GORDON L. CLARK AND NIGEL THRIFT
Introduction
Introduction
In the
public mind, the paraphernalia of international finance are well known: the
trading floor full of shouting, brightly colored bodies, the dealing room full
of macho adrenaline addicts, periodic financial crises signaled by
serious-looking commentators standing outside the headquarters of a troubled
financial institution, and so on. It would be fair to say that these kinds of
images are foremost in many academic minds as well, but translated into the
underlying processes that they are assumed to represent: a frantic search for
profit, the hyper-speed of communication driven by remorseless technological
advance, and the crisis-prone nature of capitalism.
First amongst exemplars of
these developments is usually counted the global foreign exchange (FX) market.
A recurrent image is one of lone traders hunched over their desks secretly
trading enormous amounts of other people’s money around the world in the search
for their own personal wealth. By many accounts, these traders are cowboys (at
best) or renegades (at worst) putting in play not only the fortunes of their
banks, but also the stability of national currencies and the entire financial
world. Respectable versions of much the same idea are found in commentaries on
the role and status of financiers like George Soros, and the hedge fund
industry that has followed in his wake, and which is now deeply embedded in the
global investment strategies of the largest institutional investors. At the
limit, FX trading is the deus ex machina of ‘hot money’ undermining the stability of
whole countries
This
chapter was presented in seminars at the Philipps-University of Marburg and the
University of Bonn. Our thanks go to Harald Bathelt (Marburg), Gernot Grabher
(Bonn), and Alex Preda (Konstanz) for their invitations to present versions of
the chapter. Comments on the chapter were provided by Dariusz Wojcik, Tessa
Hebb, and Terry Babcock-Lumish. Support for revising and presenting this
chapter was provided, in part, by the DAAD. Most importantly, the chapter was
made possible by the insight and knowledge provided by Simon Ford and his colleagues
at Credit Suisse First Boston (London). Data on foreign exchange trends and
volatility were also provided by CSFB and, in particular, Christian Baraldo and
Peter von Maydell. None of the above should be held responsible for any errors
or omissions. Comments made about firms and the management process in this
chapter are intended to represent larger processes rather than the particular
events or circumstances faced by any one company.
and
regions, thereby cementing the well-worn prejudices of critics concerning the
tyranny of global finance and financialization in general.
In this
chapter, we suggest that these kinds of accounts are both problematic in their
own terms and historically outdated in a number of key aspects. We argue that
the freest of free markets—which the FX markets are often presumed to
represent—is more accurately represented as a bureaucratic process of risk management that is dependent
upon assessing dispersed knowledge about market conditions and response within
the firm and across the globe. As such, its purposes are really quite mundane
and are characteristic of many firms and industries in which knowledge
management and recursive learning are core components of competitive strategy
(Nooteboom 2001). Perhaps more than in many other firms and industries, this
kind of bureaucratic process is essential to corporate financial integrity and
performance; indeed, these kinds of often mundane activities may also be
essential to global financial stability given the range of what appear to be
less-attractive alternatives (Stiglitz 2002).
The
chapter is therefore structured in three main sections. The first section
‘Leaving Behind the 1980s’ sets out a series of four myths that continue to
beset social commentaries on international financial markets, drawn from the
experience of the 1980s, and the combination of forces that have now called
them into question. We seek to dispel these myths through a close study of the
global foreign exchange market. In the second section of the chapter on
‘Foreign Exchange Markets’, we introduce the FX market and consider its
contemporary mechanics.1 We show that FX trading is a continuous
but time-sensitive process and is a global but also a spatially sensitive
process. Understanding the time and space of FX markets is vital in
understanding how the FX trading process and its attendant risks are
institutionally managed. We then go on to document and explain how private
financial institutions manage the trading process on a 24-h basis around the
globe. In developing this account, we are conscious of the need to understand
both the routine management of currency trading and the responsiveness of
private institutions to events within the 24-h cycle of markets opening and
closing one after the other.
At the
core of the chapter is a basic proposition: global FX trading is a deliberate
process of managing dispersed knowledge so as to account for and control
total institutional risk exposure. While individual greed is always present,
seeking-out the unrecognized blind spots in the management process, we contend
that the real issue is institutional coordination and management and especially
the maintenance of bureaucratic procedures that control trading exposures
across time and space. The third section of the chapter on ‘Global FX Market
Structure’ therefore considers the growth of bureaucratic procedures in large
international financial services firms. This growth is associated with increased
technological sophistication, new systems of risk management, and ever more
demanding regulatory requirements regarding compliance. Thus, modern FX
corporate trading floors are nearer to process-regulated accounting machines
than entrepreneurial bear pits. Finally, we provide a brief summary of our
argument and its implications.
The chapter utilizes three
main sources of evidence. The first source is published quantitative research
on global trading patterns and volatilities. The second source consists of
insights gleaned from our own detailed interviews taken from a study of the FX
operations of one global banking operation. We believe this operation to be
representative of the large commercial organizations that now encircle the
globe.2 The third source is our knowledge of the internal structures
of large multinational financial institutions drawn from our own interaction
with the international financial sector over twenty years or more (see Clark,
Thrift, and Tickell 2004). In any event, this chapter is deliberately
exploratory although it is designed to report evidence and findings from close
dialogue.3
Much of
the critical literature on international financial markets is predicated on a
set of myths for our time that retain a strong grip on the imagination. One
myth finds its wellspring in a particular historical period being based on
studies carried out in the 1980s, the high-noon of a particular set of
entrepreneurial practices and representations. This was the time of Thatcher’s
‘big bang’ in the City of London, as satirized in Caryl Churchill’s (2002) Serious Money, and Reagan’s Wall Street
boom, brought compellingly to life in Tom Wolfe’s (1990) Bonfire of the Vanities and Auletta’s (2001) Greed and Glory on Wall
Street.
