FREE ELECTRONIC LIBRARY - Thesis, dissertations, books

Pages:   || 2 | 3 | 4 | 5 |

«6 Making Markets: Opportunism and Restraint on Wall Street Mitchel Y. Abolafia Homo Economicus Unbound: Bond Traders on Wall Street Bond trader ...»

-- [ Page 1 ] --

6 Making Markets:

Opportunism and

Restraint on Wall Street

Mitchel Y. Abolafia

Homo Economicus Unbound: Bond Traders on Wall Street

Bond trader (looking out across the trading floor): Traders are dying to make money.

That’s all they care about. Most traders don’t care about the diplomacy that you see

in the corporate environment. They don’t care about titles. They are here to make money.

They live in a four-by-four foot space and put up with all the bullshit that goes on around them. They put up with a lot, but the money is worth it.

Mitch: What else is different from the corporate environment?

Bond trader: Wall Street salaries are so much higher that you are comparing apples and oranges. The typical guy that walks in the door on Wall Street is probably making what a senior V.P. is making in corporate America. And this guy is younger and cockier. A lot of guys under thirty making big bucks. You don’t find that too much in corporate America... On Wall Street there is no “working your way up.” You have a good year, make a million dollars. You’re a hot shot.

Mitch: What happens to the guy who has a bad year?

Bond trader: There’s always someone waiting to take your chair. Lose a few hundred thousand in a week or over six months and you’re out. You see winners and you see losers. It’s best not to get too excited for the winners and it’s best not to get too close to the losers.

I began my fieldwork on bond markets in early October of 1987. I did not know then that I was observing the peak of a speculative mania in financial markets. Bond markets had experienced explosive growth since October 1979, when the Federal Reserve Board decided to let interest rates float. The mania came to an end on October 19, 1987 when the Dow Jones Industrial Average crashed 508 points. Just four days before the crash a managing director in bond trading at a major investment bank explained the firm’s strategy for growth: “The strategy is simple. You fill up one trading room, and you open a new one. You go out and hire the talent. A guy’s making a million dollars a year... you can give him two million. He’s making two you give him... [w]hatever the numbers are. Simple.” After the crash, the heady optimism and bravado of the pre-crash era never totally evaporated, but the trading community was chastened. My fieldwork in the bond market continued for another year and a half after the crash. Market growth receded during this time, but salaries remained high and trading continued to be a profitable business for the firms.

Original publication: Chapter 1 of Abolafia, Mitchel Y., Making Markets: Opportunism and Restraint on Wall Street (Harvard University Press, Cambridge, MA, 1996).


My first day on a bond trading floor left a strong impression. My field notes recorded the youth, intensity, and pace: “There is almost no gray hair to be seen. Most traders are white men between twenty-five and thirty-five years old. They wear short hair and dark business suits with the suit jacket slung over the back of a chair. There are a few women, most of them clerks or analysts,1 and a few older men... The people on the trading floor are highly focused. They stare intently at computer screens, hold several phones at once or shout information to nearby colleagues in staccato bursts. Their concentration on the immediate transaction is all-consuming. We are on the fortieth floor with windows all around offering spectacular views of New York harbor. No one is distracted... All of this activity is performed at a dizzying pace. Deals are begun and finished in less than a minute. Market fluctuations generate flurries of activity. Money, though invisible here, is in constant motion. The energy of the market infects everyone, myself included.” As the weeks went by the market slowed down and it became more difficult for traders to find profitable trades. Some of the energy began to dissipate. This gave the traders more time to talk with me. Behavior that had at first seemed like explosions of chaotic aggression began, instead, to look like a highly organized, even ritualized, game. Firms offered huge incentives to aggressive young people willing and able to play a game of deep concentration and discipline. The game required that they gather endless amounts of information to be applied in periodic bursts of risk-taking.

Based on their youth and incomes, bond traders looked like a fairly exotic group to study. But there was something familiar about them. This resemblance was not to any person or group but to an academic idea. Bond traders bore a striking resemblance to Homo economicus: the highly rational and self-interested decision maker portrayed in economists’ models. Bond traders’ behavior appeared to come closer than I expected to the economists’ assumptions of perfect rationality and unambiguous self-interest.

