Where Do Electronic Markets Come from? Steps Towards Political Sociology of Financial Exchanges

We are witnessing a transformation in the way economic transactions are being carried out. In a wide variety of areas, from hotel accommodation to financial markets, we see a decline in the traditional fixed role markets – where buyers and sellers are set in their roles – and a rise of different models. These new models of transactions are varies, but underling them is a common historical process – a reconfiguration of the roles of the economic intermediaries that facilitate transactions.

The underpinning theoretical claim of the paper is that financial exchanges depends on their ability to differentiate effectively between the roles of the exchange and those of the traders. In particular, the role/function that was most closely protected by the exchanges was the ability to facilitate transactions.

To maintain the capacity of trading facilitation, exchanges aimed to maintain control over access to products and access to potential trading counterparties. First, the aimed exclusivity of access to products was meant to attract transacting parties (e.g. for decades, the NYSE was the only venue where GM stocks were traded on a regular basis). Second, the control over membership aimed to regulate the conditions of trading (e.g. operating hours, commitments of specialists). Trade facilitation, thus, is based on the ability to distinguish between the providers of access to products and counterparties and the users of such provisions. The exchange may maintain the differentiation by establishing status groups into the structure of the organization. Status groups can be seen as exclusionary structures that produce practices that signal who can legitimately perform certain actions who has access to “ideal or material goods” (Weber 1972, p. 537) (Podolny 1994). Similarly, differentiation can be produced through coding into techno-social structures (Lessing 2005, Latour 2005, Mitchell 2002).

The case we analyse is the discourse that surrounded the design and approval of Regulation Alternative Trading System (henceforth, Reg ATS) – a set of regulatory directives authorised by the US Securities and Exchanges Commission (SEC) in 1998. We identify the case of Reg ATS as a pivotal episode at which ‘traditional’ financial exchanges (i.e. ones that used trading floors) could no longer differentiate effectively between their roles and that of their customers. The resulting change in the regulatory and legal discourses redefined financial exchanges in such a way that gave electronic trading organizations access to customers’ orders that previously had been available only to exchanges with trading floors. This step contributed to an exponential growth in the popularity of electronic trading, to a shifting in trading practices from trading floors to computerized trading and, ultimately, to the financial markets as we know them today. How Reg ATS took its ultimate shape we intend to shed light not only on financial markets, but, more broadly on the processes through which markets change. We are using the particular historical set of events of Reg ATS as an empirical basis for developing theoretical insights about the conditions that enable and frame the changes in markets.