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Chicago Board of Trade, 1993

Chicago Board of Trade, 1993


Insider Culture in Financial Markets.

To be published by Yale University Press in 2019.

This book is about the business culture of financial insiders, the group people have in mind when they speak of ‘Wall Street’ or ‘the City.’ These are money specialists who work with other money specialists, and have little contact with customers or other outsiders. ‘Wall Street’ receives much press coverage, but remains poorly understood. High finance is like medicine, so broad in scope and so specialized as to confound even people who work in the field. Faced with too much complexity, people can focus on superficial details, clichés and stereotypes. For some the industry projects an aura of outlaw glamor; others view it as the evil heart of the of the establishment.

This book is an attempt to give a clearer and more nuanced view of who these people are, what they do, and why. The cliched view is that Wall Street has no moral code at all, but is merely a channel for greed and gluttony. Villainy is easy to find in the marketplace, but there is more to it than that. There are rules of conduct and ideas of right and wrong, but they differ from mainstream norms. Insider rules resemble those of poker, in that certain kinds of deception, and not others, are acceptable and part of the game. The widespread pubic hostility is earned, though: The group has always had an honesty problem, which inflames the public but reflects how insiders conduct their own affairs. The culture has changed little at least since the mid-nineteenth century, and fragmentary and anecdotal evidence point to a much longer history. The persistence of group norms is striking since the group itself is unstable. Turnover is high, and a central feature of the collective mindset is a short temporal horizon. Nobody looks too far ahead or remembers too far back.

This book is about a very special in-crowd, meaning that its members work in a specialized field and behave in a distinctive way. But the group is not a standalone. Social life from grammar school on is shot through with in-crowds, and they all share certain characteristics. Network theory gives good reasons for why financial insiders self-organize the way they do, and why that organization should persist through drastic changes in the host environment. The same network conditions apply to other in-groups, and they can be studied in the same way. Also, the conduct of financial insiders connects with a larger narrative on deception in the marketplace. Insiders have known much longer than economists that perceptions, not reality, are what matter on the exchange floor. Financial insiders have sought to manipulate these perceptions for as long as there have been stock markets. The case studies in this book are full of deception, almost always to influence asset prices. In some ways, the stock market is a machine to predict the future: The marketplace collects all available information about some financial asset, which market participants use to arrive at some consensus price. When the underlying information is a fiction, the prices are real nevertheless.

It is still in the public interest to find ways to get along with this group. Infuriating as they can be, financial insiders perform vital economic functions that would not get done any other way. We would all be poorer – literally – if the group suddenly disappeared. At the same time, the group has a long history of doing harm, and in recent decades the stakes have gotten higher. For most of the four centuries that stock markets have existed, damage from improprieties was usually limited to individual clients. Now, though world financial markets are now linked into a single market dominated by giant institutions, and the scale and consequences of wrongdoing are greater than ever before. But we are stuck with the group: Financial insiders have been around for a long time, and there is no end to them in sight.

Research for this project has been supported by fellowships from the Center for Economic History at UCLA, the United States Studies Centre at the University of Sydney, and the John W. Kluge Center at the Library of Congress.