Politics of Market Design

Mackenzie believed that the study of financial markets was inspired by social studies of science and technology. He argued that the study of financial markets was based on ten principles. The first principle was that facts were considered necessary in the study of finance. Circumstances that were present in the financial markets were regarded as weak when compared to those of science. Mackenzie claimed that the British Bankers Association LIBOR was able to start electronic dissemination of data. This was done through the help of multiple data providers. It was now possible for millions of people all over the world to ensure that numbers that were calculated in the London office appeared on the screen. People who were involved in that did not view figures that appeared on screen to have any problems. They were satisfied that large sums of money would change hands based on what was projected on the screen. LIBOR, London Interbank Offered Rate, was a produced fact rather than something that was stumbled upon. However, LIBOR had its share of controversy, especially during the credit crisis. Due to the massive amount of money handled by LIBOR, there were little doubts facing information from the London office. Despite this, not all attempts to ensure that market numbers were factual bore fruit. This was witnessed in the Cheddar cheese auction that took place in Chicago. Though cheese action was not considered an urgent matter, the auction was necessary even to dairy farmers. The American government relied on the results of the sale to determine minimum prices that milk farmers would receive. In 2006, controversy emerged concerning the auction. Farmers claimed that few buyers were setting the price in such a thin market. The accusation by traders was based on the fact that results of the auction were not factual. It is essential for market numbers to be accurate (Wohlgemuth, Berger, and Wenzel, 2016).

The second precept was that all actors had to be embodied. Here, all markets were considered as a combination of physical objects and human beings. In markets such as trading pits, it is hard to notice the embodiment. Essential skills of a pit trader such as his physical attributes are necessary for these markets. In LIBOR, calculations are mainly influenced heavily by brokers. Though brokers enable their clients to trade electronically, ‘voice brokering’ is also important. Brokers often sit together in an office analysing related markets and are always in contact with clients. The main work of brokers is not to trade but to identify the needs of clients. Therefore, the broker has to foster a relationship with their respective clients. Another crucial skill that is necessary for such a market is the ability to have a ‘broker’s ear.’ The broker should be able to observe what his fellow brokers are doing while communicating with the client at the same time. Hearing other observations is essential as one can acquire the latest information from the market and share it with a client. The client, the broker, and understanding of the market conditions are very vital. The third precept is that the equipment is critical. Equipment such as trading screens of the stock ticker was significant. The stocker ticker and trading screen solved the problem of not being at two places at once (Preda, 2006: Wells, 2000, 200).

Introduction of this equipment ensured that behaviours in markets were more efficient. They also reshaped markets. Tickers provided securities, their prices, and volumes of trade were printed on a piece of paper. Price changes were available in real time to anyone as opposed to before where one had to be physically present during trading. Tickers allowed for the development of patterns from price graphs. Models developed were claimed to predict how markets responded to certain conditions. Trading screens ensured that the market was not found in many places but one which was on the screen. The human brain is prone to memory loss. Therefore, economic agents must come up with ways of coping with this limitation. Organisations should consider algorithms that perform automatic pricing and trading (Shleifer, 2000:.

According to Mackenzie, economics could do things. Economics can offer a helpful analysis of markets. Economic models are tools that are used by market players, and they normally have an impact on the market. People who have studied economics at university often think differently from those who have not considered it. Economic models for risk management and pricing affects people who do not understand or even believe in them. An excellent example to show that economics can do things is the establishment of emission permit markets. Unlike previously analysed markets, emission markets were not in existence and were developed by economists. The emergence of markets was necessary due to the effects they had on the environment and politics (Barrett and Walsham, 1999, 20). Another precept was that innovation was not linear. Mackenzie pointed out that change underwent specific steps. Firstly, scientists sought to discover features that are contained in the natural world. Technologists later deduced the discoveries and, they, then became inventions. Inventions would then have an impact on society.

