Cultures of high-frequency trading: mapping the landscape of algorithmic developments in contemporary financial markets

Abstract

As part of ongoing work to lay a foundation for social studies of high-frequency trading (HFT), this paper introduces the culture(s) of HFT as a sociological problem relating to knowledge and practice. HFT is often discussed as a purely technological development, where all that matters is the speed of allocating, processing and transmitting data. Indeed, the speed at which trades are executed and data transmitted is accelerating, and it is fair to say that algorithms are now the primary interacting agents operating in the financial markets. However, we contend that HFT is first and foremost a cultural phenomenon. More specifically, both individuals and collective agents – such as algorithms – might be considered cultural entities, charged with very different ways of processing information, making sense of it and turning it into knowledge and practice. This raises issues relating to situated knowledge, distributed cognition and action, the assignment of responsibility when regulating high-speed algorithms, their history, organizational structure and, perhaps more fundamentally, their representation.     

Bugs,predations or manipulations? Incompatible epistemic regimes of high-frequency trading

Abstract

Calls for greater transparency as well as corporate and individual accountability have emerged in response to the recent turbulence in financial markets. In the field of high-frequency trading (HFT), suggested solutions have involved a call for increased market information, for example, or better access to the inner workings of algorithmic trading systems. Through a combination of fieldwork conducted in HFT firms and discourse analysis, I show that the problem may not always stem from a lack of information. Instead, my comparative analysis of different market actors (regulators, market analysts and traders) shows that the diverse and complex ways in which they access and construct knowledge out of information in fact lead to what I call different epistemic regimes. An understanding of how epistemic regimes work will enable us to explain not only why the same market event can be viewed as very different things – as market manipulation, predation or error – but also why it is so difficult to arrive at a unified theory or view of HFT. The comparative perspective introduced by the idea of epistemic regimes might also serve as a starting point for the development of a cultural approach to the study of financial markets.     

What is an algorithm? Financial regulation in the era of high-frequency trading

Abstract

In response to the flash crashes and market manipulations blamed on high-frequency trading (HFT), algorithms have been brought inside the regulatory perimeter. This paper focuses on the most ambitious regulation directed at the practice: the algorithm-tagging rule in the German High-Frequency Trading Act. Fifteen interviews with stakeholders in the Act’s implementation serve to reconstruct how regulators defined an algorithm and help pose the question of to what extent regulatory definitions and data need accurately to represent financial practices to be useful. Although tentative in its findings, the research suggests that the algorithm-tagging rule may be providing valuable signals in the noise to trade surveillance officers and having virtuous effects on the cultures of trading firms. The conclusion argues that sociologists of finance should adopt a more balanced approach when evaluating regulatory technologies and heed MacKenzie’s 2005 call to open up their black boxes.     

Rethinking calculation: the popularization of financial trading outside the global centres of finance

Abstract

The paper looks at the popularization of financial trading in Israel. It presents a qualitative analysis of the calculative models and techniques that are promoted by financial trading schools, service firms and books. Broadly, the popularization of trading in this field involves a focus on ‘technical analysis’ (TA) and relies upon a socio-psychological reading of financial charts. Incorporating explicitly non-economic ideas into traders’ calculative logic – including an emic notion of ‘performativity’ – popular TA constitutes an attempt to ‘reverse’ the making of markets: to calculatively trace price formations back to the minds, hearts and arrangement from which they had allegedly sprung as a means of foreseeing their future shape before it fully materializes. Tying the psyche and the market in a calculative loop, popular TA transcends existing social theories of financial calculation. The paper discusses this challenge and its implications for our understanding of the expansion of finance.     

Market making via regulation: The role of the state in carbon markets

Proponents as well as critics of carbon trading underestimate the institutional and political underpinnings of evolving carbon markets. Based on institutionalist approaches, this paper argues that the strong embeddedness of carbon markets explains why certain characteristics (positive and negative) materialize. Focusing on the actors who initiate and who influence carbon markets, this article also shows that currently only states and intergovernmental agreements provide the necessary regulation for carbon markets to exist and to work. Today, neither market actors nor NGOs nor public private partnerships have the political power to set up, regulate or capture evolving market structures. Thus, whether or not market‐based instruments bring about the desired results depends on good public regulation, which is – at least up to now – represented by the state. Four instances of the commodification of carbon serve as illustrations: the European Union Emission Trading System (EU ETS); the Clean Development Mechanism (CDM); the voluntary market; and new sectoral approaches, particularly Reducing Emissions from Deforestation and Degradation (REDD+).     

