldıraç oranları ile piyasaları sarsabilen bu fonlar hem organize hem de tezgah üstü piyasalardaki önemli çalkantıların baş sorumluları arasında gösteriliyor. İçinde bulunduğumuz krizin bir başka sonucu, kaldıraçtan arınma yani nakit kraldır dönemine girmemiz. Kaldıraçtan arınma günlük yaşamda detoks olarak populerleşen geçiçi yeme içme rejimlerine benzetilebilir. Aşırıya kaçan alışkanlıklardan biraz uzaklaşma, fazla mesai yapan vücudumuzu dinlendirme çabası gibi, finansal detoks dönemi bir süreliğine finansal piyasalarda aktiviteleri azaltacaktır. Fakat her detoks gibi, finansal aracılar ve yatırımcılar bir süre sonra eski alışkanlıklarına geri dönecektir.

Bu alışkanlıkların başında yeni finansal ürünler yaratma gelmekte. Küresel krizin başlıca sebepleri arasında gösterilen karmaşık finansal ürünler bu alışkanlığın bir sonucu olarak görülebilir. Bunun yanında taklit etme alışkanlığı bir kez yaratılan ürünün birçok küresel finansal aracı tarafından taklit edilmesi ve küresel çapta pazarlanmasına sebep olmaktadır. Aracılar açısından yaratma ve taklit etme alışkanlığının altında yatan temel sebep yeni finansal ürünün getireceği kar ve buna ortak olmak olarak düşünülebilir. Diğer bir açıdan bakıldığında ise bu araçların birçoğu yatırımcılardan herhangi bir talep gelmeden yaratılmaktadır. Finansal kurumların yaratıcılığı bu açıdan moda tasarımcılarının yaratıcılığına benzetilebilir. Herhangi bir pratik gereklilik veya talep olmadan yaratılan kıyafetler veya finansal ürünler moda takip eden insanlar veya kar peşinde koşan yatırımcılar tarafından birkez farkedildiğinde hızlı bir şekilde popülerleşmekte ve yaratıcılarına önemli finansal getiriler sağlamaktadır. Moda takip etmenin popülerlik, dikkat çekme gibi sosyal getirileri bir yana, yeni finansal ürünler yatırımcılar için önemli finansal getiri kaynakları olabilir. Burada önemli olan finansal aracıların yatırımcıları bu yeni ürünlerle tanıştırması, onlara bu ürünlerin ne kadar güvenilir ve karlı yatırımlar olduğuna ikna etmesi ve yatırımcılara çeşitli güvenceler vermesidir. Bu açıdan finansal aracılar moda tasarımcılarına nazaran nihai tüketici ile ilişkilerinde daha karmaşık ve birebir pazarlama çabası içindedirler. Birçok durumda yaratılan yeni ürünler ürünün yaratıcısı tarafından kontrol edilen tezgah üstü piyasalarda el değiştirmekte, bu açıdan finansal aracı hem ürün yaratıcısı hem de piyasa yapıcı olarak enformasyon avantajlarına sahip olmaktadır. Bu avantajlar işler yolunda giderken herhangi bir fark yaratmazken, kriz zamanında piyasa yapıcıları milyar dolarlık hacimlere ulaşan tezgah üstü piyasaları fiili olarak kapatmakta ve yatırımcıları madur etmektedir. 2008 yılı bu tip piyasaların fiili olarak donduğu yıl olarak tarihe geçmiştir. Bunun üzerine bazı yatırımcılar küresel yatırım bankalarını ABD’de mahkemeye vermiş ve bankalar on milyarlarca dolar değerindeki yatırım araçlarını mahkeme kararıyla geri almak zorunda kalmıştır.

