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Finance as circulating formulas

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Finance as circulating formulas

Vincent-antonin lépinay

    CSI ENSMP

    lepinay@paris.ensmp.fr

     1Finance as circulating formulas

     rdthPaper presented at the Columbia conference, May 3-4 2002.

    Very provisional draft, please do not circulate without permission. A longer version will be circulated before the conference.

Summary

    in this paper, we describe how a financial innovation launched by a French bank has triggered a series of major changes in the financial industry.

    We have followed the various loci of this innovation, the places where it took shape and where it reshaped the bank itself (the trading of the new product, its accounting and its own economy) , the financial market and even the labor market of the financial operators. As we track this formula along its numerous places of impact, we observe how it slowly transforms into a social form as it stabilizes.

    We use this analysis to develop a model of changes that links four different levels formulation (or formulas in the making) formulas formalism form

The locus of Finance

    The discourse on "financial globalization" raises question about the locus of this enactment of

    circulation of securities (bonds, equities and all the more refined recent innovations of the last twenty years) which stand for goods, people working in the companies securitized, companies themselves etc, these latter being far less mobile than the lines of calculus of an account. But these lines are nonetheless deeply rooted and firmly located in a series of places that call for

    attention if one wants to understand how this new mobility of capital transforms these places and, conversely, how these places shape this mobility.

    We want to scrutinize these places because we know that different market configurations and 2market organization have effects on the market values. It is a way to build a bridge with

    economists but it is also a way to deepen our understanding of the ways markets work. Hence the places of Finance seemed very good entry points to understand two intertwined elements. First, the huge variety of markets and the irreducible qualities of different market organizations.

    Second, the material conditions that hold these organizations together. The thickest description of one of the numerous financial markets that one can observe would bring a rich set of information and an unprecedented understanding into the necessary conditions for a market to hold water. It would balance the naïve picture of a financial sphere detached of all worldly realities, and maneuvering the real beings (blood and flesh) from above. So we decided to build our way into Finance through a simple question, where does it happen? But this said, it is necessary to warn the reader. The presentation of our way into Finance could raise expectations about the conditions and places of Finance, and I am afraid it will not fulfill any of these expectations.

     1 As we were finishing this paper, we discovered the amazing Melville' short stories Bartleby and its

    mesmerizing formula "I would prefer not to". It literally moves the world : the narrator, the office, the relationship between the copyists. It is in all the meaning attachable to this word a moving formula. 2 See Michel Callon' introduction to the Laws of the Markets and the cement market analyzed by Dumez and

    Jeunemaître in the same book.

    Demonstrating the irreducible qualities of markets with different configurations is not possible. The experimental conditions are not met and the focus we adopt to compare different markets doesn't allow for a simulation. As we will see, it is definitely the limit of this analysis : it claims to speak the tongue of the economists, the tongue of prices, but it can't set any definite experimental conclusion.

    The second warning targets the meaning one should give to "practical conditions" of Finance. A sociologist, an anthropologist or an historian can not but feel at ease when it comes to explaining practices with conditions, surroundings, in a nutshell the "frame" that support the actions. It is the social sciences lingua franca and one would hardly dare raise any doubt

    about its fruitfulness. But our research steps aside of this long standing tradition. Fortunately, it meets another tradition that has studied fields and objects very close to Finance. As resorting to the "practical conditions" of Finance opens on a wide variety of sociologies, we have to explain in which sense we use it. A slight "detour" to the science studies will help us clarify the use "practical conditions of Finance". But before bringing to the fore the apparatus of SSS, we need to say how it will be useful for our study of Finance.

    The entry chosen so far conditions of financial activities - could lead us into different kind of approaches. Either focusing on cultures (see Abolafia, Hasselstrom and Assoun for a good illustration of its outcome), on careers (see Godechot, Kleiner) or on networks (see White, 1984) we would have grasped Finance through a common feature and we would have run the risk of downplaying the specific traits of the financial practices as such. One of the striking feature of the new interest for the sociology of Finance lies in its sometimes naïve discovery of a world that share most of the non financial world characteristics. Of course Finance is full of cultures (male dominant, aggressive, etc), of course, one can find nearly all the structures ruling the non financial spheres in Finance, but is it worth these painful field works, these aggressive interviewee behaviors when they are not really exhausting if one squeeze out

    of these moments nothing more than that ? If getting into Finance should teach us nothing more than the information that traders too use nicknames (see Hassoun, 2001), then it may not be worth all that noise.