It was the time of ‘greed is good’, of red ties and braces, of champagne and
oysters, of barrow-boy star traders and unfettered masculinity—what has been
termed ‘unscrupulous acquisitiveness’ (Moran 1989: 59). It laid down a
particular set of interpretations of international finance which continue to
haunt us today (reinforced, of course, by the TMT—technology, media, and
telecommunications—boom of the 1990s and the related activities of analysts in
Wall Street-based financial institutions). These interpretations even have grip
within international finance: some of its participants would have us believe
that this is still the swashbuckling world to which they belong.
A second
myth takes it that the world of international finance lurches from boom to
bust, from unbridled optimism to scandal, and to irrational pessimism. This
myth is usually framed as a moral lesson about the iniquities and necessary
failures of neoliberal capitalism. Whether it is Orange County derivatives, the
Long-Term-Capital Management (LTCM) crash, a rogue trader bringing down a bank,
or some other manifestation, all are grist for the moral mill. The result is
that exceptional events are written about to a much greater degree than the
ordinary but vital day-to-day operations of international finance. The
mechanics of everyday reproduction are ignored or lost in a rush to demonize
the unruly nature of financial capitalism. The little things are lost.
The
third myth centers around speed. According to many commentators, international
finance has become a set of continuously moving markets, sustained by the
seamless spread of information and the increasing speed of modern
communications technology. Mythically, the world of international finance has
become a uniform landscape over which money flows like mercury in response to
the slightest variation in expectations. And the future holds out the promise
of more of the same: it is supposed that each and every financial market which
does not operate on this basis will gradually be forced to accommodate to the
imperatives of global integration. If this is a myth, it is also a claim made
about the functioning of financial markets now (O’Brien 1992) and in the future
(Shiller 2003).
The
fourth myth centers on the presumed ubiquity of information. And yet,
commentators point to a paradox: on one side, the power of privileged forms of
information exchange that still rely on unmediated communication whether these
be the buzz of dealing floors or the power of gossip retailed in pubs and wine
bars. On the other side, an environment characterized by more and more mediated
electronic communication from the telephone to the screen, from instant
messaging to electronic data display. At the limit, this myth would have it
that it does not matter where in time and space we are located—we can all trade
in the global marketplace on equal terms not withstanding the evidence to the
contrary (see Clark and Wojcik 2004).
In this
chapter, we seek to show through a detailed case study of global FX trading
that each of these four myths is suspect. They persist because of a curious
lack of attention to changing circumstances, a tendency to hyperbole instead of
empirical analysis, and a large dollop of technological determinism. In
particular, we wish to show how four forces have become intertwined and
produced a global FX market rather different from the one commonly found in the
critical social science literature if not in the expert studies of market performance.
The
first and most obvious of these forces is the gathering global recession
accentuating competitive pressures and scale. Since the burst of the TMT bubble
at the end of 2000, the world’s financial markets have been subject to a marked
slowdown in the growth of transactions. Coupled with declining demand for
advanced financial products and traded securities, the slowing rate of growth
has put great pressures on the cost structures of international financial
firms. In turn, this has been particularly problematic for smaller firms that
do not have the operational reach or depth of liquidity to participate fully in
markets where very large sequential trades across the globe are used to pick up
the slightest of profits from the smallest differences of a few basis points.
The
second force is technological efficiency. Since the 1980s, information
technology has continued to grow in scale, effectiveness, and price. In turn,
firms must now operate at much the same electronic speeds, have access to many
of the same products (and, if they do not have them, be able to catch up more
quickly than in the past), and have access to much the same information and
expertise. Even though the set-up or sunk costs associated with market position
have greatly increased in significance, competitive edge is much more difficult
to have and to hold. Similarly, markets are less likely to be characterized by
systematic inefficiencies than in the past. High levels of information flows
and the application of advanced technology have ironed- out arbitrage
opportunities, making for fewer of those opportunities while reducing the size
of pay-offs when such opportunities arise.
The
third force is increasing market concentration. The largest international
financial firms dominate global market trading and dominate many developed
domestic markets. Furthermore, market concentration measured in terms of the
share of all transactions held by the largest firms is remorselessly
increasing within and between capital markets and is especially apparent in
the United States and Europe (Davis and Steil 2001). These firms are not the
swashbuckling entities of folklore. As we shall see, they are very large and
complex bureaucracies which depend on highly articulated hierarchies of
control, management, and the flow of information. Their best interests are
served by knowing what every one of their traders are doing on a near to continuous
basis.
The fourth force is
regulation. The intrusion of regulation on firms’ operations is much greater
than is often realized and is growing—the product of the crises of the 1990s
and the concern of multilateral and national institutions charged with global
financial stability. Not only do the requirements of regulatory compliance
strengthen the bureaucratic impulse of corporate managers, not least by
strengthening the hand of back-office oversight, it also produces its own
bureaucratic layers with their own agendas outside of trading and making an
immediate profit. In other words, regulation has become a corporate force in
its own right, a point that, like the others, we come back to in the subsequent
sections of the chapter.
