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Overview
In Noise, Alex Preda explores the world of the people who trade even when by all measures they would be better off not trading. Based on firsthand observations, interviews with traders and brokers, and on international direct trading experience, Preda’s fascinating ethnography investigates how ordinary people take up financial trading, how they form communities of their own behind their computer screens, and how electronic finance encourages them to trade more and more frequently. Along the way, Preda finds the answer to the paradox of amateur trading—the traders aren’t so much seeking monetary rewards in the financial markets, rather the trading itself helps them to fulfill their own personal goals and aspirations.
Product Details
| ISBN-13: | 9780226427515 |
|---|---|
| Publisher: | University of Chicago Press |
| Publication date: | 03/01/2017 |
| Sold by: | Barnes & Noble |
| Format: | eBook |
| Pages: | 264 |
| File size: | 1 MB |
About the Author
Read an Excerpt
Noise
Living and Trading in Electronic Finance
By Alex Preda
The University of Chicago Press
Copyright © 2017 The University of ChicagoAll rights reserved.
ISBN: 978-0-226-42751-5
CHAPTER 1
Noise in Financial Markets
During my ethnographic journey, I heard a good number of academics say that noise trading is to a large extent tied to the "day trader" phenomenon of the late 1990s, which in its turn was conjoined at the hip with the "dotcom bubble" and the "Internet mania" from about 15 years ago. Often, when I presented my research to academic audiences in the years 2005 to 2010, whether the scholars were from sociology, from accounting, or from finance, one of the first reactions was "Oh, you are dealing with day traders!" Among colleagues from finance, this comment had a slightly dismissive undertone, which could also be attributed to the perceived ephemeral and superficial character of the "day trader." For most of the decade beginning in 2000, day traders were considered to have been buried under the ruins left behind by the "Internet mania." Overall, this might have been a temporary and mildly interesting phenomenon in the late 1990s, but it was gone for good — or, if still present, it was completely insignificant.
Closer to 2010, newspaper reports were signaling with some degree of surprise "the comeback of the day trader." Within a little more than a year, from March 2008 to July 2009, stories published in Canada, Australia, the United Kingdom, and Kenya were reporting individual traders who wanted not just to trade, but to make a living out of trading (see also Yenkey 2015, 565). This was much more ambitious than just earning a few dollars of additional income. Although there is no official definition, making a living from trading implies earning consistently, and earning an amount of money that should be at least equal to the minimum (if not the average) income of a trader's country.
At least as relevant is that such an assumption implies not only regular but very frequent trading, as well. It is difficult to imagine "making a living from trading" for somebody who, say, buys or sells every year just a few financial instruments. This distinguishes trading from activities like investing, which may be singular, irregular, or regular, but not frequent. The notion of investor implies a low frequency of participation in transactions, while that of trader implies both regularity and high frequency.
The prominent trope in the public discourse was thus that day trading (and now retail trading) is new and surprising (many were expecting it to die off when the Internet bubble burst). Another, closely related, trope was that it is inextricably tied to the Internet as the main if not the only explanatory factor. This is akin to a Big Bang theory: the advent of the Internet triggers the emergence and the spread of noise in the financial system. This theoretical necessity does not square with the trope of novelty or with that of the Internet as the sole (or the dominant) causal factor. If noise (aka day or retail) traders are a theoretical necessity, it means that, empirically, the conditions of their sustained presence and maintenance in the financial system should be created by the system itself. In turn, this means that we should look first and foremost at those institutional developments (including technological but also regulatory ones) that not only provide retail traders with affordances for being what they are and for doing what they are doing,but also create the very position of "noise." In other words, this latter is not a (more or less desirable) by-product of general technological developments but is intrinsic to financial institutions.
This does not necessarily mean that only financial institutions create affordances for retail traders and that the latter are completely devoid of agency. If we look at technological developments, for instance, and especially at how trading platforms emerge, we see that there is a great deal of initiative on the part of individual traders-cum-developers and that the financial services industry is initially somewhat slow to respond, but when it does, such developments are absorbed into the technological infrastructure of trading. Nor does this mean that these affordances are created according to a blueprint. In some instances, institutional changes intended to deal with issues of global institutional competition have spillover effects for retail trading. In other instances, the technological infrastructure created for institutional trading needs to adapt to ongoing developments and challenges by including provisions for retail traders as well, or by attempting to define the boundaries between retail and institutional trading.
I have said above that the financial system creates affordances for retail traders. I have purposely avoided using the notion of opportunity, which can be understood as merely a convenient occasion for action, a convenience that can be transformed into something more systematic. Viewing the Internet as the cause of day trading would mean it was something of an opportunity. As I use it here, the term affordance denotes a match between opportunities (provided by financial institutions and technological setups) and abilities (of the publics such opportunities address). The public's abilities are attuned to particular constraints and paths of action provided by financial institutions, while the latter adapt themselves to the abilities of the publics they address (Greeno 1994, 338). This process includes the public's unplanned and unforeseen appropriation and modification of tools and resources created by financial institutions, and it is consistent with my previous argument that noise trading is not a "natural" product but an institutional outcome: as such, it cannot be produced overnight.