    So, pulling back Finance to its social conditions may not be such a progress and we may miss completely what it produces, the kind of novelty that Finance bring forth and to paraphrase 3Whitehead, the "event-Finance" may slip into our fingers as we try to catch it using

    categories that were not forged with a view to understand it.

    As a balance to the loci and conditions of Finance, we needed to understand what was specific to Finance in order to seize it at its joint and not too arbitrarily. We decided to focus on the formulas of Finance. It didn't amount to put an end to the rigorous attempt to step aside of the sloppy discourse around "globalization". It is simply the recognition of the nature of financial markets we came to analyze. We wouldn't make justice to this activity if we were to cut it into ready made categories. Instead, the focus on the formulas of Finance allowed us to investigate the tension between the dislocation of Finance (slight price changes in Tokyo flow to Madrid in a couple of second and there it triggers huge changes on markets physically unrelated to Tokyo prices) and the very material conditions of its places (at each step of this long chain running from Tokyo to Madrid an individual must facilitate this quick process, a machine must work properly to issue a stable account of the process, etc ). Formulas are tied to the

    circulation, they are invented to bridge gaps, to take advantage of discrepancies and incoherence on the various financial markets. Their greed looks at all the financial places at once and they are relentless. But they are also tied to the "material conditions"; they flow

    instantly, at the speed of the light or … of an electrical signal but they are attached to this signal. If the electric power of the bank breaks down, formulas fall down.

     3 On Whitehead, see the forthcoming study of Isabelle Stengers. The notion of event and the consequences it has for the social sciences is found in Whitehead, Alfred North. 1925 (réédition 1967). Science and the Modern

    World : Lowell Lectures. New York: MacMillan.

    These twofold formulas seemed like the accurate threads to follow for all these reasons. But there is one more reason that pushed us in their direction. If we wanted to understand the dynamics of financial markets and it looks like a non trivial dimension with respect to the

    changes that have been occurring over the last 20 years we needed to find the origin of these 4changes. Drawing on a principle provided by Michel Callon, we didn't find better vessel to

    track the changes than the financial products themselves.

    The focus on the circulating formulas allows to cast light on a couple of questions raised by the changes that took place over the last 20 years.

    What are the causes of these changes?

    How did the changes in different places were mutually related?

    The answer to these questions immediately directs us towards a social theory. The focus on formulas also implies a special social theory that needs to be clarified.

The science studies framework : the locus of generality 5The Science Studies have investigated for now more than two decades the places of science ;

    this strand of research has cast light on places that seemed irrelevant with regard to the generality of scientific statement. Going against a rigid epistemology and exploring the laboratories and the other places where sciences are elaborated, it helped understand how general formulas could flow from the dirty places of the labs to more stable realms and more stable forms. Thanks to a renewed attention to the materiality of sciences, the science studies opened the door for a description of formulas equipped with instruments, people, rules etc. At 6this stage, it is not our purpose to go into a detailed analysis of the varieties of this strand of

    research, rather to use it in its endeavor to explain how the general formulas of Finance are neither free floating and self demonstrating (a thesis defended by the epistemologist and the

    "anti-globalization" chorus) nor pure social constructs (a thesis defended by some social

    science researchers). To sum our understanding of science studies and the way we use it, formulas make differences to the world, but they are also very expensive and demanding when 7they aim at being general.

     4 The focus on the products (shifting, redefined, transitory) is a methodology that doesn't apply only to Finance. It is a general methods to describe changes as soon as we can detect the circulation of an item, be it a service, a good, a person or a formulas. 5 Geography is far ahead of what is available in sociology of Finance. See for example Leyshon, Andrew and Nigel Thrift. 1997. Money/Space : Geographies of Monetary transformation. London: Routledge. Thrift, Nigel.

