A Material Sociology of High-Frequency Trading

Thirty years ago, nearly all financial trading took place directly among human beings, over the telephone or face-to-face. In the late 1980s and 1990s, electronic trading gained momentum, but initially nearly all of it was still by human beings, using computer screens and keyboards. Since 2000, however, trading has increasingly become entirely automated. Particularly prominent has been ultra-fast, algorithmic high-frequency trading or HFT. In several important markets, HFT now makes up between around a quarter and just over a half of all trading (see, e.g., Baron et al. 2012, Bouveret et al. 2014, Brogaard et al. 2014).

Our research, which links economic sociology and science and technology studies (STS), will investigate: 1) how HFT is conducted; 2) how and why it has become firmly established in some markets while failing to gain entry to others.

HFT is a theoretically pivotal topic from the viewpoint of the intersection of economic sociology and STS. Economic sociologists have productively analysed markets as contested, historically situated 'fields', focusing on topics such as the cultures of markets, their social ordering and governance, and the conflicts surrounding these. STS scholars who study markets have in contrast typically focused on the materiality of markets: the role in them of technological devices; of material procedures; of embodied human beings (rather than disembodied cognition, whether rational or not); of mathematical models not as abstractions but as material computational routines. Proponents of each approach have often seen the other approach as incomplete, even inadequate, and the theoretical objective of this research is to develop an integrated analysis that we call a 'material sociology'.

HFT is a suitable empirical topic for the development of a material sociology for two reasons:

First, HFT's material aspects are crucial. For example, even the speed of light is a constraint. The salient time unit in HFT is a microsecond - a millionth of a second - and in a microsecond even light in a fibre-optic cable travels only around 200 metres. So, e.g., the exact locations of computer systems and precise routes of communications links matter hugely.

Second, the rise of HFT has triggered conflicts about the structures of markets, the rules of trading, and so on: conflicts of the kind that interest economic sociologists. Nearly all HFT firms are small, recent entrants. They confront established players such as big banks (whose technical systems are typically slow by HFT standards). The outcomes so far of the resultant conflicts vary considerably. At one extreme (e.g., US share trading), the traditional institutional structure has eroded almost completely, to be replaced by an institutional/technical structure that - with some interesting exceptions - facilitates HFT. At the other extreme (e.g. the markets for UK and Eurozone government bonds), HFT firms have simply failed to gain any access.

Our empirical research will be informed by our 'material sociology' theoretical objective. E.g. when we examine how HFT algorithms predict price changes, we will investigate the extent to which the technical procedures by which they do so actually depend on historically-situated, contested features of markets. When we examine the interaction between HFT and the structure of markets, we will investigate not simply social roles and rules, but also material infrastructure.

We will employ semi-structured interviewing (of high-frequency traders, those who supply them with technical services, and others such as exchange staff, regulators and members of incumbent firms), supplemented by documentary sources and observational research (e.g. at HFT industry meetings). Extensive preparatory research has given us the necessary contacts, allowed us to discover how deeply we can probe interviewees without intruding on 'trade secrets', and informed our initial data-analysis framework.

Four groups will benefit from this research.

First, policy makers and financial-market regulators (faced with markets in which HFT is playing an increasing role, often improving liquidity and lowering the cost of trading, but with potential drawbacks such as socially wasteful expenditure on 'arms races' in speed) will benefit from the broad, balanced, concrete understanding that this project will generate of the material practices of HFT and their interaction with market structure. MacKenzie has already been invited to give a talk at the Bank of England on this research in March 2017.

Second, practitioners of HFT (especially new recruits) will also benefit from our analyses of HFT practices and their interaction with market structure. Existing 'how to' guides to HFT are hopelessly inadequate in these respects, and the deliberately compartmentalised nature of many HFT firms restricts the capacity of novice practitioners to learn from more experienced staff.

Third, other financial-market practitioners, who often (in our experience) have poor understanding of HFT practices and strongly negative stereotypes of the sector will, similarly, benefit from the balanced and concrete perspective we will provide.

Fourth, interested members of the general public, journalists, creative artists and relevant NGOs (such as Finance Watch) will also benefit from our analyses. Unusually for what can appear to be an esoteric aspect of finance, HFT arouses substantial public interest. For example, Michael Lewis's 2014 journalistic treatment of HFT, Flash Boys, is reported to have sold 130,000 copies in the week following its publication. Unfortunately, however, Lewis's book (along with much of the mass-media treatment of HFT) is simplistic and tends towards negative stereotyping of HFT. Our goal in this respect is to write vividly about HFT (its exotic material features lend itself to this), while remaining fair and balanced. Writing vividly can reach audiences, including, e.g., creative artists, that 'drier' treatments of finance do not, but without the stereotyping of those involved.

We will reach these four groups by six pathways:

1. Vivid, attractively written, articles in the London Review of Books, which has a subscriber base of over 60,000 and a prominent website (with over half a million visitors a month). The LRB is, e.g., widely read by journalists and creative artists.

2. Articles in the Tabb Forum, the world's leading site for discussion among practitioners of 'market structure' issues.

3. A project website and Facebook page, and - especially in the last two years of the project - blogging (especially on the 'socializing finance' blog) and use of Twitter. We are requesting modest 'boosting' (in effect, digital advertising) costs to increase the reach of publicity of our outputs and of our final dissemination meeting.

4. Circulation of draft articles direct to interviewees (who will, in many cases, be the practitioners to whom our research is most immediately relevant).

5. Collaborations with artists and appropriate NGOs. Our two earlier ESRC projects on finance (RES-051-27-0062 and RES-062-23-1958) attracted the attention of artists, leading e.g. to what has become a multi-year collaboration with the Swedish conceptual artists, Goldin+Senneby. Finance Watch, Europe's most prominent relevant NGO (and a significant influence on EU policy-making), has already invited us to its Brussels headquarters to discuss this research.

6. A final dissemination meeting, aimed largely at regulators and financial practitioners, with, e.g., a keynote speaker well-known to them as well as presentations of the research findings.

The record in achieving impact of our two earlier ESRC projects on finance is strong: e.g. Prospect magazine named MacKenzie in January 2010 as among the 25 public intellectuals with the most impact on the 'public conversation' about the global financial crisis.