Foreign
exchange trading is reckoned to be a vital cog in the global economy. It is
essential for cross-border business transactions, trade and commodity exchange,
and the flow of portfolio and direct foreign investment. It is also essential
for governments of all political persuasions, and is especially important when
offering sovereign debt. No national economy is immune from its effects.4
At a most mundane level, and usually unnoticed by most people, FX trading
greases the wheels of vacation travel and the like. In all, the unadjusted
foreign currency cross-border assets of banks reporting to the Bank for
International Settlements in September 2002 were just over $7 trillion
(compared with $6.5 trillion in December 2001) (Bank for International
Settlements
2003, table 5A: 16). Average daily turnover on conventional FX markets is of an
order of magnitude larger: on average, $1.2 trillion per day for April 2001
(Bank for International Settlements 2002). Large numbers indeed (roughly
speaking, just one week of FX trading would be worth an entire year’s value of
international commodity exchange).
The FX
trading comprises a series of markets which are usually bundled up together.
But not only does it consist of standard trades between currencies (so-called
vanilla) but it also takes in a series of more specialized submarkets. For
example, in the large financial institution we studied, there were dedicated
teams involved in fixed income and various kinds of exotics ranging from
vanilla FX options to far more complex options which involved several varieties
of derivatives and spread betting. Each of these markets had their own range
(e.g. exotics were rarely traded in more than seven or eight currencies),
skills (e.g. exotics typically demand much higher levels of quantitative
expertise to both develop and run), tempo, and spatial distribution.5
By
contrast, much of the academic research devoted to FX is about longterm
macroeconomic fundamentals such as relative money supply or relative velocity
of circulation. However, of late, more and more research time has been devoted
to analyzing and modeling the microstructure of FX markets, recognizing that
the management of information and the behavioral responses to information are
vital elements in all financial markets (Wilhelm and Downing 2001). This
chapter focuses on short-term volatility in currency exchange rates, being
conscious of the fact it is short-term volatility rather than long-term trends that
preoccupies FX traders around the world. Further, and like Knorr Cetina and
Bruegger (2002a, b), our contribution to understanding FX trading is focused on
the management of the trading process, even if we conclude that bureaucracies
and teams are more important than sole traders (perhaps the product of our
particular focus).
Another
contribution of the chapter is our argument that the management process is both
systematic and is characterized by deliberate attempts at fostering intra-bank
learning within and between related teams operating in markets over time, an issue
dealt with by many analysts including Nooteboom (2002). Individuals are, of
course, assessed in terms of their own performance. But, despite all the furor
sparked by the large salaries and bonuses generated by some individual traders,
the overall performance of FX trading within international financial
institutions is much more a function of the formal and informal mechanisms of
fostering teamwork and managing the shared knowledge and expertise that teams
corporately generate and own (while recognizing that there are also substantial
competitive pressures between individuals in teams and between teams; see
Ackerman, Pipek, and Wulf 2002). Without the collaborative support of team
members, all would be the poorer.
Over the
1980s and 1990s, Western industrialized countries deregulated their currency
exchange markets. Previous attempts at fixing exchange rates were shown to be
problematic amongst the developed economies; witness the experience of Great
Britain with the European exchange-rate mechanism (ERM) during the early 1990s.
More recently, successive regional crises (in Asia, Russia, and Latin America)
have also shown that nation-state attempts to manage global currency have
proved extremely difficult to achieve in the face of enormous financial flows
around the world, notwithstanding the fact that many countries outside the
Organization for Economic Cooperation and Development (OECD) use administrative
systems to dampen currency inflows and outflows.
At its
core, the global FX currency market is a private market that uses the US dollar
as the reference currency.6 Evans (2002) characterized the structure
of the FX market as follows. It is a decentralized, multidealer market with
three types of FX trading: direct inter-dealer trading, brokered inter-dealer
trading, and nonbank customer-dealer trading. The FX ‘market’ is actually a
virtual set of sequentially related regional markets linked together by highspeed
electronic systems (the Reuters system dominates all other systems). Being a
system of exchange, it allows for simultaneous bids, offers, and trades wherein
dealers ‘call’ one another for quotes on pairs of currencies with the
expectation of acceptance or decline of those bids within seconds. In sum, the
market is open 24 hours a day and 365 days a year, and is in theory accessible
to traders from virtually any location in space and time. But, of course, most
traders are the employees of large financial institutions just as the overwhelming
volume of FX transactions come from those institutions rather than individuals
trading on their own account.
The
academic literature has focused upon currency exchange rates, being concerned
about long-term macroeconomic trends in the value of individual countries’
currencies in relation to the US dollar and the other core reference
currencies, including the British pound, the Japanese yen, and the Euro. Over
the long term, it is arguable that exchange rates should reflect nation-state
comparative advantage in the trade of commodities and services (Sarno and
Taylor 2002). Thus, long-term exchange rates should reflect nation-state
economic growth potentials including expected rates of economic growth, labor
productivity, and innovation. Indeed, much of the literature on national rates
of economic growth and comparisons between national growth potentials assumes
that there is no FX effect on those fundamentals. In other words, FX rates are
assumed to be the medium through which national growth potentials are priced.
For example, recent debate about the relative growth prospects of the US
economy in relation to its European competitors suggests that the price of the
US dollar in relation to the Euro fully reflects its potential.7
In fact, the available
evidence suggests that much of the observed variance in exchange rates is
short-term rather than long-term and is to be found within the day rather than
between days, weeks, months, and years. Furthermore, it is widely conceded that
theoretical models based on economic fundamentals are very poor predictors of
short-term exchange rates and are virtually irrelevant to the question of
exchange rate volatility.8 It is not possible to work backward from
long-term patterns in exchange rates to predicting intra-day exchange rate
volatility. Whereas most theoretical models are focused upon exchange rates,
the volatility of intra-day exchange rates is the issue that dominates the
trading process. Not surprisingly, then, stochastic time series models clearly
out-perform econometric models when intra-day data is taken into account. As a
consequence, there is increasing interest in the microeconomic and behavioral
processes that drive global day-to-day FX operations.