Recognition as if sovereigns? A procedural understanding of indigenous self-determination

In the last two decades we have witnessed a growing global acknowledgement of indigenous rights – manifested in the 2007 UN Declaration on the Rights of Indigenous Peoples – challenging the traditional nation-state-centred understanding of political rights and democracy. In this paper, the author argues that indigenous self-determination is to be understood as a way to level the balance of power between indigenous peoples and the nation-states in which they live. Without a solid legal foundation for indigenous peoples to define self-determination in their own languages and to negotiate the conditions of their relation with the nation-states on their own terms, the colonial past (and present) of violent conquest and domination might continue. Indigenous peoples' right to self-determination ought in this perspective to imply recognition of indigenous peoples as having a standing equal to nation-states, i.e. as if they were sovereigns. What self-determination means in political practice would thus be the outcome of negotiations between two (or more) equal political entities. In this way, the right to self-determination has to be interpreted procedurally rather than substantially.     

Organizational ignorance: an ethnographic study of high-frequency trading

Abstract

This paper provides an analysis of strategic uses of ignorance or not-knowing in one of the most secretive industries within the financial sector. The focus of the paper is on the relation between imitation and ignorance within the organizational structure of high-frequency trading (HFT) firms. In social studies of finance (SSF) literature imitation is considered a strategic act, i.e. imitation is a term applied when traders copy the strategies of other traders. I wish to turn this relation between ignorance and imitation on its head and consider ignorance itself as a strategic unknown and investigate the kinds of imitations that might be produced from structures of not-knowing (i.e. structures intended to divide, obscure and protect knowledge). This point is illustrated through ethnographic studies and interviews within five HFT firms. The data show how a black-box structure of ignorance is replicated within the organizational setting of these firms and re-enacted by the traders. Towards the end of the paper the politics of the relationship between imitation and ignorance is discussed.     

Regulation lite: The rise of emissions trading

Emissions trading is the governmentally promoted hope for a sustainable world. In different contexts, trading regimes display varying potential – both in absolute terms and in comparison with other regulatory instruments. Emissions trading, however, is a device that raises urgent issues regarding its objectives, cost‐effectiveness, fairness, transparency, and legitimacy. Its use places emphasis on its “acceptability” and the virtues of regulation that is “lite” because it is non‐threatening to the most powerful interests. Emissions trading is resonant with assumptions that are highly contentious – notably that it is acceptable because it involves no losers, or because, in desperate global circumstances, we have no choice but to use it. There is a need to confront the difficult issues presented by emissions trading and to face the challenges of combining “market” and “democratic” systems of legitimization. It is also necessary to avoid taking refuge in all too comfortable beliefs in cumulative checks and balances.     

Where do electronic markets come from? Regulation and the transformation of financial exchanges

Abstract

The practices of high-frequency trading (HFT) are dependent on automated financial markets, especially those produced by securities exchanges electronically interconnected with competing exchanges. How did this infrastructural and organizational state of affairs come to be? Employing the conceptual distinction between fixed-role and switch-role markets, we analyse the discourse surrounding the design and eventual approval of the Securities and Exchange Commission’s Regulation of Exchanges and Alternative Trading Systems (Reg ATS). We find that the disruption of the exchange industry at the hands of automated markets was produced through an interweaving of both technological and political change. This processual redefinition of the ‘exchange’, in addition, may provide a suggestive precedent for understanding contemporary regulatory crises generated by other digital marketplace platforms.     

High-frequency trading,algorithmic finance and the Flash Crash: reflections on eventalization

The Flash Crash of 6 May 2010 has an interesting status in discussions of high-frequency trading, i.e. fully automated, superfast computerized trading: it is invoked both as an important illustration of how this field of algorithmic trading operates and, more often, as an example of how fully automated trading algorithms are prone to run amok in unanticipated frenzy. In this paper, I discuss how and why the Flash Crash is being invoked as a significant event in debates about high-frequency trading and algo-financial markets. I analyse the mediatization of the event, as well as the variety of eventalizations of the Flash Crash - the different ways in which the Flash Crash is being mobilized as an illustrative event. I critically discuss the impact often associated with the Flash Crash – and on that basis, inquire into why the event nonetheless attracts so much attention. I suggest that a key reason why the Flash Crash is widely discussed is that eventalizations of 6 May 2010 evoke familiar tropes about the fear of technology and the fear of herding. Finally, and given their emphasis on herding, I argue that the Flash Crash eventalizations may contribute to discussions within economic sociology about resonance in quantitative finance.     

