A Price is a Social Thing: Towards a Material Sociology of Arbitrage

Abstract

Arbitrage is a form of trading crucial both to the modern theory of finance and to market practice, yet it has seldom been the focus of study outside of economics. This article draws upon four initially separate ethnographic and interview-based studies to sketch a ‘material sociology’ of arbitrage. (The article follows financial market usage in viewing ‘arbitrage’ as trading that exploits discrepancies in relative prices, trading which is seldom the entirely riskless arbitrage posited by finance theory.) Prices are physical entities, and the extent and speed of the mobility of these entities are crucial to arbitrage. Traders' bodies sometimes need to be trained to conduct arbitrage, and the relative placement of different bodies can be crucial. Arbitrage generally involves a theory of the similarity of different assets, and material representations of relative value are often required in order to check the theory's plausibility. Arbitrageurs need to convince themselves and others such as investment-bank managers — and sometimes traders working for different organizations — of the correctness of the theory. Among the reasons this is necessary is that an arbitrage position often incurs losses before it becomes profitable, and those who provide arbitrageurs with capital have to be persuaded that those losses are indeed temporary. Patterns of trust and information exchange among known others are thus consequential, and arbitrage also has wider social aspects, manifest for example in deliberately constructed barriers to the short sales often required for arbitrage. Sometimes, too, arbitrage impinges on informal norms of proper conduct in markets.

Credit rating agencies and the sovereign debt crisis: Performing the politics of creditworthiness through risk and uncertainty

“…Arguably, a primary appeal of ratings is as an inexpensive form of outsourced due diligence. Given the uncertainty in calculating the risk of sovereign default, bond fund managers and banks attempt to minimize such costs while searching for potential arbitrage opportunities (Beunza et al, 2006;Partnoy, 2006: 78). In addition to hedge-based and other investment strategies, ratings enable investors to capitalize on the variance in creditworthiness between Member States.…”

Sources of financial synchronism: Arbitrage theory and the promise of risk-free profit

“…This applies, for instance, to the institutionalization of calculative categories that function as frames for pricing (cf. Callon, 1998), as well as to the production of comparability of different financial products (Beunza et al, 2006(Beunza et al, , 2008. However, prior to such institutionalizations, pricing on financial markets depends on the confrontation between hypothetical prices generated by theoretical models (for instance, those of mathematical finance) and empirical prices observed in the market.…”

“…Crucially, however, Beunza et al (2006Beunza et al ( , 2008 have pointed out that the comparability between assets needs to be seen as socially constituted. Most contemporary arbitrage practices, they argue, do not refer to 'one and the same' product (like gold which may be priced differently in different markets) but to products that are construed as comparable in their market risk exposures (for instance, bonds of different states that are assumed to be exposed to the same market forces).…”

Market formation and governance in international financial markets: The case of OTC derivatives¹

“…In order to be available for selling on the market, an object or service must be bounded and limited; it must identify itself with certain characteristics that are transferred over the market and it must be freed from any loose or more social or moral obligations that might, in certain circumstances, cling to it. The market must then have a set of calculative practices and calculative machines which enable prices to be set that are legitimate, predictable and sustainable; where there are overflows which do not fit into the frame, actions are taken to identify, monitor and control these overflows in order to fit them back into the frame (see also Buenza, Hardie and MacKenzie 2006;Callon and Muniesa 2005;MacKenzie 2006;MacKenzie, Muniesa and Siu 2007). These approaches are highly suggestive and relevant to the study undertaken here.…”