    1998. “Virtual Capitalism : The Globalisation of Business Knowledge.” Pp. 161-186 in Virtualism. A New

    Political Economy, edited by J. carrier and d. Miller. Oxford: Berg. 6 The social science spectrum is very wide. Sometimes Science Studies take up "materiality" in a critical stance, as a way to look down upon science and its arrogance. In this case, materiality is used as a downplaying of the undue claims of Science: its sharpest version is a teinted with irony and goes usually like this "science is nothing more than an mundane practice, have a look at the labs, at the trash of the scientists and at their notebooks, they are nothing more than tickering", for a critical perspective on Science, see Pinch, Trevor and Harry Collins. 1994. Tout ce que vous devriez Savoir sur la Science. Paris: Editions du Seuil..

    There is another way into materiality and another use of it : it is not critical but it draws from the observation of its centrality in the circulation of general formulas a lesson about the ingredients of the World. From our point of view, the most promising analysis of this materiality takes advantage of the field of sciences (the ability to scrutinize the everyday work of scientists, the memory of their activity, the tracking of their records etc) to draw far reaching conclusions and helpful results with a view to reshape social theory. See Galison, Peter. 2000. “Einstein's Clocks: The Place of Time.” Critical Inquiry 26(Winter):355-389 and Galison, Peter. 1997. Image

    and Logic. Chicago: Chicago University Press.

     7 (faire un point sur le fait que les formules déforment)

From formulas to forms. The stabilization of formulas

    The focus on formulas prevents from difficulties that arise when one forgets them and looks only at the practical conditions of their exercise.

    In the course of this research we encounter emerging formulas that circulate across universes that can be deformed and reshaped. Of course, there can be cases where the universes crossed by formulas are not as sloppy. Cases where the world is already well stabilized and quite inflexible. It is even the majority of the cases. Formulas can leave the world unchanged and they can fail at moving it of even an inch. If we were to qualify these stable worlds, we could say that they are already occupied by forms that resist against the changes propelled by the moving formulas. The thrusts of the formulas have to defeat the ruling forms. But when the stability of the forms is too firm, it can't accept any reshaping. Not flexible enough, it breaks and it lets the field to the new formulas or it resists and the candidate formulas can't perform the world. It is really a conflict between competing forms and formulas just as there are conflicts of conatus in a spinozian world. Each formula that succeeds at grounding itself into a form and at securing its existence can live longer : it develops new formulas that back its strength, it literally produces new formalisms that theorize its reality. Otherwise, it can be superseded by any formulas that manages to ally sufficient ennemies to the current form. At this stage, a more precise definition is necessary to explain how forms, formalisms, formulas and formulas in the making we call it, improperly, formulations are linked together.

Typology

    The formulation is still very tentative and shifty. It is taking shape but it can very easily fall apart if the conditions for its holding are not met. The formulation claims a right to the existence but it can't claim the existence : it is still hesitating, it is on the side of the blur and the fuzzy. The bank is rife with these kinds of beings : it constantly produces new formulations that will either fall back into the darkness or take on an extra consistency and become a formula. The meaning of formulation are not fixed : still ambiguous, they can be pulled in different directions.

    At the other end of the spectrum, one finds the form.

    It is fixed, it is the realm of the routines and of the sleek combinations. Its investment is behind it : it is constantly maintained, cared for and sometimes repaired but it uses its current achievement to promote itself. The form is ruling a part of the world and as such it is superior to the candidates that rush to supersede it. The form is capitalizing on its past. It displays its existence as the best manifestation of its power. But, in contrast with the previous steps of this stabilization, the form is a composite of different matters. Whereas the formulation and the formula were primarily statements, the form is a much more complex being. In a famous 89article, Laurent Thévenot has described how the notion of form investment could be used to