Affordances rarely, if ever, emerge spontaneously. In examining them, we need to go beyond the Internet enthusiasm of the late 1990s. I will discuss here at least two types of closely interrelated affordances, which are essential: affordances of access and affordances of action. They shape the integration of retail traders into the regulatory system of financial markets. The first type answers a simple question: how do diverse individuals access trading, based on what they've got at hand? Where do they go? What do they need to know? What do they need to do? What do they need to use? The emphasis here is on "based on what they've got at hand" — that is, based on their abilities and on the particular situations they are in. Seen in this sense, the affordances of access for retail traders are different from those for institutional traders. The networks of information-rich relationships, the capacity of calling on favors from other traders (Knorr Cetina and Bruegger 2002), the willingness of others to answer one's calls, and so forth, are not benefits that can be afforded outside the relatively narrow confines of investment banks and funds.
The second type of affordances answers an equally simple set of questions: what do noise traders need in order to participate in action? What types of knowledge and skills are implied by the action of trading? How does this trading relate to other kinds of action present in financial markets?
Roughly speaking, we can distinguish three phases in the evolution of trading institutions addressing publics made of individuals: before 1960, well-to-do individual investors were dominant in slower-paced financial markets (e.g., Kynaston 2012; Michie 1999; Geisst 1997; Traflet 2013). Then came a phase from the 1960s to the mid-1980s, when institutions such as mutual funds became dominant. Toward the end of this phase, discount brokerages introduced technical setups allowing for an intensified pace of trading. Access means not only attracting more individual money into the system, but also increasing the speed with which individual money can enter it. Finally, in a phase extending from the mid-1980s to our days, institutions came to specialize in absorbing and recycling individual money into markets at great speed. This specialization includes not only tailored products, dedicated access ways, and dedicated technologies, but also regulatory provisions (including taxation) specific to retail trading.
Access
What did a person have to do to transact financial instruments in an individual, not an institutional, capacity? Before the 1960s, the person would have had to know a broker — a member of one of the firms associated with one of the exchanges on the East Coast or in Chicago, mainly. The person would have had to have a significant chunk of disposable income (in other words, to be at least well-to-do). The person would have had to have a good deal of disposable time to spend reading publications like Barron's and to be regularly on the phone with her broker or at the post office sending telegrams. These requirements entailed relatively high costs, not only in terms of commission fees but also in terms of time — and only investors with money and leisure time could afford them.
A broker on the NYSE recalled how he had started trading as an individual in the late 1950s:
George: I was working in Washington DC in a position there for a few years, and I met a friend of mine. We were going into the National Guard for a 6 month service and he was telling me about his cousin who was a stockbroker and whatever, and all you had to do was buy a stock at 33 and you would sell it at 39. And then it would go back to 33, you'd buy it again, and you would sell it at 39. So I said, really? That's all there is to it, I mean, and he said, yes, that's it. So I, and this ... the company's name was American Marietta at the time, which has now become Martin Marietta, and I said, okay, so I waited, and the stock went to, to 33, and I bought a few shares, and it went to 39! And I sold it. [laugh] The guy's right, I quit my job, and [my wife] and I, we took off about 6 months and we just traveled around and, and during the time I was gone, I had bought 100 shares of a company called International Bank of Washington, which because, and I said, I bought it, like, at 25, and, what did I know, I said, sell it at 55. Then I went away. And I get a ... we were in [country] at the time, and I got a telegram ... sold your 100 shares of International Bank of Washington at 58. It went up too fast, I couldn't sell it at 55. Now, that wouldn't happen in this current day and age, but it gives you a sense that the way the markets worked and that, it was wide markets and, and so forth. ... Well, this was 1959, actually.
In this period, one needed to somehow know a broker ("It was much more of the buddy system in those days than it is now"). One also needed to have substantial disposable income (a few thousand dollars that could be put into shares — but we are talking here about 1959, when the average income of an individual in the United States was $2,600). And above all, one needed to have disposable time. Yet, according to the same broker, financial markets were not held in particularly high regard:
George: I would think, for the most part, and I'm representative, I didn't know anything about a stock. I never knew until I was 25 years of age that you could buy and sell stocks and make money or whatever. We were all coming out of the war, I was at ... college, and then graduate school, and I never even thought of the stock market as a career opportunity. Now, and so people were not educated in the opportunities of the market. We had come through difficult times and the markets were just building and I would say that there was a benign neglect towards the stock market. Most people didn't know about it, and it was not a very important part of the American scene at the time. It wasn't, you know, it had its role, but it's not like it is now, where the enormous advances in retirement accounts, 401(k)s, IRAs and so forth, where just about everybody — and then with the whole stock options for employees. It's now come into the forefront of our thinking. In those days it wasn't. I mean, you were going to, I was, you were a teacher, you worked for the government, you ... business was not, business schools were not significant at that time. You, it ... You would go to business school, you were thought to be, boy, you're not so smart, you couldn't get into, you couldn't become an engineer or you couldn't do something.
