Policing the Markets

Inside the Black Box of Securities Enforcement

James Williams, James W. Williams

• Publisher: Routledge
• Year: 2012
• Print ISBN:
  9780415720182
• eBook ISBN:
  9781136482984
• Topic: Law
• Subtopic: Law Theory & Practice
• Index: Law

Set against the backdrop of the recurring waves of financial scandal and crisis to hit Canada, the US, the UK, and Europe over the last decade, this book examines the struggles of securities enforcement agencies to police the financial markets. While allegations of regulatory failure in this realm are commonplace and are well documented in policy and legal scholarship, James Williams seeks to move beyond these conventional accounts arguing that they are based on a limited view of the regulatory process and overlook the actual practices and dilemmas of enforcement work. Informed by interviews with police, regulators, lawyers, accountants, and investor advocates, along with a wealth of documentary materials, the book is rooted in a uniquely interdisciplinary social science perspective. Peering inside the black box of enforcement, it examines the organizational, professional, geographical, technological, and legal influences that shape securities enforcement as a distinctly knowledge-based enterprise. The result of these influences, Williams argues, is the production of a very particular vision of financial disorder which captures certain forms of misconduct while overlooking others, a reflection not of incompetence or capture but of the unique demands and constraints of the regulatory craft. Providing a very different, and much needed, account of the challenges faced by regulators and enforcement agencies, this book will be of enormous interest to current research on enforcement, regulation, and governance both within and beyond the financial realm.

Chapter 1

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Market matters

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Introduction

One of the great ironies of research on financial regulation and securities enforcement is the failure to take markets seriously. Indeed, this is an issue in the larger regulatory literature which tends to frame questions of regulation primarily in terms of law and legal departures while devoting less attention to the unique attributes of regulatory objects themselves. This approach may be tolerated, or at least is much less problematic, in areas of regulation such as industrial pollution or workplace health and safety where there is at least a certain discernible materiality to the practices in question. However, it creates serious difficulties in the context of securities regulation. Financial markets are unlike most other areas of economic activity, constituted as they are in terms of the circulation of ‘symbolic property’ (Ericson and Haggerty 1997: 199) and the distinct layerings of materiality and virtuality This first chapter seeks to fill this gap by examining the features of financial markets as a particular type of regulatory object, one that is far removed from the conventional view of finance as a rational space of economic exchange with emphasis placed instead on the social, geographical and technological embeddedness of markets as fields of play. This is the ground on which securities regulators must tread and which shapes both the possibilities and constraints of the enforcement enterprise. Given the foreignness of finance to the uninitiated, this task begins with a brief primer on the markets.

A brief primer on financial markets¹

As a quick perusal of any basic economics or finance text will reveal, financial markets are defined in terms of formal centres of exchange in which investors come together to buy and sell stakes in a variety of financial products or ‘securities’, including stocks, bonds, commodities and derivatives. These transactions take place in a variety of fora, the most recognizable of which are the organized exchanges which represent the primary institutional form of the markets and are divided into various areas of specialization. There are dedicated exchanges dealing primarily or exclusively in equities, commodities and derivatives. In addition to the formal exchanges, there are also a number of other trading venues including: (1) alternative trading systems (ATSs), which trade exchange-listed securities independently of the exchanges themselves based on the promise of superior price discovery and trade execution, among other perks; (2) the ‘dealer market’, which consists of trading in fixed-income products such as bonds, asset-backed securities and money market instruments; and (3) the ‘over-the-counter’ (OTC) market, where parties engage in private or ‘off board’ transactions while benefiting from minimal listing requirements and a decidedly light regulatory touch. Collectively, this ‘confederation of markets’ (Reichman 1993: 67) is integral to the economy financing corporations and governments, hedging risks and operational liabilities, as well as determining the value of companies and other financial entities in the form of published prices.

In addition to their varied morphology, there are a number of additional attributes that define financial markets and distinguish them from other forms of market-based exchange. First, in contrast with producer and consumer markets, ‘Financial markets are not primarily concerned with the production of goods or with their distribution to clients, but with the trading of financial instruments not designed for consumption’ (Knorr Cetina and Preda 2005: 4). These financial instruments are abstract, intangible and largely virtual in nature, representing ‘claims on future states of the world that they embody: rights to dividends from a corporation, to interest payments from a government and so on’ (MacKenzie 2007: 357). This trading on the basis of possible futures is relatively straightforward, in theory if not necessarily in execution, in the context of bread and butter products such as equities and bonds but becomes much more complex in the case of items such as derivatives whose value is determined through an intricate layering of different product futures and thus seemingly remote lines of financial fate.