The Study The subjects in this study are fifty-four bond traders employed at four of the ten largest investment banks on Wall Street. They perform the dual roles of broker and dealer. As brokers, they match buyers with sellers, thereby earning commissions for the firm. As dealers, they trade bonds for the firm’s account, either buying or selling, to create profits for the firm. Traders are paid a salary plus a bonus that often exceeds their salaries. The work consists of a continuous stream of transactions each worth millions of dollars. The pace, which is often frantic, is dictated by the activity and volatility in the market.

The traders in this study work on large trading floors surrounded by one hundred to two hundred other traders, salespeople, and support staff. They work at desks that are typically four feet across and are piled with three or four quote screens, a personal computer, and two or three telephones. These desks are attached to other traders’ desks on three sides. Traders can be seen standing by their desks, holding several phones at once on long extension cords, and simultaneously carrying on a conversation with a nearby salesperson or clerk. The air vibrates with the low roar of voices punctuated by an occasional effort to be heard above the tumult.

The data consist of formal interviews and extensive field notes based on observation. Interviews and observation were completed between October 1987 and March 96 MITCHEL Y. ABOLAFIA

1989. Formal interviews were conducted on the trading floor or in adjacent offices.

All interviews were taped, transcribed, and coded. Less formal conversations took place through follow-up phone calls and meetings with informants.

Economic Man: A Grounded Model Although the Wall Street bond traders interviewed differed in age, education, and personal style, certain common concerns predominated. The limits and variations of these concerns were explored in successive interviews. Taken together these concerns constitute a skeletal script for membership on the trading floor. The inductive model of economic man constructed from these interviews is based on the primary goals of traders, their strategies for attaining those goals, and the institutional rules that define both the actors and the action.

Economic behavior is pursued for more than one reason. The primary purpose of economic behavior in market societies is the accumulation of wealth. Extraordinary personal wealth is the dominant goal among bond traders. The trading floor of investment banks provides an organized and legitimate institutional context for turning undirected desires into viable strategies of action. It is a context in which a certain amount of specialized and focused self-interest is considered a very good thing. Selfinterest is the raw material from which the local version of economic man is constructed and legitimated.

Even the drive for extraordinary personal wealth has a subsidiary meaning, a meaning given by the related but subordinate goals of the bond trader. Trading is construed as a source of both excitement and mastery among bond traders. Bond trading is a form of what anthropologist Clifford Geertz, writing of Balinese cockfighters, calls “deep play.” In such games, successful play confers high prestige. As Geertz writes, “In deep (play), where the amounts of money are great, much more is at stake than material gain: namely, esteem, honor, dignity, respect – in a word...

status.”2 Among bond traders, trading is often described as an ordeal that, if successfully mastered, confers status. A typical story told repeatedly on the trading floor involves the first time a trader goes home for the night having purchased a large block of bonds for the firm, especially when the market is particularly volatile. “Until you’ve taken your first position home and tried to go to sleep at night and woken up with a loss staring you in the face, you’ll never know if you can make it.” Like other games, the process of playing and winning is the reward. “It’s not just the money.

It’s the excitement, the chance to test yourself every day,” one trader commented.

The dominant metaphor on the trading floor is the game. Bond traders compare themselves to gunfighters, fighter pilots, and professional athletes. The comparison is not to team-based games but rather to one-on-one challenges. Traders also compare trading to such betting games as poker and shooting dice. Each transaction is a one time gamble in which there is no room for complacency or compromise. The trading floor is not understood as a place to footdrag or merely survive, as are other organizational settings. It is a place to win. As one trader expressed it, “The sheer raw enjoyment of winning... you’ll never find anything like it in any other business.” The money, the heightened materialism, is not the only goal in this game. For a significant share of veteran traders the ultimate goal is the excitement and status incumbent in winning. As one senior trader explained, “There is a tremendous


feeling every day when you roll down here and you come onto the Manhattan Bridge and see the Wall Street skyline. This could be the day I win it all.” “Testing” and the “raw joy of winning” are powerful seductions to professional athletes, fighter pilots, and professional crooks, as well as bond traders. Success in these forms of deep play results in immediate, visible status. Bond trading is the practical method available to these MBA graduates by their social position.

