In 2005, something revolutionary happened: activity in stock markets shifted from point-and-click trades generated by manual traders to automated exchanges engineered by algorithms that exploited speed and computation to produce profits. This was, in a sense, the birth of a trend that has defined much of the regulatory and technological activity in financial markets in recent years: high frequency trading.
Since 2010, I have been involved in a series of studies on the sociology of algorithmic and high frequency trading
, along with colleagues from LSE (Daniel Beunza), Leicester (Yuval Millo) and Edinburgh (Donald MacKenzie). In particular, we were involved in the production of two reports for the Foresight Project on the Future of Computer Trading in Financial Markets. These reports constitute the first recorded instance (to my admittedly partial knowledge) of sociological expertise being recruited to create evidence for the redesign of national economic policy. Our first report covered some of the larger aspects of high frequency trading, using the concept of impersonal efficiency as a key cultural driver that shaped the evolution of American and European markets in the late twentieth century. Based on ideas of technological efficiency and non-mediated market access, the pursuit of impersonal efficiency by regulators, economists and market participants eroded the institutional structures that gave credence to traditional forms of market activity. This led to the emergence of new risks, including the loss of norm enforcement and fragmented patterns of financial innovation. The complete report is available here.
Our second study reported on the findings from 15 structured interviews with prominent market participants active in high frequency trading. The report showed, in particular, some of the social structures that exist within the HFT community, as well as the criticality of technology and the second order uncertainties within the system. The second report is available here.
From these and related studies on high frequency trading, we have produced some articles, including one co-authored with Donald MacKenzie, Yuval Millo, Daniel Beunza and myself, available here, which explores some important aspects of the material sociology of price formation in HFT. Along with Daniel and Yuval, I am working on an article on impersonal efficiency that provides a clearer picture of the historical roots of HFT. Another work in progress concerns an article on fragmented innovation that argues that HFT implied a fundamental change in the ontology of financial markets which requires rethinking the way regulators understand the marketplace.