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.

"Finans Piyasalarinda Anlamlandirma ve Hikaye Anlatimi: Istanbul Borsasi Vakasi"

19 Nisanda doktora tezimi basariyla savundum. Tezimin basligi "Finans Piyasalarinda Anlamlandirma ve Hikaye Anlatimi: Istanbul Borsasi Vakasi". Basliktan biraz anlasilacagi uzere piyasa aktorlerinin dijital uzaktan erisim piyasalarinda gunluk haber ve veri akisini nasil anlamlandirdiklari ve bunu yaparken hikaye/anlantilari nasil kullandiklarini inceledim. Anlatidan kastim gunluk hayatta olaylar arasinda sebep sonuc ve baska iliskileri hikaye formatinda nasil kurdugumuz. Aslinda hikaye/anlati yani "storytelling" insanlarin hayatlarinda en cok basvurduklari anlamlandirma yontemi. Insanlar bunu yaparken zaman ve sebep sonuc iliskisini kendilerine rehber olarak aliyorlar. Yani aciklamaya calistigimiz olaylar sonuclar bir kronoloji otesi sebepsellik icinde anlam kazaniyor. Diger yontem ise daha bilimsel olan, var olan bilinen bilimsel katagorik gerceklerden yola cikarak olan olaylari bu kategorik gerceklerin bir yansimasi olarak zamandan ve mekandan bagimsiz gormek.Tabi insanlar hikaye anlatirken bu kategorik gerceklerden de faydalaniyorlar fakat burada onemli olan hikayenin gozlenen bilenen olaylari sebeb sonuc icinde bir siraya koymasi.

Dijital finans piyasalarin ilginc bir ozelligi dunyanin dort bir tarafindan haber ve verileri akim (flow) seklinde piyasa aktorlerinin bilgisayar ekranlarina aktarmasi. Yani haberler ve veri (fiyat verisi dahil olmak uzere) kendi iclerinde sirali bir sekilde akmakta. Bircok akim bir araya geldiginde ise piyasa aktorleri icin bu akimlar arasinda hikaye formatinda sebep sonuc iliski kurmak daha kolay hale gelmekte. Piyasa aktorleri bunu yaparken kategorik gerceklerden faydalanmakla beraber (buna bagli olarak degerleme modelleri, risk analizi araclari kullanilabilir) hikaye/anlati formati anlamlandirma ve gecmis ve gelecekle ilgili bilinmezlikleri minimize etme konusunda en cok basvurulan yontemlerden biri. Bu finans teorisinin fiyatlarin var olan butun haberleri yansittigi, yani gecmisin aslinda bilindigi onermesine de ters bir durum teskil etmekte. Bunun en onemli sebebi bas dondurucu yogunlukta ve coklukta akan bilgi/veri akisi, ekranlarda her an var olmasina ragmen, bu akisin toplami kendi basina bir anlam ifade etmemekte. Yani ekranlar dile gelip piyasa aktorlerine olan biteni yorumlamamakta! Bu anlami /yorumu piyasa aktorleri kendi bilissel cabalariyla yaratip yatirim faaliyetlerine baglamak durumunda.