Redistribution in a political union: The case of the EU

A key function of centralized budgets in federal and political unions is to act as an equalizing mechanism to support economic and social cohesion. This is also the case with the European Union's (EU) budget, which operates as a redistributive mechanism that counteracts the cross-national and cross-regional inequalities created by the single market. Despite the limits on cross-national redistribution imposed by a centrifugal system of representation, the net fiscal position of member states – what they pay to the EU budget minus what they receive from it – is very diverse and has changed quite remarkably over the last decades. In this paper, we investigate how and why the net fiscal position of each member state toward the rest of the EU changes over time. We develop a novel panel dataset (1979–2014) to study how key national and EU-level political and economic variables affect the EU redistributive dynamics. We find that redistribution via the EU budget primarily targets developments in inequality within EU member states, and that an increase in domestic unemployment may also improve the country's fiscal balance. Moreover, we find that voting power in the Council is unrelated to a more positive fiscal balance. However, we find that governments with a centre-right profile are in general more successful in improving their redistributive position vis-à-vis the other member states. This may create a problem of budgetary ‘rent extraction’.     

Explaining Different Trajectories in Immigrant Political Integration: Moroccans and Turks in Amsterdam

This article examines why the political integration and representation of ethnic minority groups may develop along different paths. Taking Amsterdam as a case study, it compares two of the city’s most predominant immigrant groups: Turks, who have taken a group-based incorporation strategy – visible in this group’s dense organisational infrastructure – and Moroccans, who have followed a more individualist assimilation strategy. The distinct trajectories have produced a relatively high proportion of Turkish-origin elected officials, while individuals of Moroccan origin feature more prominently in executive office, exercising power over day-to-day decisions. The article proposes that whereas features of the electoral system determine which opportunities exist for immigrants to participate in the political process, it is the structure of an immigrant group that affects the ability of members to seize such opportunities. Furthermore, it shows how political parties and party elites act as gatekeepers and facilitators of immigrants’ political participation.     

The political role of the Japanese media

This article examines the political role of the mass media in contemporary Japan. Journalists, especially newspaper reporters, have long enjoyed privileged access to politicians through a system of kisha (reporters') clubs, a system which allows for a cosy rapport between reporters and their sources, but often works against the public interest. In recent years, however, some television journalists have adopted a more rigorous approach to political stories. Critical programming by television stations such as TV Asahi may have contributed to the end of 38 years of Liberal Democrat Party rule in 1993. Nevertheless, there is insufficient evidence to argue that the Japanese media is now acting as an effective political watchdog. Like the mass media in many other Asian countries, the Japanese media continues to enjoy an ambiguous relationship with holders of political power.     

Succession,power-sharing and the development of representative institutions in medieval Europe

Historians have documented that in medieval Europe, bargaining over the loyalty of lay magnates and high clergy was most intense during successions and that this often forced monarchs to give political concessions. We argue that matters related to succession predict short-term power-sharing concessions by rulers but that – because they do not permanently alter the balance of power between ruler and elite – they only trigger lasting changes of political institutions if these changes are in the mutual interest of the ruler and the elite groups. It follows that successions are unlikely to have long-term effects on representative institutions but that they may consolidate the rules regulating succession (the succession order). Using the natural deaths of monarchs as an instrument for successions, we confirm these claims with a new dataset that includes fine-grained data on succession and parliament-like assemblies in 16 European polities between 1000 and 1600. These findings shed new light on the development of representative institutions in medieval Europe, on the changes in succession orders that brought about clear rules about primogeniture and on the political leeway of legislatures in authoritarian regimes more generally.     

Consensus,compromise, justice and legitimacy

Could the notion of compromise help us overcoming – or at least negotiating – the frequent tension, in normative political theory, between the realistic desideratum of peaceful coexistence and the idealistic desideratum of justice? That is to say, an analysis of compromise may help us move beyond the contrast between two widespread contrasting attitudes in contemporary political philosophy: ‘fiat iustitia, pereat mundus’, on the one side, and ‘salus populi suprema lex’, on the other side. More specifically, compromise may provide the backbone of a conception of legitimacy that mediates between idealistic (or moralistic) and realistic (or pragmatic) desiderata of political theory, i.e. between the aspiration to peace and the aspiration to justice. In other words, this paper considers whether an account of compromise could feature in a viable realistic conception of political legitimacy, in much the same way in which consensus features in more idealistic conceptions of legitimacy (a move that may be attributed to some realist theorists, especially Bernard Williams). My conclusions, however, are largely sceptical: I argue that grounding legitimacy in any kind of normatively salient agreement does require the trappings of idealistic political philosophy, for better or – in my view – worse.     

