Sensemaking and Storytelling in Financial Markets: Evidence from Istanbul

I defended my PhD thesis on 19 April. The title of my thesis is “Sense-making and Storytelling in Financial Markets: the case of the Istanbul Stock Exchange”. As it can be inferred from the title, the study is about how market actors make sense of data/information flows in digitized and remote access financial markets and what role storytelling might have in this cognitive activity. What I refer to by story/storytelling is the cognitive process in which we establish cause-effect relationships between events and actions. According to the sense-making literature, this is the most commonly used mode of knowledge and explanation among human beings and it is informed by temporality and causality. That is to say, events and actions are put in a sequence according to the perceived cause-effect relationships. The other mode of knowledge and explanation is usually described as categorical knowledge. This is a more deductive method in which the existing scientific or technical knowledge is evoked to demonstrate events and actions as manifestations of these “facts”. Temporality therefore becomes a non-factor in categorical explanations. Of course, it is recognized in the literature that both modes of knowledge and explanation can be used together but what matters here is storytelling relies on putting observed/known events and actions in a non-random temporal order according to a perceived cause-effect relationship among them.

What is significant about digitized financial markets or what Karin Knorr-Cetina and Alex Preda call 'scopic market systems' is that all the data/information from different parts of the world is represented on computer screens in a flow mode. That is to say, data/information (including price) is presented in a sequential manner. Moreover, there are multiple flows that happen contemporaneously. It is therefore easier for market actors to make connections among these multiple streams. Although market actors also rely on categorical knowledge in their sense-making activity (and use risk and valuation models accordingly), it is storytelling that can be expected to be the most dominant way of reducing uncertainty about the past, present and future in the face of multiple flows. This premise might actually sound antithetical to the mainstream finance’s assumption that prices include all available data/information (or market actors actually know what happened in the past). The main reason for this is that the ever present dazzling stream of data/information on the screens is not self-explanatory. That is to say, the screens don’t talk back to market actors and tell them what has happened and what will happen! Such a higher datum is only achieved by market actors’ interpretative or calculative efforts with a view to incorporating price and other  data into their investment decisions.

While the conceptual framework for the role of narratives in sense-making in digital financial markets looks like this, my thesis empirically answers the following questions: do market actors ever resort to storytelling in their sense-making activity? If so, would there be different types of stories in terms of their content and plot structures? If there are, where do these differences come from? I tried to answer these questions with a field work in the ISE in 2008/9. I accessed four intermediary organisations plus an asset management company. My full day observations were around 75 days and I collected over 1200 sense-making stories. These field sites generated around 8% of the annual trading volume in the ISE in 2008/9. They represented different types of investors such as domestic retail, foreign institutional and domestic institutional investors.

Leaving aside the number of stories collected over the observation period, the field observations showed that storytelling was the main mode of making sense of the flows rather than a calculative mode that generated quantified predictions. However, the collected stories showed variance in regards to their content and plot structures in accordance with market actors’ individual and organisational identities. To give an example, among the three domestic sales teams that I observed and where domestic retail investors were served, more than 40 % of the stories fixed an event or news (that were to) happen(ed) abroad as the cause of what was (to be) observed in the ISE. In one of these field sites, this ratio went up to 54 %. This was mainly because of their clients’ preference for trading in ISE futures contracts in line with what was happening in the leading economies and global futures markets. On the other hand, in two observation sites where institutional investors from Europe and North America were served, this correlation/cause-effect logic between world markets and the ISE went below 20 %. More interestingly, the institutional sales teams that served foreign institutional investors usually kept this type of "market abroad" stories to themselves to coordinate trading activity in Istanbul whereas the domestic sales teams told most of the "market abroad" stories to their clients with a view to encouraging them to trade. Although these stories used the same logic of cause-effect or correlation when there was no news event abroad, their frequency and mode of delivery demonstrated that organisational identities/resources affected the cognitive scheme market actors adopted.