At the
same time, it should be recognized that there is detailed information on both the temporal
and geographical structure of FX trading patterns. In fact, recent statistical
studies can provide us with a clear characterization of the various components
that make up intra-day FX volatility (Andersen and Bollerslev 1998; Evans
2002). Most importantly, such characterizations depend a great deal upon
knowledge of the opening and closing, as well as the moments of overlap,
between the three core global FX markets: in order of GMT, Tokyo, London, and
New York. To illustrate, Andersen and Bollerslev (1998: 221) characterized the
then spot DM-US dollar market in the following terms: ‘a 24-hour market
composed of sequential and partially overlapping trading in regional centres
worldwide, so it has no definite closures, except those generated endogenously
by the market. This allows for the study of the volatility process over periods
that would be non-trading intervals under centralised market structures’.
Evans
(2002) showed that in each of these markets the ‘home’ currency is the most
traded currency in relation to the US dollar, recognizing that London is both
the center for trading in sterling and the Euro. In describing FX trade over
the course of a day, he suggested that it can be characterized as
‘triple-humped’. Beginning about 1 am GMT in Tokyo, the first hump is
relatively low volume. That is followed by the opening at about 7 am GMT in
London for trade in sterling and the Euro which records the highest volume of
trade over the day, which is followed in turn at about 12:30 pm GMT by the
opening of New York at a lower volume of trade than London. In terms of the
management of the trading process within many FX companies, the close of trade
in New York effectively closes the book for that day on FX operations.9
This is customary practice for many such firms in the industry and around the
world. We noted above that trade is anonymous in the market, and that the
volume and volatility of trading is closely associated with the entry and exit
of market traders by region. In fact, although trading can be continuous second
by second, minute by minute, and hour by hour throughout the 24-hour cycle it
is commonly observed that trade peaks at the opening and closing of each of the
three markets.
Notice
that London has an especially important place in the 24-hour cycle of FX
trading. This is partly because of its historical role as a center of calculation
collecting diverse market interests from around the world, and providing an
unmatched depth of liquidity and range of risk preferences (Clark 2003). The
role of London has also been important in recent financial history, being
particularly associated with the ‘big-bang’ in the 1980s, the subsequent float
of major European currencies, and the introduction of the Euro. Furthermore,
London is very important as a switching point between Asia and Europe and
Europe and North America, being a place where financial deals can be packaged
and priced in terms of their currency exposure. As has been suggested many
times in interview, if London did not exist it would have to be invented at
much the same place in time and space between Tokyo and New York.10
It could be in Paris or Frankfurt, but for all these reasons, reinforced by the
concentration of related banks and trading talent, flexibility, and
technological capacity, London remains the dominant international financial
center.11
Considerable
research has focused upon the role of information flow and sources in driving
trading volume and volatility on an intra-day, daily, weekly, and
calendar-basis. Anticipated public disclosures of relevant macroeconomic and
monetary information have an impact upon FX trading by region. In some cases,
especially those associated with news from New York, the impact of this kind of
news can be distributed in time over the day. However, it has also been
observed that anticipated public news has a limited temporal and spatial impact
upon trading intensity even if public news may have an immediate and
significant affect on the FX market concerned (Galati and Ho
2001) . This type of information
is thought to underpin long-term patterns embedded in observed short-run
high-frequency volatility. Even so, since such announcements are regular, they
are also, more often than not, anticipated in terms of their likely effects
upon regional markets as well as the turnover between markets. Expectations are
an essential ingredient in FX trading especially if there are marked
differences between markets in the meaning attributed to anticipated
announcements.
On the
other hand, it appears that unanticipated private information has the biggest
impact upon daily trading volume and intensity in FX markets. For Evans (2002),
this is because of the apparent anonymity of FX markets and the fact that FX
trades cannot be directly observed by third parties not involved in those
trades. As a consequence, at any point in time there is a distribution of
exchange rates and an intensive search by traders for an approximate reference
point in making subsequent trades. In other words, just as there is a
distribution of FX prices at any point in time and space, that distribution is
itself partially dependent upon previous distributions of FX prices. More
technically, it is observed that FX markets are characterized by informational
asymmetries, by heterogeneous expectations, and by an everpresent need to
trade when others trade so that current conditions are revealed to traders by
sequential pairs of currency trades. By this logic, traders cannot afford to
‘sit-out’ the market awaiting new information that would propel local market
traders to an expected equilibrium point in the relationship between
currencies.12
The
exact temporal and spatial decay function is therefore less important at this
juncture than the realization that the significance of this component also
varies by trading intensity. Although the electronic trading system is
available for FX trading every second of every day, FX trading is not continuous
but marked by identifiable trading peaks and troughs within each day by market.
