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Transaction Machines the Infrastructure Of TRANSACTION MACHINES THE INFRASTRUCTURE OF FINANCIAL MARKETS Bogdan Dragos PhD Thesis Centre for Cultural Studies Goldsmiths, University of London Declaration The work presented in this thesis is the candidate’s own. Bogdan Dragos London, October 2015 2 Abstract This thesis describes financial markets as technological systems in the broader sense, as ways of organizing informational flows and performing certain functions in regards to the processing of transactions. We focus on the transaction infrastructure of financial markets, sometimes called the ‘plumbing’ of finance, which allows transactions to happen. Firstly, in order for a financial market to function there needs to be some mechanism for aggregating and matching disparate transactional requests. Another mechanism is then needed in order to untangle and reduce the complexity of overlapping exposures between participants. This sequence of functions, composed of very specific step-by-step procedures and operations, represents the infrastructure of financial markets. The history of finance shows us that there are indeed certain patterns and regularities, procedures and mechanisms present in any system that processes financial transactions. To this aim, we put forward the notion of transaction machines, understood as complex technological systems for the execution of financial transactions. This is achieved by leveraging a specific philosophical account of technological systems coupled with a computational and evolutionary account markets. We ultimately focus two types of transaction machines, performing the matching and clearing of financial flows, allowing financial markets to work. We also provide a sketch for an evolutionary trajectory of these machines. From medieval fairs to the millisecond electronic platforms of today, transaction machines evolved under the demands and needs of marker participants. Moreover, we also describe the complex power dynamics of contemporary transaction machines, as they become the dominant hubs of global financial markets. 3 Acknowledgements This is dedicated to Ana, whose patience and support made the whole endeavour possible. This thesis would not have been possible without my colleagues from the Centre for Cultural Studies who provided an intellectually stimulating environment for the development of this thesis. In particular, I would like to thank Inigo, Sebastian, Carina and Matt. I would also like to thank my supervisor Scott Lash for his guidance and enthusiasm throughout this process. This thesis would not have been possible without a series of fortunate encounters with Bernard Stiegler and Philip Mirowski. Parts of Chapter 6 and 8 have been previously published1. 1 Dragos, B. and Wilkins, I. (2014) ‘An ecological/evolutionary perspective on high-frequency trading’, Journal of Sustainable Finance & Investment, 4(2), 161- 175. 4 Table of Contents Declaration ........................................................................................................ 2 Abstract ............................................................................................................. 3 Acknowledgements ............................................................................................ 4 Table of Contents ............................................................................................... 5 List of Figures ..................................................................................................... 7 Introduction ........................................................................................................... 8 Machines ............................................................................................................ 12 Transactions ....................................................................................................... 17 What is a Transaction Machine? ........................................................................ 20 PART I: THEORY ................................................................................................... 26 Chapter 1. Markets and Assemblages ............................................................... 26 1.1 New Economic Sociology .............................................................................. 27 1.2 Assemblage Theory and Markets ................................................................. 36 Conclusion .......................................................................................................... 43 Chapter 2. Technology and Individuation ......................................................... 45 2.1 Philosophy of Individuation .......................................................................... 46 2.2 The Amplifying Relay and the Tendency of Concretization .......................... 55 2.3 The Modes of Existence of Technical Objects .............................................. 61 Conclusions ......................................................................................................... 69 Chapter 3. Markomata: Markets as Algorithms ................................................ 73 3.1 Mirowski and Unorthodox Economics .......................................................... 74 3.2 John von Neumann’s Theory of Automata ................................................... 80 3.3 Auction Ecology ............................................................................................ 84 3.4 Experiments, Market Microstructure and Zero Intelligence ........................ 87 3.5 Mirowski’s Markomata ................................................................................. 92 3.6 Markets as Evolving Computations .............................................................. 97 Conclusions ....................................................................................................... 101 PART II: HISTORY ................................................................................................. 106 Chapter 4. Medieval Transaction Machines ..................................................... 106 4.1 Towns and Markets .................................................................................... 107 4.2 Merchants and Double-Entry Bookkeeping ................................................ 110 4.3 Matching: Brokers and Bourses .................................................................. 116 4.4 Clearing Fairs and Bills of Exchange ............................................................ 122 Conclusions ....................................................................................................... 128 Chapter 5. Modern Exchanges ......................................................................... 131 5.1 The London Stock Exchange ....................................................................... 132 5.2 The New York Stock Exchange .................................................................... 136 5.3 Development of ECNs ................................................................................. 144 5 5.4 NYSE and the Hybrid Market ...................................................................... 150 5.5 London, Paris and Chicago .......................................................................... 155 Conclusions ....................................................................................................... 161 Chapter 6. Clearinghouses & CCPs ................................................................... 164 6.1 Bank Clearing in London and New York ...................................................... 165 6.2 The Clearing of Stocks ................................................................................. 171 6.3 Clearing Derivatives .................................................................................... 177 6.4 The Evolution of Clearing in Chicago .......................................................... 185 6.5 Clearing with Computers ............................................................................ 192 Conclusions ....................................................................................................... 198 PART II: CONTEMPORARY TRANSACTION MACHINES .......................................... 201 Chapter 7. The Age of High Frequency Trading ................................................ 201 7.1 Algorithmic Ecosystem and Electronic Matching ....................................... 202 7.2 High Frequency Trading .............................................................................. 207 7.3 HFT Controversies ....................................................................................... 215 7.4 Flashes and Crashes .................................................................................... 220 Conclusions ....................................................................................................... 227 Chapter 8. Clearing OTC derivatives ................................................................ 229 8.1 OTC Derivatives .......................................................................................... 230 8.2 OTC Dealers and Central Clearing ............................................................... 236 8.3 Interviews on OTC Central Clearing Reforms ............................................. 240 8.3.1 Methods and themes ........................................................................... 240 8.3.2 Regulation ............................................................................................ 243 8.3.3 Standardization ...................................................................................
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