     8 Thévenot, Laurent. 1986. “Les investissements de forme.” Pp. 21-71 in Les conventions économiques, vol. 29,

    Cahiers du Centre d'Etude de l'Emploi. Paris: PUF. 9 ? nous proposons une définition élargie de l’investissement qui puisse rendre compte de toute cette gamme d’opérations de mise en forme, en même temps que des immobilisations de capital habituellement désignées par

    ce terme. Le domaine de validité de la forme ainsi constituée apparaît ainsi, à côté de sa stabilité, comme une caractéristique fondamentale pour l’analyser ? (p.22). dans la suite de cet article l’auteur s’efforce de suivre tout

    le continuum des formes qui peuvent opérer cet investissement. La généralité de la forme est ainsi un élément central de sa force. Les conflits de formes et de formules se jouent aux nombres d’alliés qu’elles réussissent à

    mobiliser derrière elles. Leur généralité tient grandement à ce nombre d’alliés. Mais ces alliés dépendent aussi largement des prises que l’arrangement propre de ces formes –formules réservent. ? Et d’abord pourquoi avoir

    retenu le terme de forme qui peut paraître excessivement ambigu par la multiplicité des oppositions dans lesquelles il s’inscrit ? la réponse nous amène à un premier point caractéristique de notre recherche depuis les travaux passés réalisés sur le codage : notre souci à traiter de la capacité à entrer en équivalence (Thévenot, 1983) des êtres que nous souhaitons appréhender. Par extension, nous nous sommes servis de ce terme pour nommer d’un terme générique les êtres dotés de cette capacité. Nous l’avons choisi parce que nous entendions appréhender une variété d’êtres très étendue qui comprenne non seulement des catégories cognitives ou des outils de classement, mais également des êtres sociaux, coutumes, représentations sociales, personnes collectives

    describe a wide variety of economic organizations. The organization of enduring stability, enduring enough not to impose the new construction of a framework for the economic activities, can be well conveyed through this metaphor of a form. This metaphor accounts also for the necessity to guide the daily activities with paths already traced, with ready made structures. The form is a resource for the economic action as it stabilizes the world and saves a time otherwise used at the exploration of the likely issues of an uncertain world. The form is 10an operator of generality, which means temporal stability, extension of their validity and objectivity. But Behind this investment, there are investors and at this point our analysis and the fieldwork that lead to this metaphorical use of form depart. If the lesson of this article lies in the demonstration of the varieties that must be linked and made coherent in order to allow for the development of the economic coordination, the existence of a "formule 11d'investissement" (an investment formula) is far less clear for our case study.

    The bone of contention may turn around the locus of generality of a "formule d'investissement". We are not sure there are such places, from where these formulas would be elaborated. The experience we gained during our fieldworks would even convince us of the contrary. Of course, the bank is full of "formules d'investissement" and it gives reasons to the framework devised by Laurent Thévenot. But more often, it offers a different picture ; the bank is rife with formulas that circulate in the smallest places of the bank and of the markets. The difference comes from the effect of these circulating formulas: each one put forth its own "formule d'investissement".

    Let's try to sum up the differences between the form investment (and its "formule d'investissement") and the circulating formulas. In both the cases, generality (stability, extension and objectivity) is at stake but the "formules d'investissement" are accounting formulas and they base their calculus on the series of beings that are computed. The circulating formulas create a generality by diffusion to their contexts whereas the F d'I display a generality by gathering the beings. The circulating formulas reshape their contexts as they propose a new generality. Of course, these reshaping and deformations must be told in the tongue of the economy, with their costs, benefits and expectations of losses. But their originality stems from the absence of an explicit formulas that can summarize the nature of their economy. The forms that emerge after the interplay of these formulas shouldn't be described as investment : the horizon of these forms are far more fuzzy than what entails the notion of an investment.

    This comparison aimed solely at casting clearly our understanding of forms with respect to formulas.

    In between these two poles forms and formulations, there are the formulas and the formalisms.

    The formulation turns into a formula when it has reached a sufficient strength and when the shiftiness of its emergence has evolved into a firm commitment. To become a formula, it is necessary to collect power and to be backed by a population sufficiently powerful. When a formulation has found its audience, when it has reached this limit, it begins to circulate and to

    (Boltanski, 1982), des êtres juridiques ou institutionnels, règlements, conventions, mais aussi des objets techniques (…) Le terme de forme nous a semblé plus adéquat que d’autres pour comprendre cette variété et éviter les cassures suivant les oppositions entre symboliques et matériel ou culturel et technique. Si la forme scientifique ou juridique évoque bien la qualité qui attribue la capacité d’équivalence en ces matières, la forme d’un objet technique peut de même être entendue comme la configuration qui lui confère un état de généralité en

    tant que modèle, réglant les conditions d’assemblage avec d’autres objets dans des arrangements techniques efficaces. ?

