NORTHWESTERN UNIVERSITY Working at Risk: An Ethnography of Making Markets in Chicago A DISSERTATION SUBMITTED TO THE GRADUATE SCHOOL IN PARTIAL FULFILLMENT OF THE REQUIREMENTS for the degree DOCTOR OF PHILOSOPHY Field of Anthropology By Gail E. Eby EVANSTON, ILLINOIS JUNE 2008 2 © Copyright by Gail E. Eby 2008 All Rights Reserved 3 ABSTRACT Working at Risk: An ethnography of making markets in Chicago Gail E. Eby This dissertation examines the role of market makers in making markets for options and futures on Chicago’s derivatives exchanges. Recent institutional and technological changes in the ways that financial products are traded have given rise to the possibility of markets without market makers, raising the question of how these developments alter the relationships between market participants, and the effects of those alterations. This dissertation draws upon ethnographic fieldwork with a group of market makers in options and in futures trading across Chicago’s derivatives exchanges. The research methods include interviews and participant observation, as well as gathering secondary data. I address first changes in the institutional setting of trade, drawing out the historical context of the acquisition of the Chicago Board of Trade by the Chicago Mercantile Exchange, looking at how the market itself is made. I then turn to the ways in which market makers experience their participation in their markets, and find that they confront four principal challenges. The first challenge is that of maintaining behavioral standards within a market. The second challenge is that of mastering the skills required to manage risk. The third challenge is that of self-management. The final challenge is that of changing technology, whether on the trading floor or in an electronic system. I found 4 that markets do not arise effortlessly, but are instead the outcome of a process of ongoing effort, negotiation and re-negotiation on the part of participants. 5 ACKNOWLEDGMENTS This dissertation has benefitted from the support and generosity of many people. I was fortunate to have an outstanding committee. Timothy Earle has been a wise and generous intellectual guide and mentor over two continents, two universities, two centuries, and over projects spanning the Neolithic to the present day. It seems appropriate that our final project together is one that looks toward the financial future. Helen Schwartzman has shared generously of her experience and insights, and kept both me and the project grounded and focused, seeing possibilities even when I did not. Robert Launay’s work on traders without trade helped me to understand the world of traders with trade; he also reminded me that anthropology should be serious, but it should also be fun. Northwestern has been a stimulating and collegial place to be a graduate student, due in no small part to the leadership of Bill Leonard; I owe him my thanks as well. At UCLA, my thinking about money and markets was shaped and sharpened by conversations with Jean-Laurent Rosenthal and with Stephen Munzer. At Northwestern, this project had its genesis in a class taught by Annelise Riles; I thank her and Hiro Miyazaki for introducing me to new ways of thinking about anthropology and financial markets. Thank you to Chris and Gwynne Attarian, Rob Beck, Maria Bidelman, Douglas Bolender, Marian Caudron, Beth Fulkerson, Patricia Hamlen, Kristina Kelertas, Josh 6 Kellman, Elise Levin, Anne Lovelace, Belinda Monahan, Karen Poulson, and Kara Reichart for your friendship. In the course of this project, I benefitted from the surgical skills of Dr. Edwin Kaplan and Dr. Ivan Ciric; I cannot thank them enough for their roles in making this work possible. My family has been extraordinarily supportive, emotionally and financially, throughout this rather lengthy process; this is as much their achievement as it is mine. I also benefitted from University Fellowships I received from Northwestern University. Finally, none of this would have been possible without the extraordinary participants. I owe you all an enormous debt of gratitude for introducing me to your craft, and for sharing your time and skills and wisdom and experience. I learned more from you than I could ever fit in a single dissertation, and I hope that this work has captured a small part of the reality of your lives and work. 7 For Jocelyn, Charles and William, with love 8 TABLE OF CONTENTS ABSTRACT ........................................................................................................................ 3 ACKNOWLEDGMENTS ................................................................................................... 5 CHAPTER 1: INTRODUCTION: WORKING AT RISK .................................................. 