Evans’ (2002) observations and arguments provide a compelling rationale for
strong intra-day patterns. What is not often realized is that the significance
of the ‘sampling’ component of FX volatility varies in terms of the volume of
trading. Whereas it is the dominant component in normal market conditions, it
declines in significance when trading intensity is very high suggesting that in
these circumstances the distribution of FX prices narrows and converges toward
a shared reference point only to diverge and once again spread as trading
intensity declines. There appears to be no necessary intra-day temporal pattern of high activity except for the fact that all
traders are aware of the peaks in trade associated with market opening and
closing. Under conditions of risk and uncertainty, traders bunch together at
those moments in time and space for more information and for the opportunity to
off-set and share risk by discounting specific positions (characteristics of
all securities markets; see Shin 2003).13
Added to
this problem of managing the 24-hour market structure is the problem of
managing speed. It cannot be gainsaid that, under pressure from improvements in
information and communications technology, financial markets have tended to
demand more and more rapid response, especially in markets like FX which
depend on arbitrage to such a degree. But the problems presented by speed
should not be overplayed for at least two reasons. First, the markets are only
nominally 24 hour. There is still, in reality, a gap of an hour or so in the
global 24-hour clock between New York and Tokyo. As well, there is the problem
of settlement. We were constantly told that managing 24-hour books ‘would be a
nightmare’. Like the noonday sight at sea, there has to be a close of business
in order to assess net positions. In any event, handing on a book from one
market to another takes a considerable amount of time. The process is not
instant: it occupies several hours each day, involving regional and global
members of the FX team in constant conversation and what can often be a complex
series of negotiations (see Table 11.1).
Table 11.1. A Typical FX Dealing Timetable for London
|
Having
outlined the nature of the FX markets, we can now consider the management
problem that this poses for participants. We hope to identify the basic
elements of the FX management problem by drawing upon the observations made
above about the temporal and spatial patterns apparent in global FX trading. In
doing so, we focus upon three kinds of ‘agents and institutions’: individual
traders, their firms, and the markets in which they operate. Most importantly,
we focus upon how global financial firms manage time and space on a 24-hour
basis by being responsive to anticipated and expected events arising market by
market, as well as the unexpected and surprising events that may drive high
levels of intra-day market volatility. In the first instance, this requires
conceptualizing the FX management problem. In the second instance, it allows us
to emphasize the essentially bureaucratic nature of corporate decisionmaking in this
arena which lies at the heart of this chapter.
Of
course, bureaucracies have had notoriously bad press of late. In the face of
1990s, management paradigms focused around concepts like networks and communities
of practice, hierarchical bureaucracies have often been depicted as shallow and
energy-sapping forms of organization, sets of mundane routines that are
inimical to the production of enterprising cultures and persons (Leavitt 2003):
at odds, one might think, with what is often depicted as the free-wheeling
nature of trading. In fact, as we have already argued, the FX markets rely on
vast swathes of bureaucratic routine to function, from the day-to-day minutiae
of settlement and compliance to the larger issues of regulation and general
managerial oversight. Further, it is doubtful that bureaucracy is simply useful
background for more entrepreneurial activities: most entrepreneurial
activities like trading rely on bureaucratic routines for sustenance, whether
these are embedded in software packages, organizational knowledge, or highly
complex logistics. Indeed, du Gay (2000) goes as far as to argue that
bureaucracy ought to be seen as a substantial ethical domain in its own right
and not just an impoverished set of checks and balances on the real business of
entrepreneurial effort.
Yet, in a series of
descriptions of financial markets dating from the nineteenth century and from
Weber (1978 [1919]), it has become commonplace to regard financial markets as
the very opposite of bureaucracies. But, as we have tried to show, the scale of
the management task of collecting and synthesizing dispersed financial
knowledge is now so great that, for the main corporate players who constitute
so much of the market, this no longer amounts to a realistic or even a
desirable description. Large financial firms are highly structured,
hierarchical operations that try to impose order and security as well as make a
profit (the two by no means being inimical to one another). Though regional FX
teams may work quasi-independently, they are all overseen by an inevitably
authoritarian management hierarchy whose task is to manage risk on a global
scale in organizations, which may have been put together through mergers and
acquisitions and therefore may have a mix of quite different cultures and even
quite serious rivalries. Thus the managerial imperative is consistently toward
a classical nested organizational hierarchy with each team head reporting
upward in a formal fashion to the global manager (see Thompson 2003). How
might we characterize this situation and its consequences? This is the subject
of the next section of the chapter.
At the
most general level, FX management is a problem of managing dispersed knowledge.
This issue has been the subject of increasing amounts of research in the
management literature, and is the focus of Becker’s (2001) seminal paper, and
related research by Girard and Stark (2002).14 In essence, Becker
contends that the issue of dispersed knowledge is representative of a most
important aspect of modern economies, that being the utilization of knowledge
where economic agents are themselves decentralized and coordinated through
market exchange. Becker cites the relevant literature and goes on to reference
Hayek’s argument to the effect that in market economies characterized by the
division of labor knowledge must be organized, codified, and deliberately
managed if agents and their institutions are to be competitive with one another.
Further, Becker suggests that this issue is now ‘more salient than ever’ (2001:
1039). Because many markets and systems of production and exchange are global
rather than local, and because networks of communication allow access to
markets by people from many more locations in space and time than ever before,
dispersed knowledge is now one of the most important management issues
preoccupying firms and their managers.
Assume
that FX trading firms and their employees seek to maximize, respectively, reported
profit (by division) and earned income (including yearly bonuses) while
minimizing firm costs and potential catastrophic losses. Also assume that,
given the robustness of firms’ reporting practices and monitoring functions, it
is difficult for any individual trader to build up over time positions that
threaten the financial integrity of their firm. We must assume, however, that
firms have an interest in allowing their traders sufficient discretion that
firms may benefit from their employees’ exploitation of market knowledge,
experience, and intuition. In other words, the most important imperative
driving the FX trading process is the interest of traders and their firms in
making money day after day, week after week, and year after year. In this respect,
traders and their institutions cannot afford to sit out market trading in the
hope that collecting and organizing market knowledge will allow them an
opportunity to make ‘excess’ profit out of a limited set of trades. For any
firm seeking to maximize profit from FX trading, achieving this goal is a
function of the strategic collection and dissemination of knowledge to and from
their own traders located in different markets around the globe. This is an
essential management function, and an issue of managerial control. It goes
beyond the issue of setting correct incentives to the organization of the firm
itself.15
This
issue can be characterized in the following ways. With respect to intraday FX
trading, firms must manage the flow of knowledge (1) within each market and
between their traders (within the firm), (2) between each market and between
their market-based traders (within the firm), and (3) within and between
markets with reference to external (nonfirm) traders. They must do so in ways
that sustain mutual learning between team members and recursive response to
changing conditions across the globe. This is a deliberately managed process
because the costs of individual discretion and competition between team members
are too high, even potentially catastrophic, for the firm and the global
financial system.