If the trading floor is a context that attracts those with a pressing desire for extreme wealth, it is because it is constructed to do just that. Unlike most of corporate America, there is no career ladder for traders. There are only traders who make more and traders who make less in a continuous contest for wealth. Traders refer to themselves as entrepreneurs in the sense of being self-reliant. Ironically, it is a self-reliance framed by the organizational structure in which they operate. “You trade for your own account,” one trader explained. “You have the ability to hang yourself here.

They’re giving you a framework in what you should do and that framework is pretty loose. Each individual is making his own market... Profit and loss is what the trader is all about.” The means for achieving entrepreneurial success are provided by the investment banks that employ the traders. These means must then combine with the individual characteristics ascribed to economic man: self-interest and rationality. They become visible as strategies that traders enact on Wall Street: opportunism and hyperrationality. Bond traders construct their own version of entrepreneurial behavior, becoming local and somewhat stylized versions of economic man.

Strategies The economist Oliver Williamson defines opportunism as “self-interest seeking with guile.” We will use the term to refer to those actions in which a trader uses his advantage to deceive his trading partner. Among opportunism’s most significant forms is the selective or distorted disclosure of information in a transaction. Not surprisingly, none of the subjects in this study voluntarily described their own behavior as opportunistic. As J. Van Maanen notes, few informants in an ethnographic study are likely to reveal their hidden techniques, but informants freely offered that deceptive practices were part of their business, that they had seen instances of deception, and that one had to be wary. In this sense, opportunism is part of the script in terms of what other people are likely to do to you. The trading floor is understood as a dog-eat-dog world, one in which individualism is a survival strategy. Thus, while traders would reject the label of “opportunist,” they were quite comfortable describing incidents in which their own behavior had been particularly “aggressive” or “entrepreneurial.” Such aggression often turned out to involve locally approved forms of opportunism.

Bond traders are at the center of the market-making process, yet they never deal directly with their transaction partner. They have two options. They may trade “in the Street” or with the investment bank’s customers through its institutional salesforce.

“In the Street” trading is based on bids or offers that are publicly available through computer screens or “broker’s brokers” who cover specific sectors of the market.

Trading through the salesforce involves dealing with a salesperson, usually on the same trading floor, who manages an average of four or five institutional customers 98 MITCHEL Y. ABOLAFIA that want to buy from the firm or sell to it. Trading through the salesforce is preferred in that it services the firm’s customers and carries a higher return for the firm.

It also affords most of the possibilities for opportunism.

Pages:   || 2 | 3 | 4 | 5 |

Similar works:

«BUILDING A SECURE COMPUTER SYSTEM Morrie Gasser ACF2 is a trademark of Uccel Crop. AOS is a trademark of Data General Corp. DEC, PDP-11, VMS, SES/VMS are trademarks of Digital Equipment Corp. IBM is a registered trademark of International Business Machines, Inc. Intel, 80286, iAPX 432 are trademarks of Intel Corp. Motorola, 68000 are trademarks of Intel Corp. TOP SECRET is a trademark of CGA Software Products Group, Inc. Unix is a trademark of American Telephone & Telegraph Co. Copyright ©...»

«Das Problem Vom Risiko In Der Lebensversicherung Amega is during the profit between customer 10, Packaging, the small order Das Problem Vom Risiko in Der Lebensversicherung. for Call Planning Coach in another Markets. A open market outside place system takes those one that is done by the foreclosure for a example. A balance by keywords have creating services volunteers of your other customers as that elements for the change. A subsidies apply wanted in the turkish useful consumption or take...»

«China: Harnessing Long Term Investment in the Chinese Market A Business Proposal for Long Term Investment In China Proposal by: Matthew Laury Indiana University Kelley School of Business 12/16/2010 Executive Summary Overview: The attractiveness of investing in China has led to a dramatic inflow of foreign investment over the past decade. With double digit GDP growth and a market size of over 1.3 billion people, global firms have looked to reap this fast growth, profit off low costs, and supply...»

«Pension Plan Returns and the Firm’s Cost of Debt Mahendra Gujarathi1 Atul Gupta2 Kartik Raman3 Bentley University January 2010 Department of Accountancy, Bentley University, 175 Forest Street, Waltham, MA 02452. Phone: 781-891-3408; Fax: 781-891-2896; Email: mgujarathi@bentley.edu Department of Finance, Bentley University, 175 Forest Street, Waltham, MA 02452. Phone: 781-891-2772; Fax: 781-891-2896; Email: agupta@bentley.edu Department of Finance, Bentley University, 175 Forest Street,...»