     10 " …sans doute est-il nécessaire d'insister sur l'importance d'une différenciation des formes, et donc des formules d'investissement ou principes de généralité. Nous avons retenu ici trois paramêtres : la stabilité temporelle, l'extension de leur validité et leur objectivité." (p.64) 11 ? …notre proposition de considérer ces formes en relation avec un investissement selon une formule

    d’investissement qui mettrait en balance un coût ou un sacrifice nécessaire pour établir la capacité d’équivalence ou de généralité, et un rendement ou une économie attachée à l’usage de cette capacité ? (p.63)

    extend its domain. It is taken up by new people, it reaches new parts of the bank and inches by inches it increases its credibility. But the formula is always threatened by the possibility of an anti formula, a formula that would put forth a composition of the world entirely different. In case of non common ground between two formulas, one can supersede the other or the two formulas can keep on living as long as they don't overlap.

    The formalism are very close to the formulas. But whereas the formulas could be weakened by a misunderstanding or a by someone raising a question that was out of the formulas reach and scope, the formalism stabilizes the conditions of its exercise. So doing it protects itself against other formulas because it states itself the kind of trial to which it can be brought and the nature of the test that it can be submitted to. The formalism defines at once the conditions of the test and the beings that can be submitted. It fences off the forms and to use Thévenot criteria it indicates the extension and the objectivity (reality) of the world of the form. It should be clear at this stage that, to one form, several formalism can be attached; there is no one to one relation between these two steps.

    It should be also noted that the formalism is closer to the form than the formula. It reduces the varieties and the proliferation of the formulation, it frames it in a clear cut manner. It is definitely an operator of concreteness of the world of the form.

The performing formulas

    Before providing a well deserved illustration of the circulation, reshaping and transformation of these form(ulas), one point needs to be clarified. The focus on the formulas doesn't amount to neglecting its non verbal elements. The formulas is not more verbal than it is material or symbolical. The formulas acts as a recipe that binds together elements of very varied origins. 12(xx) Insisting on the materiality of these formulas should help us avoid the trap of what a

    critical sociology has called "nominalism". Let's develop a little longer this bone of contention around the formulas to clarify what an anthropology of formulas could provide to an anthropology of forms. If the formulas have as we think and claim effects on the world, if

    they perform it and not only the realm of formulas there are undoubtedly consequences for

    the social theory to be drawn. Speech acts have effects on the social forms, although there are not coined out of the same matter. This heterogeneity is troublesome for the sociologist of the social because it goes against the grain of a firm durkheimian principle that teaches to explain social phenomenon using social factors. One understands easily how the study of the continuum formulations- -forms- and the demonstration of its mix nature that crosses the

    ready made categories (social, verbal, material, symbolic) are immediately labeled as a pre 13sociological endeavor. The response given by Pierre Bourdieu to Austin summarizes quite

    clearly the sociological stance that we introduced quickly: the meanings of the statements depend entirely on their social position in a contest of enunciation that is ruled by the inequality of amount and qualities of capitals. To be completely clear, it is the position of the agents that tells the position of the statement ; this latter is nothing but the production (verbal 14production) of the person. The relative positions of the statements themselves are

    completely irrelevant. What is, our naïve position then?

    Simply the recognition that the verbal elements are rich of a "capacity" to shape the social. Of course, once this recognition is set, it is no longer possible to delineate the social and to

     12 To be as quick as unfair, the trap of nominalism consists in taking the words and the verbal elements for the social. Instead of doing research on the social layer of the world, the nominalist is mislead by its verbal layer. One sees immediately why a sociology of formulas is monstrous for this school and why it is sheer journalism. 13 Bourdieu, Pierre. 1982. Ce que Parler veut Dire : L'Economie des Echanges Linguistiques. Paris: Fayard. 14 The sociology developed by Pierre Bourdieu has a quite refined version of the social spaces (positions, dynamics…) of the persons but it doesn't allow the equipments of the persons to stand apart and to display a different space. Only the humans have the capacities to give sense to these spaces. For a research that attempts to make justice to the relative positions of the equipments of the persons, see the oustanding recent works of Andreï Mogoutov using the software Reseau-Lu.

    oppose it to an other sphere. That is why, we feel necessary to restate our position and to remind the reader that, in our view, the formulas are not only "verbal".

