«6 Making Markets: Opportunism and Restraint on Wall Street Mitchel Y. Abolaﬁa Homo Economicus Unbound: Bond Traders on Wall Street Bond trader ...»
6 Making Markets:
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).
OPPORTUNISM AND RESTRAINT ONWALL STREETMy 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
OPPORTUNISM AND RESTRAINT ON WALL STREETfeeling 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.