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Chicago Board of Trade, 1993

Chicago Board of Trade, 1993


Floor Rules: Insider Culture in Financial Markets.

To be published by Yale University Press in 2021.

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 glamour; others view it as the evil heart of the of the establishment.

This book presents a 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 some deceptions, 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, 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 the larger narrative of marketplace deception. 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.

Financial insiders perform vital economic functions, but at the same time have a long history of doing harm. In recent decades the stakes have increased. For most of the four-century history of stock markets, damage from improprieties was usually limited to individual clients. Today, giant institutions dominate a single, global marketplace, and the scale and consequences of wrongdoing are far greater. But financial insiders are not going anywhere. No matter how much the marketplace itself changes, network and personal dynamics serve to keep the group, its mores and business practices, intact.

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.