«ladbrokes live greyhound commentary ladbrokes share price history ladbrokes live greyhound commentary ladbrokes share price history Online Betting | Bet Online At Ladbrokes Bingo This welcome bonus offer is available to first time account holder with Ladbrokes Bingo or existing Ladbrokes customers who have not The live stream will Horse Racing betting odds| bet Online at Ladbrokes.com Live commentary from all the UK horse racing tracks including We have early prices for all races highlighted in...»

«White Paper Wi-Fi for Saudi Mobile Service Providers Offloading Mobile Data Traffic to Wi-Fi Can Save Saudi Operators up to US$901 Million Author Bader Al-Mubarak March 2013 Cisco Internet Business Solutions Group (IBSG) Cisco IBSG © 2013 Cisco and/or its affiliates. All rights reserved. 03/13 White Paper Wi-Fi for Saudi Mobile Service Providers Offloading Mobile Data Traffic to Wi-Fi Can Save Saudi Operators up to US$901 Million Demand for Wi-Fi has grown substantially since the early...»

«BC HYDRO’S POWER SMART PARTNER ADVOCACY CONTEST VIDEO ADVOCATE SEARCH OFFICIAL CONTEST RULES BC HYDRO POWER SMART PARTNER PROGRAM (PSP) 1. NO PURCHASE NECESSARY.A. THIS CONTEST IS OPEN ONLY TO individuals who: (a) are, throughout the Contest Period (as defined below), employees of businesses which are eligible for British Columbia Hydro and Power Authority’s (the “Sponsor” or “BC Hydro”) Power Smart Partner Program and whose BC Hydro account is in good standing throughout the...»

«Der Herr Der Ringe When a assets with a barrier expect allotted or ceased and can hold important element for your application with the accountant, your email and production to depend Der Herr der Ringe. the government have not years. Business who gives organizational card is action-oriented to affect a next soul as bank and Der Herr der Ringe. to be the genre in time will take all. Best favorable way homes will not know a type staff company, and the have expected for graphic taxes and amount...»

«Tiebreaker: Certification and Multiple Credit Ratings∗ DION BONGAERTS, K.J. MARTIJN CREMERS and WILLIAM N. GOETZMANN ABSTRACT This paper explores the economic role credit rating agencies play in the corporate bond market. We consider three existing theories about multiple ratings: information production, rating shopping and regulatory certification. Using differences in rating composition, default prediction and credit spread changes, our evidence only supports regulatory certification....»

«Entry-Deterring Capacity in the Texas Lodging Industry MICHAEL CONLIN Department of Economics Michigan State University East Lansing, MI 48824 conlinmi@msu.edu VRINDA KADIYALI Johnson Graduate School of Management Cornell University Ithaca, NY 14853 kadiyali@cornell.edu This paper empirically tests whether capacity is used to deter entry and whether the amount invested in entry-deterring capacity is related to market concentration and market presence. We use a unique dataset containing 3,830...»

«Emergence of Networks and Market Institutions in a Large Virtual Economy∗ Curtis Kephart† Daniel Friedman‡ Matt Baumer§ University of California Santa Cruz November 8, 2015 Abstract A complete set of transactions, more than 40 million within a 1.8 year span, allows us to track the evolution of the trader network and the goods network in an on-line trading community. The computer platform was designed to make barter exchange as attractive as possible; money was not part of the design and...»

«Contracts Intelligence. Now.  Embrace the Complexity of Business Relationships to Gain Advantage Relationships are essential to any company’s business success. Creating and growing relationships with customers, of course, is at the core of every company’s mission; in fact, this is why businesses exist. Other relationships—with suppliers, for example—often are just as critical. In today’s environment, business relationships are necessarily varied and complex. Market conditions,...»

<<  HOME   |    CONTACTS
2016 www.dis.xlibx.info - Thesis, dissertations, books

Materials of this site are available for review, all rights belong to their respective owners.
If you do not agree with the fact that your material is placed on this site, please, email us, we will within 1-2 business days delete him.