9 CHAPTER 2: EVENTFUL EXCHANGES ...................................................................... 39 CHAPTER 3: THE PRODUCTION OF VIRTUE ............................................................ 72 CHAPTER 4: LES JEUX SONT FAITS ....................................................................... 102 CHAPTER 5: DISCIPLINE AND PROSPER ................................................................ 137 CHAPTER 6: LIQUID MARKETS ............................................................................... 169 CHAPTER 7: CONCLUSION: FUTURES AND OPTIONS ....................................... 204 BIBLIOGRAPHY ........................................................................................................... 212 9 Chapter 1: Introduction: Working at Risk A central trope of the recent Western past has been the idea that markets work. Markets are commonly portrayed as natural, positive and powerful, as occurring inevitably wherever the fetters thought to constrain them are removed. If humans could be said to have a natural state, this line goes, it would be the Smithian propensity to truck and barter. This project arose in response to this trope of effortless, natural markets. The project sought to answer several questions: “How do markets work?” “How do they arise?” and “How are they maintained?” This project is far from the first to ask these questions and others like them, but they were asked of a setting that is relatively novel for anthropologists, the heart of contemporary finance, the derivatives markets of Chicago. There the questions were asked of some of the people most qualified to answer them, the actors who bring markets into being and maintain them, the category of economic actor known as market makers. The research was carried out at a critical period in the history of the exchanges in Chicago, between 2001 and 2003, with traders who made markets in both futures and options (and options on futures) in a range of markets across all of Chicago’s derivatives exchanges. This dissertation is an account of the ways in which those traders participated in making the markets that they traded, the challenges that they faced and the lessons that they learned, and imparted in turn, about the sum of their experience in how participants shape and are shaped by the economic action. 10 The global market This research was conducted across four contexts – the global derivatives market, the city of Chicago, the exchange trading floors of the city, and among market makers. The first of these contexts is the global market for derivatives. Most broadly, derivatives are financial instruments that change in value in relation to price movements in an underlying instrument (such as a stock). They derive their value from the underlying product, ergo the term derivative. In practice, the majority of derivatives traded on exchanges are futures contracts and options contracts. A futures contract is an agreement between two parties, a buyer and a seller, to exchange a particular good for a particular price at a particular date in the future (ergo “futures”). An options contract is similar to a futures contract except that the buyer pays to buy the contract, and has the right, but not the obligation, to take delivery. The buyer has the option to use the contract, but not the obligation (ergo “options”). The global market for derivatives is enormous and growing. In 1997, the value of traded derivatives was a staggering $360 trillion (Levin 2004:1) In 1998, the average daily turnover in the foreign exchange derivatives market was $1.5 trillion (Knorr Cetina and Bruegger 2002:906). In 1999, the notational value of derivatives traded in Chicago alone was $217 trillion; for comparison, the notional value of contracts traded on the New York Stock Exchange in the same period was $7 trillion (Bass 1999:13). MacKenzie and Millo report that “By June 2000, the total notational amount of 11 derivatives contracts outstanding worldwide was $108 trillion, the equivalent of $18,000 for every human being on earth” (MacKenzie and Millo 2003:109). Notational value of contracts tells part of the story; the other part of the story is the volume of contracts, which is the primary venue in which exchanges compete. As of May 2007, the volume of contracts traded on all exchanges worldwide reached 5.8 billion (Burns 2007:10-13). The leading exchange between January and May 2007 was the Korea Exchange, with 1,155.15 million contracts traded (up 1.38% from the year before), and the second largest the Frankfurt-based Eurex, with 774.28 million contracts (Burns 2007:10-13). The Chicago Mercantile Exchange was third with 650.75 million contracts (up 19.57%), the Chicago Board of Trade fourth with 393.38 million contracts (up 19.21%) and the Chicago Board Options Exchange was