Iste benim tezim bu noktada su sorulari cevapliyor: Piyasa aktorleri gercekten hikaye/anlati yontemine basvuruyorlar mi? Eger basvuruyorlarsa, acaba anlattiklari hikayeler arasinda icerik ve mantik acisindan bazi farkliliklar var mi? Varsa bu farkliliklar neden kaynaklaniyor? Bu sorulari Istanbul Borsasinda yaptigim gozlem calismalariyla cevaplamaya calistim. 4 araci kurum ve bir portfoy yonetim sirketinde (2008/2009 yillarinda borsa islem hacminin yaklasik %8'ini gerceklestirdiler) yaklasik 75 tam-gun piyasa aktorlerini gozlemleyerek onlarin anlik anlamlandirma faaliyetlerini kaydettim. Buradan cikan anlatilarla/hikayelerle (1200 civarinda) bu sorulari cevaplamaya calistim. Oncelikle piyasa aktorleri anlatilara cok sik basvurmakta. Piyasa ekranlarindaki akislari surekli sekilde anlamlandirmaya calisip bunlari yatirim kararlarina baglama ugrasi icerisindeler. Fakat burada piyasa aktorlerinin kisisel ve kurumsal kimlikleri (ornegin araci kurumun sadece yerli bireysel yatirimcilara veya yabanci kurumsal yatirimcilara hizmet vermesi gibi) anlatilan hikayelerin icerigini etkilemekte. Bir ornek vermek gerekirse, gozlemledigim uc ayri yurtici satis departmaninda anlatilan hikayelerin %40'indan fazlasi yurtdisi piyasalarda ve ekonomilerde ne olduguna dair. Bir araci kurumda, vadeli islemler piyasinda aktif olarak islem yapan yerli yatirimcilara hizmet esnasinda, bu oran % 54'e kadar cikmakta. Ote tarafta ise, yabanci kurumsal yatirimcilara hizmet veren iki departmanda bu oran %20'nin altinda. Daha da ilginci, yurtici satis departmanlari bu hikayelerin buyuk bir kismini musterilerine anlatirken, kurumsal satis departmanlarinda bu hikayelerin cogu departman icinde kalmakta. Aslinda anlam/icerik bazinda bu farkliliklar bizlere sunu anlatmakta, araci kurumlar musteri tiplerine gore farkli bilissel cerceveler gelistirip ona gore piyasadaki veri akisini yorumlamakta. Turkiye Sermaye Piyasasi Araci Kuruluslar Birligi (TSPAKB) istatistiklerine gore, yerli bireysel yatirimcilar kisa vadeli yatirim yapip cok fazla islem yapmakta. Ote tarafta yabanci kurumsal yatirimcilar portfoylerini cok daha uzun sure ellerinde tutup islem hacminde o kadar etkili olmamakta. Bu tercihlerin yansimalari piyasa aktorlerinin anlattiklari hikayelerin iceriginde ve sikliginda gorulmekte.

Farkli bilissel cercevelere bir baska ornek ise gene yerli bireysel yatirimcilardan gelmekte. Ornegin gozlemledigim uc yurtici satis departmanindaki yatirimcilarin cogu, ki bu yatirimcilar TSPAKB'nin istatistiklerine gore yerli yatirimcilar arasinda en onemli 100 bin kisilik grup icindeler hisse sahipligi anlaminda, buyuk ve likit tahtalarda islem yaparken, bir dorduncu gozlem yerinde, bir araci kurumun subesinde, daha kucuk ve az likit tahtalarda da islem yapan yatirimcilari gozlemleme sansim oldu. Bu yatirimcilar digerlerinin aksine, piyasa ekranlarinin otesindeki ozel bilgilere ulasilabilecek cesitli sosyal aglar icinde bulunmaktalar. Ornegin piyasamizda etkili olan yerli spekulatorler ve onlarin yarattigi momentum veya gudumlu fiyat hareketleri. Calismamda bu tur bilgileri ozel (private) bilgi olarak adlandirdim. Sonucta subede gozlemledigim bu tip yerli bireysel yatirimcilar, anlattiklari hikayelerin % 20'sinde bu tip bilgilere basvurup piyasa ekraninda olan olaylari anlamlandirdilar. Bu oran diger uc yurtici satis departmanda % 5'in altinda.

Bu son ornek aslinda 2001 sonrasi Istanbul Borsasinda yasanan bilissel devrimin en iyi orneklerinde birisi. Artik yerli yatirimcilarin onemli bir kismi 1990larin en onemli ozelliginden olan "ozel" bilgi kullanma yerine, yatirim faaliyetlerini piyasa ekraninda var olan bilgi ve haber akisina gore yapmakta. Tabi yerli bireysel yatirimcinin devam eden kisa vadeli yatirim aliskanligi bu bilgi akisini daha firsatci kullanmasina zemin hazirlamakta. Piyasa ekranlari da bu kisa vadeli egilime hizmet eden cesitli dijital araclar sunmakta yatirimciya. Obur tarafta ise, kurumsal yatirimcilar arasinda en onemli bilissel araclardan biri analist raporlari, yani sirketlerin nakit ve gider akislarini hesaplayan ve buna gore uzun vadeli fiyat tahmininde bulunan anlatilarla hesaplari birbirine ekleyen analizler. Gozlemlerimden cikarttigim sonuc yabanci yatirimcilara anlatilan hikayelerin cogu bu analist raporlarindaki cercevelerden yani uzun vadeli hesaplanabilir firsat ve risklerden ilham almakta, yurtdisinda DOW'da DAX'ta ne oldugundan degil! Diger taraftan yerli bireysel yatirimcilara anlatilan hikayeler bilgi akisinin her turlusunden kisa vadeli faydalanmaya yonelik ve Istanbul Borsasinin kendi ic dinamiklerini (ornegin yerli yatirimcilarin yurtidisinda olan biten olaylara gore cok sik islem yapmasini) goz onune alan hikayeler. O sebepten yerli bireysel yatirimcilar icin analist raporlari ya kisa vadeli al sat firsati ya da acaba yabancilar rapor cikarip tersini mi yapiyor sorusunu sorma firsati olarak gorulebiliyor. Tezimde ayrica bu bilissel cerceve farkliliklarinin tarihsel sebeplerini de tartistim. Bu tartisma bir onceki gonderimde bahsettigim makaledeki tartismanin bir benzeri fakat daha kapsamlisi.