Second, the transactions that make up financial markets are embedded in a dense interactional network consisting of a variety of players and intermediaries. At its most basic level, this includes issuers, the companies whose stocks (ownership stakes) or bonds (debt obligations) are issued for purchase and sale and the investors who buy and sell these financial stakes. These players are then surrounded by a host of middlemen (the gendering of which is appropriate here) responsible for organizing and executing these transactions and providing advisory services in return for which they receive a commission or percentage of the transaction’s value. This includes: (1) the investment banks who underwrite and issue new offerings; (2) the broker/dealers and financial advisers who execute the trades and offer advice on trading strategies and investment portfolios on behalf of retail and institutional investors; and (3) a cast of supporting professionals, ranging from the analysts and ratings agencies who value securities and rate corporate debt, to the lawyers and accountants who oversee corporate financial reporting and advise on the legal ramifications of deals and transactions. Thus, ‘creating and distributing a securities product combines a diverse set of actors and organizations into a single network organized around a particular, related product. Each actor has to be both responsive to the deal and also to the larger constellation of actors that embed his or her work’ (Reichman 1992: 255).

Third, following from the abstract and future-oriented nature of financial markets, information is a key determinant of value as products are priced on the basis of available information regarding both the product in question and larger economic conditions and circumstances. This linkage between information and financial value informs one of the most influential and long-standing philosophies of investment activity, the ‘efficient market hypothesis’. This theory holds that the prices of stocks and other financial products perfectly reflect all available information in the marketplace and that, as a result, it is impossible to ‘beat the market’ by searching for under- or over-valued stock: ‘The implication of the hypothesis is that shares are fairly priced, at any given moment, and so it is impossible, at least for the amateur investor, to find “bargains” and so beat the market with any consistency’ (Condon et al. 2005: 221). While ostensibly a theory of value, the efficient market hypothesis is also grounded in a view of the markets as highly rationalized spaces of economic exchange with investment decisions rooted in the assessment of objectively available market information, hence the status of investors as rational calculators and investing as an eminently rational activity (Preda 2009a). There is also a subtle normativity to this position as the markets are conceived as being entirely transparent and thus absent the informational asymmetries that would advantage some players over others. This fits with the view of markets as extensions of political democracies and is consistent with narratives of the evolving democratization of finance (Erturk et al. 2007). It is thus the presumptively rational nature of the markets and investing that is the hallmark of the efficient market hypothesis and which continues to inform the cultural imaginings of finance.

Cultural spaces and social spaces

Despite their deep penetration into professional and public consciousness, these representations of rational and transparent markets have come under fire in recent years in the form of behaviouralist theories of finance. Developed by finance scholars as a competing theory of investing, behaviouralist theories challenge the efficient market hypothesis on the grounds that it neglects not only the less rational dimensions of investing, including the impact of investor bias and herd instincts, but also fundamental asymmetries in the availability of information and thus buying and selling opportunities (Langevoort 2002). While this approach certainly opens the door to the social rather than purely economic roots of financial markets, it remains grounded in a rather narrow, individualized and ultimately economistic approach to investing.

For a much broader view of the social side of the markets and investing, a natural place to look would be the social sciences. And yet the relationship between sociology, and other social science disciplines, and the financial markets may best be described as one of benign neglect (Adler and Adler 1984; Baker 1984; Knorr Cetina and Preda 2005; Preda 2007). This oversight stems from a range of possible factors, including a belief that the markets are best left to economists, a view of finance as an overly complex and esoteric area of inquiry (Miller 2001; Preda 2007), a greater interest in producer and consumer markets (Knorr Cetina and Preda 2005) and/or the notion that, amidst a disciplinary orientation towards demystification, the influences of financial interests and dominant forms of political power on this social domain are so transparent as to be uninteresting. Moreover, where the markets have been taken seriously, most notably work in a political economy vein, there is a tendency to subscribe to a view of finance that is not all that different from that of orthodox economics, a point made by de Goede (2005):

The current literature in the broadly defined field of political economy insufficiently considers the socially and politically constructed nature of money and finance. In fact, many authors assume finance to be an autonomous sphere with clearly defined boundaries and take for granted the unproblematic existence of money, banknotes, credit, financial instruments, etc. as a material starting point to their inquiries (xxv).