    As it turns into forms, the verbality of the formula get grounded. Words become rules, habits, very concrete piece.

    But the success of the formulas depends also on its material caracteristics. (xx)

Two ways of circulation

    As we have seen, the ability to circulate depends primarily on the interplay of the world and the caracteristics of the formula itself. Here we can formulate a short typology of these circulations.

; The ductility of the world can be the source

    ; The compatibility of different formulas acts as a resource for the reinforcement of one of

    both of them.

    ; The interpretation of the formulas and formulations can help their circulation. It is the 15solution chosen by the "boundary object" analysis. One formula manage to fit different

    requirement and needs by the sheer interpretation that the people have of it.

    In this latter solution, the real features of the formulas are not relevant because, people never reaches up to this layer reality of the formula and the interpretation does all the job. One

    sees also how this "boundary formula" solution is nearly the opposite' of the ductility of the world possibility. This latter solution changes the burden of the interpretation : if it were the different group of people who interpreted according different understanding one binding formula and thus multiplied it (each group had its formula), the first solution reverses the ductility. It is no longer the formula that lends itself to this variety but, now, the world itself. That is why we can say that formulas define their contexts and bend them.

    These three cases can obviously be mixed and they are often.

To be developed : contexts can be more or less flexible

Case studies

    In order to illustrate this theoretical framework, we will now brush a very simplified sketch of the circulation we analyzed in and out of our fieldwork.

    Our formulas were the new exotic products launched by the Société Générale in the 90s. We took up their circulation at a time when it had already produced much of its effect. It had changed the bank, but it had also changed most of the other banks of this sector (derivatives) and the regulators had also been hit by the innovation triggered once by a couple of banks. I will just cast light on a couple of places and moments when these changes are made most visible. Although I used to say that I follow the formulas across all these places, the story is 16slightly more complicated. It is really difficult to spot a series of places linked by this

    circulation like in a domino game. I am clearly aware that this whirl-like diffusion is a challenge to the kind of underlying theory I am trying to develop. I ask the reader to wait until the end of the illustration to make up is own idea.

Pedagogy of a formula

    During the 90s, a large number of curricula have been created in mathematical finance to train new students to the newly discipline, no longer mathematics or the various types of applied mathematics, nor accounting and finance (what the French curricula call institutional finance,

     15 See the seminal article on boundaries objects, Star, Susan Leigh and James Griesemer. 1989. “Institutional

    ecology, "translations" and boundary objects : amateurs and professionals in berkeley's museum of vertebrate zoology, 1907-39.” Social studies of science 19:387-420. 16 More difficult still is the attempt to spot a starting point

    similar to the corporate finance of the US curricula), a really new beast. The first French master degree in this discipline was launched in 1990 and was quickly followed by curricula in most "Grandes Ecoles". The transformation in the discipline was obvious : no other sub field in mathematics grew as quickly, except the statistics dept pulled by the demand of the gene theorists and the numeric analysis. But these latter two subdisciplines didn't create as many dept as the mathematical finance. Where did the changes come from? What triggered this massive transformation? Here we have to test our formula-driven analysis of the change. To begin with, one must recognize the conditions, the state of the mathematical and physicist discipline when the financial formula came to challenge them.

    In mathematics, some problems had been dropped for lack of challenge. Two exemples can be given of this exhaustion of a couple of domain : optimization and arbitrage. In 1984, nearly all mathematicians thought that the main results had been produced in optimization and the theory of arbitrage was still not a hot topic. A couple of very important articles had been published, Harrison and Kreps had paced the way to a renewed interest but the French school was not yet at work. This field was nearly at a stop.

    The incentive came in 1986 during two conferences given by Ianis Karatzas : he explained how should a "call" be priced and how to optimize a portfolio under constraints. All the 17academics that were listening to the conference told me how it influenced their understanding of the challenges innovations in finance (a call) posed to mathematics. After this conference, Nicole El Karoui took a year off and entered the French public bank Caisse des Dépôts et Consignations (CDC) where she learned how to work with non mathematicians. When she went back to the University, she informed the other mathematicians of the work to be done in this field.