Muhtemelen yatırımcıların karmaşık finansal ürünlerle ilgili yakın gelecekteki düşünceleri bir açıdan bizlerin on veya yirmi sene öncesinin modası hakkında mesela bahçıvan pantalon hakkındaki olumsuz düşüncelerimize benzeyecektir. Modanın bir özelliği olan geçmişin eğilimlerini tekrar moda haline getirmek finansal piyasalar için de geçerlidir. Bu dönemsellik bazı finansal araçları (getiri açısından) sıkıcı ve demode yaparken diğerlerini mutlaka alınması gerekenler listesinde üst sıralara çıkartacaktır. Bu bağlamda dünyayı krize sürükleyen karmaşık ürünlere benzer ürünlerin yeniden moda haline gelmesi mümkündür. Artan sayıda yatırımcının ilgi gösterdiği yeni karmaşık ürünler arz talep dengesindeki hareketlerle veya başka sebeplerle (örneğin konut balonu) önemli getiriler sağlamakta, bu getiriler ise daha fazla yatırımcının ilgisini çekip kendi kendini besleyen bir süreç halini almaktadır. Bu noktada artık ürünün içeriğinin ne kadar riskli veya zehirli olduğunun pek önemi kalmamakta, piyasa psikolojisi fiyatları yönlendirmektedir. Bu modanın dışında kalmak ise yatırımcı için neredeyse imkansız hale gelmektedir. Bu açıdan bakıldığında, finansal piyasalardaki yaratıcılık kamu veya kar amacı gütmeyen kurumlar tarafından etkin şekilde düzenlenmediği sürece, dünyamız yeni dönemsel finansal krizlere gebedir. Sonuç olarak birkaç bin piyasa aktörünün birbirini taklit ederek yarattıkları ve kamoyundan gizledikleri kollektif mantıksızlık ve onu takip eden küresel krizin sonuçlarını milyonlarca vergi mükellefi ödemekte. Bu sebepten finansal yaratıcılığın topluma getirdiği iddia edilen ucuz kredi gibi tali yararları ne olursa olsun, bu yararlar yaşadığımız krizde misliyle elimizden alınmakta. Bu tür felaketlerin tekrar yaşanmaması için ihtiyatın, sadeliğin ve şeffaflığın küresel piyasa aktörleri arasında yeniden moda olması zamanı geldi.

Global Credit Crunch and Social Nature of Financial Markets

The turmoil in global financial markets is taking its toll on investors and general public. We the tax payers are forced to bailout imprudent bankers and clean the mess they have created over the last 7 years. The British PM and the Chancellor say without a bailout, the UK economy would have come to a standstill and the effects of the recession would have been exacerbated. Search for the culprits of the continuing mess is still on. Prime suspects are CEOs of major investment banks taking home multimillion pound bonuses thanks to the toxic waste they have created, branded well and sold to unsuspecting investors. Hedge funds are also singled out. They are the smaller villains in the market, looking for quick profits, punishing weak members in the flock by short selling and engaging in all sorts of games using leverage in organized and over the counter markets. It is said that we are now in the era of “de-leveraging”, i.e. “cash is the king and safest bet in the turbulent times.” De-leveraging is like detoxication after clubbing and binge-drinking. We don’t necessarily stop drinking and become teetotal for the rest of our lives after the fresher’s week’s excesses. It is prudent to stay away from alcohol for a couple of days to give over-working liver a break; however a total abstinence will be quite a socially deviant and probably socially-depriving behaviour in this historical epoch of “drink to be social”.

We should expect a good detoxication period in financial markets which may last a year or so. However, the dust will eventually settle and confidence in the essentiality of creating new financial products to be the leading players in financial markets will be restored. It was that kind of confidence among bankers that led to invention of exotic products, which eventually pushed the markets into turbulence. Market professionals are imitative creatures like the rest of us. They like to imitate products created by their rivals. Just as we follow unsolicited fashion without any practical necessity motivating us, market professionals create and imitate products without a universal practical need/demand called for by investors. However stakes of innovation and imitation is much greater in financial markets than following fashions in social life due to the nature of the beast. Global investment banks create products and then create the demand for them by spreading the word about how great and must-have their product is. Then they create a market for the products by becoming market-makers. They promise investors that there will always be a market for their products. But they can refuse to buy them back if the informational asymmetry they enjoy evaporates all of a sudden and everyone realizes the toxic nature of the product. Informational asymmetry between the market-maker and the buyer means that the house always wins unless the law-enforcers say no. This was the case in February 2008 when major global investment banks refused to buy back auction rate securities, a type of debt instrument which was invented by a global investment bank back in the 1980s. It was only after a law-suit filed by investors in New York, the banks accepted to buy back more than 50 billion USD worth securities as such.

Probably in hindsight, investors’ perception about auction rate-securities will be like our current feelings about dungarees, not so glorious, are they? But can we be 100 per cent sure that the latter will never make it back and we won’t flock to high-street shops to buy a nice pair of dungarees? Like fashion objects, financial products are cyclical in nature, some will be in vogue and sexy while others will be seen as old-fashioned and boring. Investors will be convinced by product designers that it is sexy to buy exotic products again. Not only will it be sexy, but it will also be very profitable to buy them when the demand for such products will be soaring again. After all, supply and demand mechanism still works in the markets and no one can afford to be left out when the buying frenzy means profits even if the product traded is actually toxic waste that may eventually explode and poison the whole system. As long as there is no fundamental change in the way the innovation is regulated, more cyclical global crises are to come. After all, it is millions of tax-payers who take the brunt of reckless behaviour of few thousand market professionals imitating each other and creating collective irrationality clandestinely until it turns into a systemic crisis. So whatever trickle-down effect financial innovation is claimed to bring to public, it takes more than it has given to the public in a crisis like this. It is time prudence, simplicity, and transparency become fashion among market professionals.