Thus, with a handful of notable exceptions (eg Baker 1984, 1990; Abolafia 1996, 1998), social science scholars have devoted very little attention to financial markets and, to the extent that they have engaged with this domain, have tended to reify and rationalize finance in a manner that makes them rather awkward bedfellows with the economists.

Fortunately, this situation has changed quite dramatically of late with the emergence of what is variously described as ‘cultural economy’, ‘the social studies of finance’ or ‘the sociology of financial markets’. Situated within the larger tradition of economic sociology, and building on earlier contributions from authors such as White (1981), Granovetter (1985), and Fligstein (1996), this diverse body of work is grounded in an appreciation for the distinctiveness of finance and financial markets as a particular social and institutional site. Most critically, rather than approaching the markets as reified, hyper-rational domains catering to the interests of financial capital conceived as a relatively singular and homogeneous actor-subject, this tradition seeks to examine both the social, cultural and geographical dimensions of the markets, and the contextualities, contingencies and vulnerabilities of finance as ‘knowledge-producing webs of social relationships’ (Preda 2007: 507). Emphasis is thus placed on the discursive labours through which the markets are actively constituted and reproduced as rational, natural and scientific domains, on the grounding of finance in everyday practices of investing (Aitken 2007; Langley 2008a), on the unique forms of sociality underlying the markets and the role of interpretive communities in driving market exchanges (Knorr Cetina and Bruegger 2002) and on the ‘materiality’ (MacKenzie 2009) or what Beunza et al. (2006) refer to as ‘the technicality of financial markets: the role played in those markets by technologies and by systematic forms of knowledge; the concrete, material practices of trading, risk management and regulation’ (721, original emphasis). By exposing the material practices, interpretive dynamics and discursive performances at the root of finance, that is the work of production that underlies the markets, the objective of these authors is both to repoliticize that which appears natural and taken for granted (de Goede 2005) and to highlight points of vulnerability that unsettle the financial order of things. Having sketched the basic contours of this admittedly broad tradition, there are three key lines of research that are directly relevant to the study of securities enforcement undertaken in this book.

Interactional/Interpersonal

The first analytical tack involves the notion that financial markets are, at their root, complex social and informational networks. The most obvious manifestation of these social features of the markets are the forms of networking and interpersonal relationships that provide access to information that may not be available to the general public, or at least not available in a form conducive to profit-making opportunities:

The social organization of Wall Street … reveals little resemblance to the neoclassical imagery. The prevalence of network ties and the premium on inside information make market operations far from the ideal of individual utility maximization with perfect information. Indeed, stock markets across space and time are rife with political interventions, social networks, and power considerations.

(Lie 1997: 343)

This extends well beyond formally sanctionable activities such as insider trading to include what is euphemistically referred to as ‘information leakage’, as well as the more innocuous circulation of various bits of information, impressions and rumours. Rooted in a very different view of finance as a world of hunches and guesswork, and investing as the leveraging of relatively small and often imagined informational advantages (Abolafia 1996; Lie 1997; Leyshon and Thrift 1997; Thrift 2000; Zaloom 2003; Beunza and Stark 2005), the markets thus consist of socially constituted informational networks with information flows circulating through and across established relationships. As we will soon see, this complex layering of the informational and the social creates challenges for regulators lacking this more finely textured view of the markets.

A second insight offered by this tradition is that investment and trading decisions hinge not simply on the availability of information but on its interpretation as common or shared knowledge. As noted by Abolafia (1998) in a seminal contribution that prefigures the cultural economy tradition:

Once information has been gathered and sorted, traders employ a networking routine to see how others are perceiving the same or different information. They are in contact with a network of brokers, traders, salespeople, economists, and informants in government agencies. Traders are generally aware that it is not the correctness of the interpretation that counts, but rather the degree to which others will read the same information the same way (75).