Horizontal coordination in cooperative federalism: The purpose of ministerial conferences in Germany

ABSTRACT

Intergovernmental councils in Germany comprise 18 sectoral ministerial conferences and the prime ministerial conference as peak organization. They complement the Bundesrat as institutions of Intergovernmental Relations in the German system of cooperative federalism, dealing with matters of shared rule as well as self-rule. Based on expert interviews among ministerial bureaucrats, this contribution finds that contrary to conventional wisdom, vertical influence and autonomy protection are not their main purpose. Rather, they serve primarily information exchange and coordination. Still, the emphasis on either influence and autonomy protection or coordination and information as well as the directions of interaction vary across policy sectors. We further investigate constitutional allocation of power and party political composition as determinants on the specific purpose of ministerial conferences. The findings suggest that the allocation of power is more important than party political composition in explaining variation between sectoral ministerial conferences.     

The Lost Treasure of Arendt's Council System

Abstract

Hannah Arendt's On Revolution offers a critique of modern representative democracy combined with a manifesto-like treatise on council systems as they have arisen over the course of revolutions and uprisings. However, Arendt's contribution to democratic theory has been obscured by her commentators who argue that her reflections on democracy are either an aberration in her work or easily reconcilable within a liberal democratic framework. This paper seeks to provide a comprehensive outline of Arendt's writing on the council system and a clarification of her work outside the milieu of the post-Cold War return to Arendt. Her analyses bring to light a political system that guarantees civil and political rights while allowing all willing citizens direct participation in government. Framing her discussion within the language of the current renewed interest in constituent power, her council system could be described as a blending together of constituent power and constitutional form. Arendt resists the complete dominance and superiority of either element and argues that the foundation of a free state requires nothing less than the stabilization and persistence of constituent power within an open and fluid institution that would resist either the bureaucratization of politics or its dispersal into a revolutionary flux. Although one may conclude that her institutional suggestions are far from flawless, her political principles allow a conceptualization of democracy in more substantial ways than current liberal political philosophy.     

Why Cryptocurrencies Want Privacy: A Review of Political Motivations and Branding Expressed in “Privacy Coin” Whitepapers

New currencies designed for user anonymity and privacy – widely referred to as “privacy coins” – have forced governments to listen and legislate, but the political motivations of these currencies are not well understood. Following the growing interest of political brands in different contexts, we provide the first systematic review of political motivations expressed in cryptocurrency whitepapers whose explicit goal is “privacy.” Many privacy coins deliberately position themselves as alternative political brands. Although cryptocurrencies are often closely associated with political philosophies that aim to diminish or subvert the power of governments and banks, advocates of privacy occupy much broader ideological ground. We present thematic trends within the privacy coin literature and identify epistemic and ethical tensions present within the communities of people calling for the adoption of entirely private currencies.     

Explaining non‐participation in deliberative mini‐publics

This article investigates citizens’ refusal to take part in participatory and deliberative mechanisms. An increasing number of scholars and political actors support the development of mini‐publics – that is, deliberative forums with randomly selected lay citizens. It is often argued that such innovations are a key ingredient to curing the democratic malaise of contemporary political regimes because they provide an appropriate means to achieve inclusiveness and well considered judgment. Nevertheless, real‐life experience shows that the majority of citizens refuse the invitation when they are recruited. This raises a challenging question for the development of a more inclusive democracy: Why do citizens decline to participate in mini‐publics? This article addresses this issue through a qualitative analysis of the perspectives of those who have declined to participate in three mini‐publics: the G1000, the G100 and the Climate Citizens Parliament. Drawing on in‐depth interviews, six explanatory logics of non‐participation are distinguished: concentration on the private sphere; internal political inefficacy; public meeting avoidance; conflict of schedule; political alienation; and mini‐public's lack of impact on the political system. This shows that the reluctance to take part in mini‐publics is rooted in the way individuals conceive their own roles, abilities and capacities in the public sphere, as well as in the perceived output of such democratic innovations.