This was not surprising for the following reason. As a social resource for intermediaries, investors in the ISE showed distinctions in their investment activities. For instance domestic retail investors on average invested for several week periods and generated bulk of the trading volume in the ISE whereas foreign institutional investors on average held their portfolios unchanged for a few  months and traded infrequently. These dispositions of investment therefore led to differences in narratives as sense-making outcomes with regard to their frequency, content, and mode of delivery.

Another significant example of different dispositions among investor types and their manifestation in story outcomes comes from the domestic retail investor scene. In addition to the three field sites of domestic retail activity, I observed a fourth site in which retail investors were more interested in thinly traded and/or guided shares thanks to high net worth/high frequency trading retail actors, a.k.a. “domestic speculators”. This fourth site was significantly different from the three domestic sales sites where I had the chance to observe a representative sample of the 100,000 or so core domestic retail investors who traded in relatively liquid and large-capitalisation shares. These three sites had hardly generated any stories about “domestic speculators” or guided moves in shares. Dealers and clients in these sites seemed content with what they observed on market screens. On the other hand, in the fourth site, the domestic retail investors and their intermediary seemed to go beyond the market screens and relied on their network relationships to access what I call “private” information. This information was mainly about these guided moves in shares and what a number of influential actors in share trading were up to. In the fourth site, 20 % of the stories relied on this type of “private” knowledge. The three “mainstream” domestic sales sites on the other hand relied on this type of “private knowledge” in less than 5 % of the cases (in one field site, one dealer and his high net worth client skewed the instance of private knowledge use single-handedly –otherwise the percentage was less than 2%).

This last example is quite telling about the post-2001 cognitive revolution that took place in the ISE. A great majority of the domestic retail investors do no longer rely on the 1990s’ most significant type of information, namely “private” information. In today’s ISE, majority of domestic retail investors make their investment decision in accordance with the data/information flows from the world economies and markets and Turkey as available in real-time on their market screens. This is despite the fact that short-term investment disposition of domestic retail investors shape the use of these data/information flows, mostly into an opportunistic cognitive stance.

In fact, the local data vendors have been catering for this opportunistic stance of domestic retail investors by generating calculation and representation modules on market screens that allow investors to harness a plethora of data/information on price, trading volume, and data on companies and economies. On the other hand, the most important cognitive device among institutional investors, especially foreigners, seems to be analyst reports on companies, sectors and macro economy and politics of Turkey. These reports are based on calculative and probabilistic frames that forecast future price movements. What I observed during my residence in the institutional sales departments was that most of the in situ stories told to clients were based on or disciplined by these analyst reports and thus paid attention to the calculated risk and return projections.

This was unlike the majority of stories told in the domestic sales departments that looked to short-term news and market movements abroad, especially in the DOW (USA) and the DAX (Germany)! I also observed that domestic retail investors had a knack in turning all types of information/data flows into short-term trading opportunities. They did so with the vernacular knowledge about the ISE's internal dynamics (for instance, that domestic retail investors traded frequently in the ISE according to what happened abroad- this actually sustained a perception of one-way correlation between the world markets and the ISE). That was why domestic retail investors perceived analyst reports as yet another opportunity to do short-term trades or even ask themselves the question whether foreigners would do the opposite of what they said in their analyst reports. In my thesis, I discussed the historical roots of these distinctive cognitive schemata among the different types of investors in the ISE. This discussion was a more substantial version of my article in Competition and Change.

In sum, I stress the following two points in my thesis. First of all, despite the digitization in financial markets which have brought more and more events and actions in to a calculative and abstract space, market actors, irrespective of their roles, identities and resources, make sense of these digitized and abstracted flows in a narrative mode. This means that market actors cannot be conceptualized as cognitive creatures that rely solely on calculation. Secondly, because financial markets are formed of individual and organisational actors who have different historical roles, identities and resources, one can talk of distinctive cognitive schemata and consequent differences in storytelling outcomes. This undermines the normative notion of a unitary universal rationality for all the market actors in financial markets.

My gratitude goes to all of the market actors who helped me in my field research in Istanbul. Without them, this study would never have been completed.

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

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.