Firms
must therefore decide whether traders trade on their own account or trade as
members of market-specific teams, and whether the geographical and temporal
segmentation of FX markets should carry over into the accounting structure of
the day-to-day performance of the firm itself. For the moment, let us assume
that traders trade as members of market-specific teams and that those teams are
held to account in terms of their contribution to the day-to-day performance of
the firm in FX currency markets. We will explain how and why this is the case
in the next section. All we need to suggest at the moment is that knowledge
management and integration is more efficient if individual traders have a clear
responsibility to their market- specific teams and if each team has a
responsibility to the subsequent market team (in time and space). In essence,
there is an operational hierarchy that culminates in just one FX team in the
firm, a team that is local in its immediate functions but global in terms of
its scope of responsibilities.
This type of managerial
logic requires formal mechanisms of authority and accountability. It also
imposes huge obligations on team managers to develop codes of practice that
bridge time and space in a deliberate and predictable manner. In a world of
settled expectations and the routine execution of transactions, there is
little doubt that this type of managerial system would disappear into the
fabric of the firm and its culture. But the recurrent and unpredictable
currency crises emanating from emerging markets over the past few decades have
meant that this managerial logic is an essential organizational device for
handling episodes of great uncertainty and the consequent risks to the firm and
its employees. When asked how they respond to such currency crises, managers
suggested that they rely upon the firm-specific global management system for
inter-market coordination and they intensify their use of intra-firm coordination
mechanisms to respond to the temporal and spatial transmission of currency
crises. This is not, however, a recipe for global market stability; it is a
recipe for the survival of global financial firms in the hope that stability
will be engineered by domestic and multilateral agencies (Kaminsky and Reinhart
1999).
This
kind of managerial imperative has only been underlined by three further
developments which strengthen the hold of hierarchy and general bureaucratic
procedure. The first of these is the capacity for technological oversight of
each trader’s and team’s performance. The growth of information and
communications technology and, much more importantly, the increasing ability to
stitch together often quite diverse systems into a functioning whole, has
gradually allowed key managers to gain oversight of performance at all relevant
points (in time and space) of the firm.16 Thus, the global FX manager
knows the position of every trader at the end of each day and should be able to
pick up rogue traders within one day or a few days at most. Whereas some
analysts of related phenomena emphasize the development of trust between
related individuals as a crucial social regulatory determinant of information
flow, it is clear that, in this particular context at least, this kind of
device is fragile at best and is better handled by explicit oversight.
The
second development is the growth of risk management which is meant to
constantly monitor and assess risk exposure. All large international financial
services firms have substantial risk measurement and management divisions
which usually monitor trading according to limits set by a Senior Management
Committee or equivalent. These divisions are hungry for data with which they
assess the state of play of the firm at selected points in time and space. They
use various software packages to help them achieve this goal, some of which are
written in-house and some of which are proprietary. The goal is to speed up the
system of monitoring so as to get as close to the close of business as
possible. Even so, this has not proved easy. There have been significant
problems in handling the flow of data.
The
third development is the growth of regulation. The enormous growth in
regulatory demands has in large part arisen from periodic financial scandals
which have underlined the need for more control, as well as adding new
semi-independent layers of bureaucracy. In our case study, trading teams may
have acted to an entrepreneurial stereotype but this stereotype was encased in
bureaucratic systems of oversight and regulation, much of which the teams
themselves seemed to be only partially aware of. What seems clear, however, is
that there has been a shift in the balance of power between the front and back
office. The back office has become more important, partly because of all the
requirements of oversight and regulation, partly because front and back offices
have become closer through electronic booking, partly because more senior
managers have had to take on certain back office functions, and partly because
the entrepreneurial ethic, though still valued, has been in part subsumed under
the imperative of safety.
Perhaps
the best means of symbolizing this change is through what has happened to
trading floors. Ten or even five years ago, trading floors were often noisy
places. Traders existed in a noisy hubbub as information, rumor, and mood were
passed back and forth as means of finding opportunities for arbitrage. That has
now changed. Most trading floors are quiet. Most FX trading takes place through
the medium of the screen and electronic booking systems. Most information also
comes through the screen—through proprietary services (and especially
Bloomberg) or through email and bulletin boards to which all the traders on the
floor can contribute17—and through telephone conversations on open
lines with company dealers in other locations.18 Rumors no longer
have the same place they once had in this world of ‘response presence’ in which
much interaction is at a distance but, through the medium of teams and screens,
can be gathered at one ‘place’ of management and control (see also Knorr
Cetina and Bruegger 2002a). They are much less likely to move the market
because so many of them can be verified as true or false—through a combination
of the modern media and internal assessment—within 5 minutes of their launch.19
The
focus now is therefore much more likely to be on ‘sampling’ market prices by
reference to expected market-specific moments of collectivity and overlap,
thereby providing those companies with the most resources (money and
management) with the opportunity to arbitrage around unexpected events.20
Of course, speed is still vital on the trading floor. Indeed, given the paucity
of opportunities in recession and the accelerating impact of technological
change, the discipline of speed on FX trading may have even become greater.
