TRANSACTION MACHINES THE INFRASTRUCTURE OF FINANCIAL MARKETS Bogdan Dragos PhD Thesis Centre for Cultural Studies Goldsmiths, University of London May 2016 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 complex machines in the broader sense, as systems for organizing informational flows and performing certain functions in regards to the processing of transactions. We focus on the transaction infrastructure of financial markets, on the flow architecture that allows transactions to happen in the first place. First, 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. 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. The thesis describes this sequence of functions as transaction machines, understood as complex socio- technical systems for the execution of financial transactions. This is achieved by leveraging a specific philosophical account of technology coupled with a computational and evolutionary account of financial markets. We ultimately focus two types of transaction machines, performing the matching and clearing of financial flows, acting as the infrastructure of financial markets. We also provide a sketch for an evolutionary trajectory of these machines, evolving under the demands and needs of marker participants. From medieval fairs to the millisecond electronic platforms of today, transaction machines have gradually transitioned from human- based ‘hardware’ to electronic automated platforms. Moreover, we also describe the complex power dynamics of contemporary transaction machines. In as much as they are the dominant hubs of global financial markets, the thesis argues for the necessity of a more granular account of the functioning and evolution of transaction machines. 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 What is a TransaCtion MaChine? ..................................................................................................... 14 Theory, History and EmpiriCal ........................................................................................................ 19 Chapters .................................................................................................................................................... 26 PART I: THEORY .............................................................................................................. 29 Chapter 1. Markets and Assemblages ............................................................................... 29 1.1 New Sociology of Finance ........................................................................................................... 30 1.2 AssemblaGe Theory and Markets ............................................................................................ 38 ConClusion ................................................................................................................................................ 45 Chapter 2. Technology and Individuation ....................................................................... 47 2.1 Philosophy of Individuation ...................................................................................................... 48 2.2 The Amplifying Relay and the Tendency of Concretization ........................................ 56 2.3 The Modes of Existence of TeChniCal ObjeCts .................................................................... 62 ConClusions .............................................................................................................................................. 69 Chapter 3. Markomata: Markets as Algorithms ............................................................. 72 3.1 Mirowski and Unorthodox EConomiCs ................................................................................. 73 3.2 John von Neumann’s Theory of Automata .......................................................................... 79 3.3 Market ECology ............................................................................................................................... 83 3.4 Experiments, Market MiCrostruCture and Zero IntelliGenCe ...................................... 86 3.5 Mirowski’s Markomata ................................................................................................................ 90 3.6 Markets as Evolving Computations ....................................................................................... 95 ConClusions .............................................................................................................................................. 99 PART II: HISTORY ......................................................................................................... 102 Chapter 4. Medieval Transaction Machines .................................................................. 102 4.1 Towns and Markets ................................................................................................................... 103 4.2 MerChants and Double-Entry Bookkeeping .................................................................... 106 4.3 MatChing: Brokers and Bourses ........................................................................................... 112 4.4 Clearing Fairs and Bills of ExChange .................................................................................. 119 ConClusions ........................................................................................................................................... 126 Chapter 5. Modern Exchanges ........................................................................................... 128 5.1 The London Stock ExChange .................................................................................................. 129 5.2 The New York Stock ExChange .............................................................................................. 133 5.3 Development of ECNs ............................................................................................................... 139 5.5 London, Paris and ChiCaGo ...................................................................................................... 145 5.4 NYSE and the Hybrid Market ................................................................................................. 151 ConClusions ........................................................................................................................................... 156 Chapter 6. Clearinghouses & CCPs ................................................................................... 158 6.1 Bank Clearing in London and New York ........................................................................... 159 5 6.2 Clearing the Stock Market ....................................................................................................... 165 6.3 Clearing Derivatives .................................................................................................................. 170 6.4 The Evolution of Clearing MaChines ................................................................................... 178 6.5 Clearing with Computers ......................................................................................................... 186 ConClusions ........................................................................................................................................... 191 PART III: CONTEMPORARY TRANSACTION MACHINES .................................... 193 Chapter 7. Matching in the Age of High Frequency Trading ...................................