Sonuc olarak tezimde su iki noktaya vurgu yapiyorum. Finans piyasalarinda dijitallesmeye ragmen, ki bu dijitallesme daha cok sayida olayin sayisallastirilip hesaplanabilir hale getirmekte, piyasa aktorleri soyutlastirilan, sayisallastirilan, dijitallestirilen bu akimlari anlati/hikaye formatinda anlamlandirmakta. Yani piyasa aktorleri sadece sayisal hesaplar yapan bilissel varliklar degil. Buna bagli olarak ikinci vurgum ise, finans piyasalarinin farkli bilissel cerceveleri ve gecmisleri ve kimlikleri olan gruplardan olusmus olmasindan dolayi, bu anlatilan hikayelerin birbirinden farkli olmasi. Yani finans piyasasindaki gruplar anlamlandirma ve yatirim faaliyetlerinde farkliliklar gostermekte. Bu da finans piyasalarinda tek bir rasyoneliteden ve bireysel, izole piyasa aktorlerinden bahsetmeyi zorlastirmakta.

Calismamda bana deskte olan tum piyasa calisanlarina, yatirimcilara ve regulatorlere minnettarim. Onlarsiz bu calismayi bitirmek dusunulemezdi.

25 sene, buyuk kazanclar ve kayiplar: IMKB ve bireysel yerli yatirimcilar

IMKB Aralik 1985 yilinda acildi. Acilisin modu Ankaradaki politikacilarin finansal serbestlige yonelik bir sembolik hareket daha yapma konusundaki kararliliklari sebebiyle biraz tepeden inme ve sallapati oldu. Hisse senedi sahipligi Istanbuldaki araci kurumlarin ve bagimsiz hisse simsarlarinin kurdugu tezgah ustu piyasaya ragmen topluma mal olmus bir yatirim sekli degildi. Aslinda su ana kadar boyle bir duruma gelmeyi de basaramadi. Pisayada yabancilar diye bilinen ve 1989'dan beri IMKB'ye yatirim yapan uluslararasi kurumsal yatirimcilar son 5 6 senede IMKB’nin piyasa degerinin yuzde 60 ve daha fazlasini ele gecirdiler.

Competition and Change Aralık 2010 sayisinda yayinladigim makalede IMKB’nin tarihini 1985’e kadar getirip yerli bireysel yatirimci karakterinin son 25 senede yasadigi degisimleri tartisiyorum. Bu tartismanin amaci yerli bireysel tasarruf sahiplerinin borsa yatirimina neden soguk baktigina bir cevap bulabilmek. Bunu yaparken 25 senelik tarihi IMKB’nin yasadigi iki kuresellesme dalgasina boluyorum. Birinci dalga acilistan 2001 krizine kadar olan, yuksek faiz yuksek enflasyon ve Erturk (2003)’ un kupon kapitalism diye adlandirdigi donem. Ikinci donem ise 2001 krizi sonrasi yapisal reformlarin meyvesini verdigi ve Turkiye’nin “yapisal saglikli” ekonomi donemine gecisinin devam ettigi donem. Bu donemleri islerken bireysel yerli yatirimcilarin nasil bir macro ve micro piyasa kosullarinda yatirim yapmayi ogrendigini gostermeye calisiyorum. Bunu yaptiktan sonra yerli bireysel yatirimcilara hizmet veren dort araci kurumdan piyasalari anlamlandirma ve yatirim kararlari alma faaliyetleri uzerine deliller sunuyorum. Araci kurumlarla ile ilgili bolum 2008 ve 2009’dan, yani buyuk cokus ve toparlanma doneminden geliyor. Makalenin IMKB’nin 25. yili kutlamalarina denk gelmesi benim icin hos bir tesaduf oldu.