But, speed is mediated to a much greater degree than ever before by
technological and team backup so that its effects may be rather less than are
often envisaged.
This
does not mean there is no role for social glue, of course. But most of that
glue is no longer the residue of local boozy nights out; FX traders may just as
easily be a part of teams that stretch around the world. A good part of these
dispersed teams will not therefore be physically present in the London trading
room. Sociality is therefore deliberately engineered. Globally dispersed teams
meet-up on a yearly basis and meet one-to-one much more frequently than that in
order to talk strategy, swap new expertise, and hone existing communication
skills.21 Thus, at any one time, the trading floor consists of
intra- and inter-floor linkages which cannot be separated out. The floor is
partly a virtual society but one run on the assumption that teams interact
face-to-face on occasion and learn the social assumptions and cues typical of
other team members. Team membership is spun out of these assumptions and
provides the cues for ‘local’ decisionmaking based upon certain well-defined
parameters of shared experience (in ways consistent with Nooteboom’s 2002
emphasis on managing the costs and consequences of ‘cognitive distance’).
Thus a crucial point that
we want to end this section with is that it is dangerous to concentrate on
just the traders and the trading floor, as has become common in a number of
recent ethnographies which track the market as it is made. As we have tried to
show, the management of these floors is more and more dictated from without by
bureaucratic procedure which may or may not be crystallized in technological
interfaces like the screen. Knorr Cetina and Bruegger (2002a, b) make this
point but perhaps do not develop it far enough. In stressing the role of
individual traders who are partially set apart from the rest of the corporate
organization, they may have produced an account which is now historically
misleading (Mitchell 2002). While it is clearly the case that traders
constitute the market, they also increasingly represent corporate goals and
organization, either in the form of codified rules of procedure, forms of
oversight, and membership of a team which may stretch well beyond local
traders’ code (Thrift and French 2002). There are more and more ‘traffic cops’
within firms with the result that the boundary between explicit and tacit
knowledge of the markets is shifting in the former’s direction (Wilhelm and
Downing 2001). In particular, as new metrics are invented and implemented (e.g.
measures of overall corporate exposure), so they have become constitutive of organizations’
work. Similarly, new opportunities for control have arisen (all the way from
new kinds of higher management meeting called to consider the information
arising from new metrics to a raft of new additions to the corporate rule book
for traders).
In this
chapter, we have tried to puncture four myths about global financial markets by
appealing to a mix of our own observations and existing empirical work. We
used the FX market on the grounds that, if it were possible to find
counter-narratives in even this fast-moving and in many ways stereotypical
financial market, then existing accounts of the pathologies of individual
decisionmaking and market volatility might require considerable adjustment.
What we
found was a market which is increasingly coordinated by large bureaucracies
that attempt to make money by threading a large number of administrative
procedures through individual entrepreneurial behavior. Some of these
bureaucratic procedures are activated through the medium of teams which are
dispersed around the globe. Others involve overarching corporate organizational
structures which are similarly global. In other words, maximizing profit and
minimizing risk involves organizing time and space on a global scale which in
turn has prompted these organizations to manage how proprietary knowledge of FX
markets is dispersed through the organization and then put to best use;
dispersed knowledge is both a problem and a solution.22 In the process of
dealing systematically and on a global scale with dispersed knowledge and
expertise, the balance of power in large international institutions has subtly
but inexorably shifted toward bureaucratic procedures of synthesis, oversight,
and regulation—and away from the kind of untrammeled entrepreneurialism often
associated with FX dealers.
Of course, all this can be
overdone. Large international financial institutions are still driven by
competition, regional divides and at times untrammeled entrepreneurialism is
still allowed to let rip. But our argument is that large international
financial institutions are learning how to do global finance and, as this process continues, so
many international financial markets, often depicted as the domain of the
get-rich-quick, are becoming the haunt of large bureaucracies. As more and more
of the activity of these markets is taking place within these organizations,
this argument becomes more and more relevant. Though markets are still
fast-moving and, at least to a degree opaque, it would not do to overemphasize
these features. International financial markets are not being domesticated but
many of them are now moving into a new phase of coordination in which the broad
contours of activity are understood and subject to the power of bureaucratic
routine.
1. Here, we are particularly
interested in institutional investors, recognizing their importance in the FX
trading process (Davis and Steil 2001; Chinn 2003). We do not investigate their
clients in any detail.
2. At the end of 2001, this
institution had approximately US$13.9 billion in revenues, US$10 billion in
equity, and US$406 billion in assets. It operated in seventy-seven locations
across more than thirty-six countries and was involved in a variety of
activities including securities underwriting, sales and trading services,
investment banking, private equity, financial advisory services, investment
research, venture capital, correspondent brokerage services, and asset
management.
3. This kind of inductive
process of empirical analysis and theoretical interrogation is increasingly
important in the social sciences (Beunza and Stark 2003), and is characteristic
of recent developments in economic geography and finance (see Thrift 1996;
Clark 1998; Wrigley, Currah, and Wood 2003). It is also a vital research tool
in finance and economics in building a better understanding of the behavioral
structures underpinning global financial markets (see Shiller 2000, 2003).
4. To illustrate, consider the
November issue of the OECD’s (2002) Financial Market Trends. Therein, after a page devoted
to broad trends and prospects, the report looks in detail at FX markets before
considering recent developments in interest rates, equity and bond markets, and
the management of global market volatility. Financial stability, domestic and
international, is driven in part by FX markets.