The linear view of innovation came under very sharp criticism. It is claimed that when technologists relied upon science, they used it a resource rather than deducing the implications. Technologists wanted to fit technologies into their ‘context’ instead of responding to changes in technology. New trading mechanisms and financial products can be referred to as innovations. It is important to note that economics is a source of these innovations. However, economics is not the only source. Other factors range from cultural differences, the political process, to legal structures. Market design, as a political matter, is another precept that was advanced by Mackenzie. To have a clear understanding of this, the emphasis was placed on markets in carbon emissions. The existence of such markets is being challenged politically although not with the required force. The rules that govern their presence are a political matter. Another precept that was developed states that scales are not stable. Politics of markets tended to divide phenomena into small and large. Small phenomena were issues such as interpersonal reactions while an example of huge events was capitalism. People were made aware that it was impossible for such aspects to remain fixed.

Investing in financial markets requires a lot of knowledge and experience. One is required to be in touch with the happenings in the business world. A trader should have the ability to read charts and reports and understand trends. If one is not able to achieve this, then a lot of money may be lost. Social trading is an important tool to overcome such challenges. Social trading is more of a social network where people share trading ideas. Social trading is important to a less experienced investor as their financial decisions are based on others. Moreover, social trading platforms are tools through which brokers can benefit from. On this platform, there is a low probability of losing money. Hence, traders are not reluctant to join. Brokers can take advantage of this and gain new clients by communicating and building trust. New traders on these platforms tend to follow the broker who is experienced. Brokers who maintain a good image are likely to have more clients following them (MacKenzie, Beunza, and Hardie, 2008, 89: Oehler, Horn, and Wendt, 2016).

Social trading platforms are filled with traders from all over the world. This may increase the trading activities of brokers as dealers are from different time zones. Trading platforms ensure that there is constant communication between the broker and the clients. The platform provides that the broker keeps his clients updated concerning market changes. Traders will appreciate this as they are aware that their analysis of the market is up to date. Through trading platforms, brokers must ensure that their customers are also making money. This motivates traders not to keep on changing brokers. Social trading platforms ensure that brokers set stop levels to manage risks. Failure to use stop levels exposes traders to unlimited risks. Hence, a broker might lose customers. Social trading assists brokers to lower their attrition rates. By reducing these rates, they can retain their customers by providing a community in which they feel a part of (Berndt and Boeckler, 2011, 559: Black, 1986, 529).

Social trading may also present a challenge to brokers. Traders are not in physical contact with their broker. This leads to lack of trust between the trader and the client, thus discouraging people from using social trading platforms. Due to the higher number of trading platforms, it is difficult for traders to choose the right platform. This poses a challenge to brokers who are not on public platforms as they lack business (Breslau, 2013, 830: Bryant, G., 2016, 880: Çalışkan and Callon, 2010, 30).

Moreover, traders are not aware of the conditions in which the brokers are trading in. Brokers may be engaging in high-risk trading, and this might subject the trader to an unlimited number of risks. Traders do not know the capital investments of their brokers. This implies that they do not know their trading strategies. This results in certain traders fearing to follow certain brokers. Stockbrokers are usually sales people and are paid according to how they make revenue (Hanson, 2003: Knorr-Cetina, and Bruegger, 2002). No matter how well they may talk to clients, they are out to make revenue from them. People who lacked the best interests of the trader are only out to exploit and earn from them. Other brokers may engage in buying and selling of stock to generate commission. This is referred to as churning, and it is usually beneficial to brokers but not customers. The success of brokers is not entirely long term. If a particular broker was always successful and suddenly starts to make losses, then he/she loses clients. This is not favourable to brokers as traders who relied on them lack the confidence to trade with them (MacKenzie, 2008: MacKenzie, 2009).

Social trading is not a perfect way of transaction. A trader is not guaranteed that they are going to earn profits by copying successful traders. One is advised to learn how to develop strategies, making their trades, and managing risk. Social trading should be seen as a tool that a person should not follow blindly. Information obtained from such platforms can be used to one’s advantage. Therefore, a trader should not just follow other people’s recommendations.





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