Makalemde piyasa sosyoloji bakimindan temel argumanim su: Piyasalar rekabetin ve catismalarin yasandigi cok-yuzlu kurumlar. Piyasalari modern finans teorisinde savunuldugu gibi rasyonel, isbirlikci ve cogu iyi niyetli insanlarin toplamindan olusan seyler olarak goremeyiz. Eger kanun koyucular ve uygulayacilar piyasalari ikinci sekilde gormekte israr eder ve daha zayif olan gruplarin guveni kazanmakta basarisiz olur, onlari firsatci araci kurumlarin, sirket sahiplerinin, bireysel spekulatorlerin eline birakirsa, zayif gruplarin taklit yoluyla bu gruplar gibi firsatci ve kisa vadeci olmalari sasirtici olmasa gerek. Tabi bunun daha kotu bir sonucu da bireysel yatirimcilarin piyasaya yatirdiklari servetleri kaybetmeleri ve piyasan bir daha geri donmemek uzere ayrilmalari. Ne yazik ki 1990li yillarda bu olumsuz durum bircok bireysel yatirimci icin gercek oldu. Fakat bu uzucu gerceklikte daha fazla onemli olan sebep ulkeyi yuksek enflasyon ve butce aciklariyla yoneten populist politikacilardi.

2000 sonrasi Turk ekonomisinin, siyasetinin ve ona paralel olarak araci kurum sektorunun yasadigi buyuk bir degisim var. Bu degisim bir bakima kuresel finans sermayesinin tesvikiyle gerceklesti. Bu degisime ragmen bireysel yatirimcilar borsa yatirimlarinda hala firsatci ve kisa vadeli bir bakis acisina sahipler. Buradaki en onemli degisim ise bireysel yatirimcinin artik piyasalar hakkinda daha bilgili olmasi. Bunda kuresel ve Turkiye piyasalarinda yasanan dijital devrimin de buyuk payi var. SPK’nin ve IMKB’nin son bir kac senede yaptigi piyasa reformlari, ve bireysel yatirimcilar arasinda egitim ve guven kazanma kampanyalari sayesinde belki IMKB’nin 50 yilinda bambaska bir piyasa ile yasayacagiz.


Makalenin ingilizce ozeti asagidaki adresten gorunebilir
http://www.ingentaconnect.com/content/maney/com/2010/00000014/F0020003/art00011

Not: Bu calismada bana yardimci olan, zamanlarini benle paylasan Istanbuldaki tum piyasa calisanlarina ve yatirimcilara tesekkurler. Bu makale onlara adanmistir!

A Quarter century of learning by great rewards and losses-Turkish retail investors in the Istanbul Stock Exchange

The ISE was opened in December 1985 in a rather haphazard manner with the command of politicians in Ankara to make yet another token for their policy of financial deregulation. Although there was an OTC market in Istanbul populated by banks and independent brokers, share ownership was not a mass  phenomenon. In fact, so far it has never managed to become so. Foreign institutional investors known as "foreigners" in market parlance, have bought up more than 60 per cent of the portfolio value in the market in recent years.

In my new article, which is published in the Competition and Change's December 2010 issue, I trace the ISE's history back to 1985 and discuss the evolution of the Domestic Retail Investor figure over two and a half decades to find an answer to why Turkish household savers are not very enthusiastic about stock market investment. I then present evidence on the sense-making and investment activities from four brokerage houses which serve retail investors. The evidence is from 2008 and 2009, the crash and the recovery years of global financial markets. It is also a nice coincidence that this article is published when the ISE is celebrating its 25th year in operation.

My argument in the article is simply this, markets are multifaceted institutions of competition and conflict and they are not the aggregate of rational, cooperative and nice individuals as it seems to be espoused in modern finance theory. If one ignores this aspect and fails to win the trust of less powerful groups (domestic retail investor in the case of the ISE) and leaves them in the hands of opportunistic intermediaries, company owners, self-made domestic speculators and so on, then it is not surprising that retail investors in the ISE evolve into opportunistic and short-termist participants in the market or worse lose their fortunes and leave the market for good. This was unfortunately the case in the 1990s for many domestic retail investors in the ISE. But a more powerful factor in this evolution was the populist politicians of the 1990s who ran the Turkish economy on high budget deficits and high inflation in order to finance their unsustainable populist policies. Despite the great transformation in brokerage sector and the Turkish economy and politics in the new millennium, both of which were partially sanctioned by the global finance capital, the retail investor figure is still short-termist and opportunistic, like they used to be in the 1990s, but with a more informed perception frame about the markets thanks to the digital revolution in the global and Turkish financial markets. Maybe, with more public campaigns and micro-market reforms for education and trust building among retail investors as it is now done by the ISE and the Capital Markets Board, we will have a totally new ISE in its half centenary in 2035!

Article's abstract is available here . A summary of the paper's significance for social theory and finance scholarship can be found here

PS: Many thanks to all my informants in Istanbul. This article is dedicated to them.

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.