5. The latest confirmed data
on FX derivatives trading indicated that daily average turnover was in the
order of US$1.4 trillion for April 2001 (Bank for International Settlements
2002).
6. This is a complex issue,
beyond the scope of the present chapter. Suffice it to say that while there is
a global market for transactions in the currencies of advanced western
economies relative to the dollar, there is hardly any market for transactions in the
currencies of emerging markets and developing economies. Given the risks
associated with those currencies, any related FX transactions must be done
directly in US dollars. And given the instability of many emerging market
economies and domestic institutions, this has significant implications for the
long-term stability of global financial markets.
7. This is the lifeblood of
global investment banks. There is a premium for informed commentaries on the
relative value of the US dollar compared to the Euro, GBP. and Japanese Yen
which mix together current issues like the prospects and consequences of war
with the productivity effects of the new economy and labor and capital market
flexibility in the United States. See the recent reports by Quinlan and
McCaughrin (2002), and McCaughrin, Kimbrough, and Roach (2002) from Morgan
Stanley Dean Witter (New York) on these issues and more.
8. See Sarno and Taylor
(2000:136), who conclude their review of the value of theoretical models of
long-term exchange rates with the observation that ‘empirical work on exchange
rates has not produced models that are sufficiently statistically satisfactory
to be considered reliable and robust’.
9. In fact, in our global
financial institution, close of play was taken to be 1615 EST with all
subsequent trades going on to the next day. The situation is even more
complicated because common books are not really passed on in the way depicted
in many accounts. In our global financial institution, each region still had
its own books even if positions were passed on between markets.
10.It has also been suggested
that London is important because the Pacific Ocean is too wide (in time). If it
were narrower, presumably New York would be able to bridge the gap, thereby
being able to compete directly with London. Geography in this sense is a marvelously
simple idea.
11.We would suggest, moreover,
that the traditional virtues associated with London as being a place of gossip
and face-to-face contact is less relevant than often assumed, given the
significance of electronic linkages and networks on a second- by-second basis.
In any event, like Cheung, Chinn, and Marsh (2000), we have not found any
discernible firm-specific or market-specific collective view about the
significance or otherwise of the determinants of long-term trends.
12.When asked, FX traders and
managers had little to say about the underlying driving forces behind currency
exchange rates. Their world is not theoretical; the significance of intra-day
volatility is such that any long-term position on a set of currency exchange
rates informed by theory or related expectations would be practically
irrelevant or worse. By implication, their actions are consistent with models
of financial markets that emphasize herd behavior and informational
asymmetries. That is, expectations may become self-fulfilling prophecies
(Morris and Shin 1998). Even nation-specific cyclical patterns that drive the
relative attractiveness of one country’s currency as opposed to others may be
treated by FX traders as long-term and therefore irrelevant to their daily positions.
Only if cyclical patterns appear as unexpected time-dependent shocks would they
be factored into the trading process (cf. Allen and Gale 2000).
13. In fact, the search for
information by sampling others’ expectations and positions is reputedly one
explanation for the enormous volume of FX trading day in and day out (Harris
2002). Another possibility is the fact that any FX trade precipitates a
sequence of trades designed by the institutions concerned to reduce their
exposure to the risks associated with many of their clients’ positions.
14. We use the term ‘dispersed
knowledge’ because it captures succinctly the geography we wish to analyze.
But other related conceptual reference points would work as well including
‘cognitive distance’ and the ‘cycle of discovery’ (see Gilsing and Nooteboom
2002).
15. By contrast, much of the
literature in finance when dealing with similar issues emphasizes the cognitive
and behavioral biases apparent in many individuals when dealing with risk and
return, the valuation of reward and loss, and the response to time-dependent
events. In this respect, the finance literature ignores the institutional
management of knowledge and behavior. It is preoccupied with ‘star-traders’
rather than institutional structure (see Clark 2000 on related issues relevant
to pension fund and investment decisionmaking).
16. This has proved an enormous
problem in most international financial services firms. For example, in the
firm we studied computer systems had been quite different in different world
regions and there were still substantial problems with legacy systems. It is no
surprise, then, that very large amounts of effort still go into developing
software. Even a small team may have ten people on its IT side. Mainline FX
teams may have upward of 120.
17. One major rite of passage
now is inserting information on the very public bulletin board: if it is proved
wrong the contributor’s credibility obviously declines.
18. Open lines are crucial
when, for example, London traders may be spending up to
2 h a day on the line to
their counterparts in New York and half-an-hour to an hour on the line to their
counterparts in Tokyo handing on the book and generally talking business.
19. The focus is therefore much
more on set economic events (like interest rate changes) and analyzes and
arbitrage opportunities around these events.
20. Similarly, it has become
much easier to make educated guesses about the sources of activity in the
market when relatively few key traders from relatively few financial services
firms are making most of the running.
21. For example, the manager of
one small team goes to Tokyo at least once a year to meet team members and to
New York at least twice a year.
22. Consider, for example, the
management ‘solution’ to this problem implemented at Barclays Global Investors (BGI):
‘two global co-CEOs-located 5,371 miles apart’ (London and San Francisco). When
asked about how they divide their responsibilities, one of the CEOs indicated
that the divide was functional along ‘regional and product lines’. As for
coordination, the other CEO responded as
follows. ‘One of (the)
things that has helped is that the two of us have worked together for a long
period of time and we know each other extremely well’. As for the advantages of
such an arrangement, ‘the business benefits from having the leverage of two
people who act as CEOs in different time zones. But it only works if we are
joined at the hip in the way in which we are communicating’. (Reported in the
industry newspaper Pensions & Investments April 14, 2003: 14).
沒有留言:
張貼留言