The 1960s brought the expansion of the mutual funds industry (Useem 1996; Fink 2008), but also the reemergence of discount brokerages, a process that has been less investigated. (Concomitantly, business schools were improving their public perception, to the point of becoming fashionable; see Khurana 2007, 288). While the mutual fund industry created new, more affordable (in money terms) products (by pooling together financial securities and selling shares in these pools) geared to (middle-class) individuals, they did not change much else in terms of access: somebody wanting to put his money in a mutual fund still had to walk into an office, make an appointment with an adviser, call the adviser on the phone, wait to receive the certificates in the mail, read the prospect, read Barron's, read the Wall Street Journal, and so on. The relatively long time it took to get access was geared to the horizon of the activity itself: one would have expected that mutual fund shares, similar to the shares of a corporation, would be held for a long time. At the same time, the creation of associations of individual investors such as the American Association of Individual Investors in 1978, with regional chapters, regular face-to-face meetings, and publications, supplemented the provision of data, notions, advice, expert recommendations, and other paraphernalia of "informed access." When I attended a chapter meeting in 2009 in the Midwest, I (as a middle aged man) was clearly the youngest person in the room, and if the outfits were any indication, the least affluent, too. The discussion, during which the audience knowledgeably (and sometimes furiously) grilled a local mutual fund manager, made it clear that at stake was an "investment" process during which financial securities were held for one year and more.
Discount brokerages, however, were different in some respects. They did not provide new products (that is, pools of shares) and stood in tension with the more established, full service houses of New York City and Chicago, which, to a large extent, were based on close-knit family networks (see also MacKenzie and Millo 2003). Many operated in the so-called third market, meaning they listed shares that were traded over the counter. In 1975, when the Securities and Exchange Commission (SEC) finalized the introduction of negotiated commissions (meaning that customers could shop around for the cheapest full service broker), this third market became attractive for many brokers: over-the-counter trading meant it was much more difficult and time-consuming for clients to find a standardized price, and therefore it was more difficult to negotiate commissions as well.
Wealthy individual investors had always had the possibility of accessing stock market data straight from their homes. Even in the 1970s and the early 1980s, technology companies were leasing stock tickers and data services to individual investors. Prices, however, were prohibitive. In 1983, for instance, a private stock ticker cost $1,350 and the monthly service fee was $85 ("Brokers and Others" 1983, 58). When personal computers became more widespread and modems were introduced too, at around the same time, brokerages started selling data services to individual investors over the computer and over radio transmitters, and even providing execution services over the computer. True, the latter were initially offered only by one discount broker on the West Coast, while data services were offered by established houses such as Dean Witter and E. F. Hutton. Subscription prices were high, though: for instance, one service called QuoteDial had a monthly minimum charge of $50 and an additional charge of 10–38 cents per minute (58). In June 1983, the American Association of Microcomputer Investors was formed. While personal computers were seen early on as a channel for financial data transmission and even for order transmission and execution, only those who could afford the high costs used them.
A reduction in costs came initially not from this corner, but from novel usages of a well established technology: the telephone. To keep costs down, discount brokers based in the Midwest started taking orders mainly by phone, offering clients toll free numbers as an incentive. They also bought line capacity in bulk from phone operators; some brokers, based near communication hubs, got deeper discounts on line capacity. In the mid-1980s, a consequential innovation, the touch tone system, was spreading out:
Joe Ricketts, founder of Ameritrade (henceforth JR): So moving on to the middle 1980s we had gotten to the point where the larger business also brought the same amount of costs, so we were doing more business but we were not improving our profits. So I was looking for something that would allow me to grow the business and keep my costs lower. At that time, Alex, the touch tone system was becoming popular. So I asked my technology person if he could develop a order entry and quote system off of the touch tone telephone and he indicated yes. I asked him how long it would take, he said it'd take about six months. I said how much money, he said a little under a million dollar[s]. ... And but it took two years and it took about five million. [...] Because we were doing things that had never been done before and these people really didn't know. So they were cutting new ground with technology and were guessing the best they could. When I finally had the system in place I was ... I had a focus group as the business schools tell you. ... So I went out to my customers through our agents and I asked them if they would use the touch tone system, and the overwhelming response was no, why would I, as a customer, want to use a touch phone system when I can talk directly to a broker? So I was fearful that my cost was a lot higher than what I anticipated and that I would lose money, so I put the prices of the commission very low if people would use the automated touch phone system. In fact we put it down to three cents a share. [clears throat] It had ... a retail brokerage that had never been advertised before that way and so we, you know, we just showed a palm of a hand with three pennies and the system started to ... started to grow.
(Continues...)
Excerpted from Noise by Alex Preda. Copyright © 2017 The University of Chicago. Excerpted by permission of The University of Chicago Press.
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Table of Contents
Introduction: The Ethnography of Noise in Electronic Finance1. Noise in Financial Markets
2. How Does One Become a Trader?
3. Taking On the Market: Competitions and Spectacle in Trading
4. Rituals and Illusions of the Trading Screen
5. Talk in Trading, Talk for Trading, Talk of Trading: Group Communication in Electronic Markets
6. Trading Strategies
7. The Lives of Traders
Conclusion: Bourgeois Freedoms
Acknowledgments
References
Notes
Index