Similar insights emerge from more recent ethnographic accounts of exchanges and trading rooms, which reveal that traders are regularly confronted with ‘informational ambiguities’ (Zaloom 2003: 61) and must thus contend with the task of ‘figuring out how to pull meaning from interminable streams of numbers’ (Pryke and du Gay 2007: 344; see also Zaloom 2003; Beunza and Stark 2005; Preda 2009b). These interpretive challenges have become more rather than less acute in recent years given the growing availability and volume of digitized, realtime market data (Pryke and du Gay 2007: 345; Knorr Cetina and Bruegger 2002; Sassen 2006; Zaloom 2006; Pryke 2010) and changes to the very organization of the markets. What were previously face-to-face exchanges are now highly automated digital networks where trading occurs under a cloak of anonymity through buy and sell orders matched automatically using sophisticated electronic trading systems (Zaloom 2003, 2006). Here social relationships and interpersonal networks, or what MacKenzie (2004) refers to as ‘social connectivities’ (83), remain crucial as informational ambiguities are negotiated through collective forms of ‘interpretive work’ (Sassen 2006: 359) or ‘communities of interpretation’ (Beunza and Stark 2003: 141). This interpretive labour hinges on the ability to make use of various cues and forms of intellectual shorthand as well as to impute motives to on-screen transactions, that is, to infer the ‘socially relevant attributes’ of trading activity (Preda 2009b). The markets are herein constituted as a kind of shared ‘narrative space’ (Zaloom 2003: 267), a further testament to the inherently social features of the markets even in their most digitized and thus ‘asocial’ form.

Geographical/Spatial

The notion that market transactions are dependent on localized interpretive communities and forms of social connectivity also figures prominently in a second research tradition in the sociology of markets. Emerging from the work of cultural and economic geographers, this is a stream that emphasizes the importance of place or space to the operation of financial markets which, despite their increasingly electronic form and global reach, nevertheless remain grounded in specific geographical locales. For evidence of this, authors such as Leyshon and Thrift (Thrift 1994, 2000; Thrift and Leyshon 1994) and Sassen (2004, 2006) point to the enduring status and significance of international financial centres such as New York, London and Tokyo:

Empirically what stands out in the evidence about the global financial markets after a decade and a half of deregulation, worldwide integration, and major advances in electronic trading is the extent of locational concentration and the premium firms are willing to pay to be in the major centres. Large shares of many financial markets are disproportionately concentrated in a few financial centres.

(Sassen 2004: 233)

This is certainly the case in Canada where the activities of the major banks and financial institutions are concentrated in a four block stretch of Bay Street in what is widely recognized as the financial district of downtown Toronto. The cultural geographers attribute the stability of these highly localized urban financial centres to the irreducible value of social contacts and connections which offer not only sources of information but also forms of social reflexivity, the ‘interpretations and inferences that come with bouncing off information among talented, informed people’ (Sassen 2004: 238) and which are only sustained by the kinds of face-to-face exchanges that occur in the meeting rooms and restaurants of the financial district (Thrift 1994; Thrift and Leyshon 1994; Sassen 2004). As noted by Thrift and Leyshon (1994), while there is a ‘disembedded electronic space … there is also a re-embedded set of meeting places (from restaurants to trading floors) where many of the practices of the first space have to be negotiated … These meeting places become soups of reflexivity, where people work hard to present themselves’ (311–12). Markets are thus defined by their geographical moorings with the social features of markets as information orders dependent on the forms of ‘spatial agglomeration’ (Sassen 2005: 26) that financial districts provide. For Thrift (1994), ‘International financial centres will continue because they satisfy essential communicative/interpretive needs that cannot be met through electronic communication. There will be no “end to geography’” (352). This of course begs the question of enforcement’s own spatial and geographical roots.

Calculative/Performative

A third course of analysis focuses less on the interactional and interpretive side of the markets and more on what authors such as MacKenzie (2009) refer to as their materialities. This includes the various mechanisms, devices and technologies through which the markets and finance are constituted and performed on a daily basis. Examples include recording technologies such as the stock ticker (Preda 2006), market indices including the Dow Jones In...

Table of contents

• Cover
• Halftitle
• Title
• Copyright
• Contents
• Preface
• Acknowledgements
• Introduction
• 1. Market matters
• 2. Mandates and mantras of securities enforcement
• 3. Inter-agency politics and jurisdictional boundaries
• 4. Symbolic capital, experience and expertise
• 5. Technologies, narratives and morality plays
• 6. Legal couplings and regulatory encounters
• 7. Regulatory vision and the politics of knowledgeability
• Conclusion
• References
• Index