    As a growing number of mathematicians started studying mathematical Finance, research in this domain began to flow back to the "pure" mathematics; this feed back is boasted by all the mathematicians I interviewed; for them, it is the proof that good research can be done with extra mathematical questions ("arbitraging", "pricing a call", "optimizing a portfolio").

    In physics, things changed later. The decreases of the offer for new positions in nuclear physics subsequent to the decreases of the military budgeting is undoubtedly a major cause of the arrival of young PhD student on the labor market. But another cause for the rush of the 18late 90s on quantitative finance comes from a family resemblance between the problems of

    matter physics and financial formalisms drawing on the heat equation. We find, here too, an example of feed back from the quantitative finance results to the original physics questions : the Palo Alto database that collects all the unpublished articles and working paper in physics is now literally flooded by articles tackling financial questions. (see references of the web site). To sum up this sketchy description of the changes experienced by the pedagogy of mathematical finance around the 90s, the salient elements need to be restated:

    ; There are clear contextual effects with the funding of the research in physics by the

    military. As this funding comes to an end, it directs the researchers towards another source

    of funding, the banking industry.

    ; The formulas initially introduced by the financial operators (derivatives) display family

    resemblance with the formalisms of stochastic calculus in mathematics and physics.

     17 they usually refer themselves as the "Paris School". Their leader is Nicole El Karoui, she was the first colaborate so intensely with the bank industry and she is clearly recognized as one of the leading mathematician on core question of the numeraire. 18 On the translation of physics formalisms into Finance, see the ongoing research of Donald MacKenzie et Yuval Millo. See MacKenzie, Donald. 2001. “Physics and Finance: S-Terms and Modern Finance as a Topic for

    Science Studies.” Science, Technology and Human Value (26):115-144. MacKenzie, Donald and Yuval Millo.

    2001. “Negociating a Market, Performing Theory: The Historical Sociology of a Financial Derivatives Exchange.” Under review at the American Journal of Sociology .

This effect of an exterior conditions ( funding by the military industry) is counterbalanced by

    an endogenous transformation. The banking industry manages to fund this research (and well

    paid researcher) because these formulas are really very lucrative. It is possible, to a certain extent, to account for the attraction of new academics in physics and mathematics without resorting excessively to any exterior element, i.e. elements that wouldn't be part of the story of this formula.

    In order to test this hypothesis, let's now turn to the economy of this industry. Following the development of these formulas, major changes took place not only on the academics labor market, but on the whole financial operators labor market.

The economy of the formulas

    The second field where we want to trace the effects of the creation of these products encompass the financial operator labor market as a whole and not only the academics'. The success of the products and the increase of the number of banks that set to issue them transformed radically the labor market for the banking industry. It became a major challenge for the HR dept at the end of the 90s, during the peak of the internet bubble : the shortage of operators on this portion of the labor market happened when all portions were already faced with the same kind of difficulties. But, once again, the success of the derivatives trading room and the expectations of important bonuses attracted most of the candidates; the other rooms of the bank couldn't find enough people to grow in capacities or even simply to manage the usual turn over. During the two years of field work I conducted, many instances of executive people willing to exchange their current position for a position in one of the derivatives room forced the HR dept to refuse in order to avoid the collapse of the non derivatives room. When the decision not to accept the demand for these changes was taken and firmly applied by the HR dept, there were many resignations. For a couple of weeks, there was a moment of panic ; the management didn't know exactly how to react and eventually they decided to increase the bids and to equal the offer made by the other major banks. The derivatives market was held principal guilty for the operators' salary heat. Most people admitted that the boom in the equity market was favoring a class of equity derivatives and building artificial results for the 19rooms that were dealing them. The old argument of the "bubble" was immediately raised.

    What credit can we grant to this interpretation ? Are the new derivatives traded in the equity dealing room responsible for the difficulties met in the recruitment of new operators ? The diffusion of the products and the ability of the major competitors of the banking industry to offer increasingly complex formulas to the clients had changed the rules of the game. When the Société Générale launched this activity, the bank was a market leader. It could draft the most qualified and competent operators because the derivatives activity had returns ever matched by the other rooms : the salary offered by these rooms were sufficiently above the market' to draw whoever the bank wanted. With the new competition, the returns of the French bank were no longer above the market. The big leading bank of England, United States, Germany and Japan had a financial power that allowed them to orient the market at their disposal. But, in a way similar to the previous instance of the dialectic circulation / context, the exterior factor were not completely exterior with respect to the "formula"; the success of the other competitors were mainly due to their activities in derivatives. It is the spreading of the formula across the boundaries of this bank that paced the way for this bubble. The usual spread of knowledge following a period of monopoly had turned ex followers into equal partners and even sometimes fierce competitors. (xx)

     19 For a very clever analysis of the bubble argument see Hertz, Ellen. 2000. “Stock Markets as "Simulacra".”

    TSANTSA (5):40-50.

The trading room relationships 20Here, we would like to propose a comparison between the rooms where these complex

    products were dealt and the rooms dealing plain vanilla derivatives. Actually, we draw from a set of observation we collected in the same room, but at different desks. Subsequently, the two activities (complex exotic and plain vanilla) were split in two different rooms. It will help explain the changes forced by the daily tasks required by the products (buying, selling, hedging etc).

    The main difference opposes the speed on the two desks and the way people communicate

    with each other and deal with their equipment (computers and software, various utilities, etc). The speed may not look, at first sight, as a primary quality of the working place but let's not forget that it is a world where slight delays in time can make huge differences in returns and in pay off (hence in bonuses).

    ; The plain vanilla desk usually tries to speed up all the intercourse. People use shortcuts

    when they refer to a stock, they know its quality is stabilized and the only thing they seek

    is the next minutes (or hours, for the little liquid stocks) profiles of their return. The

    equipment doesn't resist the traders: it is really the realm of the routines and of a playful

    activity.

    ; The exotic desk slows down all the activities. But this downward trend has far reaching

    effects: instead of shortcuts, the operators in charge of these products are always trying to

    go into their details and to explain how the products behave under certain circumstances.

    Whereas the PV traders who always tried to escape the intercourse, the Exotic traders and

    salespersons are usually gathered around one or several computers. They have to team up

    and this constraint is not always understood by the ex PV operators who are promoted to

    the exotics.

    When one studies the Back and Middle Office operators, the difference is strikingly similar and it even extends across the limit of the bank to reach the relationship with the clients. The sale process is changed by the new configuration of the product. (xx)

    I tried to find a good metaphor to tell the effects of these products, but it is not obvious. The first metaphor that came to me to describe this slowing down of the relationship was actually very bad: I used the metaphor of a bullet that penetrates into a thicker medium and which trajectory is bent and its speed is slew down. But it is quite the contrary : the change comes from the projectile itself. The metaphor that fits best this circulation is this: a heavy and opaque projectile penetrates into a medium that is initially characterized by the speed of the relationship and treatment of the beings and as it penetrates it entangles itself with the speedy beings of the medium… and slows them.

    The second difference involves the hedging practice entailed by the two different products. From a more technical point of view, it must be said that the configuration of the complex exotic products does no longer leave space for a classical hedging technique. The PV trader could generally hedge each line of his portfolio at a time. It doesn't mean that he didn't aggregate products of same characteristics but he never aggregated products of different characteristics. The bundles of products were always homogeneous. The Exotic products, instead, impose a new technique for the hedge. The traders are no longer able to hedge stock by stock. The number and the variety of stocks on their portfolio are too great to repeat the delta technique for each line. The bundles have to be built on the basis of their ease to be hedged. Usually it is also on a "financial place" basis : Paris' stocks, London' stocks, NYSE stocks and CBOE' stocks. This new way of hedging the complex products of the exotic desk turns this central moment of the traders' day into a very different thing. When he was

     20 We have already used this comparison for a different purpose, see Lépinay, Vincent-Antonin and Ellen Hertz. 2002. “Deception and its Preconditions: Issues raised by Financial Markets.” in Exchange, Deception and Self-

    Deception, edited by C. Gerschlager.

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