Financial Markets and Organizational Technologies

The derivatives revolution, and the exponential growth of the trading of complex financial instruments in exchanges and over-the-counter in the 1990s, have significantly altered the technological image of finance. Financial engineering, trading technologies and telecommunication backbones of electronic financial networks are now defining many people’s perception of the use of information technologies in banks and in the wider financial sector (Bodie 1999). The former Chairman of the Federal Reserve, Alan Greenspan, one of the main figures of the modern capitalist era of rapid globalization and securitization, adopts a similar view. In his words, ‘information technology has made possible the creation, valuation, and exchange of complex financial products on a global basis heretofore envisioned only in our textbooks. […] Derivatives are obviously the most evident of the many products that technology has inspired. […] Calculation capabilities has permitted […] new ways to unbundle risk’ (Greenspan 2000: 109). Yet this focus on ‘building systems that model, value, and process financial products such as bonds, stocks, contracts, and money’, as we can read in a textbook on financial technologies (Freedman 2006: 1), produces a one-sided perspective. Operational complexities, originating in the evolution of banking institutions offering utilities to a wide range of enterprises and households since the late nineteenth century, have shaped the technological landscape in the long term, and in a much stronger sense.

Modern financial theories based on the economics of information suggest that banks arise as a response to existing frictions in the process of acquiring information and making transactions. Bank intermediaries ameliorate such frictions through brokerage (which enhances the matching of borrowers and lenders by overcoming information asymmetries) and portfolio transformation (banks acting as delegated monitors and providing liquidity insurance). The way banks perform these functions — their ‘financial technology’ — changed dramatically in the 1970s on a global scale. We define financial technology as a body of knowledge that specifies the whole range of activities creating economic value in financial intermediation, encompassing product, process and organizational technologies. Financial innovations occur in each of these areas and improve the efficiency with which intermediaries perform their basic functions by expanding opportunities for risk sharing, lowering transaction costs and reducing asymmetric information and agency costs (Merton 1995: 463).

‘Risk management can never achieve perfection.’ Alan Greenspan, former chair of the US Federal Reserve (the Fed) wrote this after the credit crisis broke. He still has faith in risk management, saying problems lay not with regulators’ inaction, but with the people using products like derivatives, who became ‘greedy’ and dishonourably peddled them. He implies they lacked the integrity and reliability of ‘the pharmacist who fills out the prescription ordered by our physician’.¹ This typical moral argument embodies one of the tensions explored here. The logic is that technical risk models would be perfect were it not for their abuse by people.

In this chapter, I shall describe and advocate a’ science-studies’ approach to global finance.¹ ‘Science studies’ is the generic name for a collection of humanities and social-science specialisms that examine the contents and contexts of science and technology. These specialisms are diverse: some are historical, some philosophical, some sociological, some anthropological, some draw on literary theory.² They have no simple overarching theory or methodology, so it must be emphasized that what I am discussing is a science studies approach, not the science studies approach. References to other authors studying finance from a science-studies perspective will be found in an endnote,³ but the topic is still a relatively new one for science studies, and the work done so far has only scratched the surface of what is possible. In advocating a science-studies perspective, in no sense do I wish to denigrate the contributions of other approaches. There is an exciting emergence or revival of interest in financial markets in economic sociology (e.g. Godechot 2001, 2007), anthropology (e.g. Zaloom 2006) and human geography (e.g. Leyshon and Thrift 1997); and of course international political economy has long been interested in finance (e.g. Mosley 2003). A science-studies approach is complementary to those of other disciplines, not in competition with them.

Daniel Bell’s study ‘The Coming of Post-Industrial Society’, published in 1973, claimed to be ‘a venture in social forecasting’ (Bell 1973). Coming as it did on the eve of the most severe crisis of the global economy since World War II, Bell’s book was certainly apropos. By the same token, Harvard’s eminent sociologist could hardly have imagined how many global events would coincide with its appearance. 1973 was not only the year of the first oil price shock. It would also see the opening of the Chicago Securities Exchange and the end of the Bretton Woods system (Helleiner 1994; MacKenzie 2006).

Greater use of credit and debit card payments as well as the mirage of the ‘cashless society’, led some North American and British observers to consider automated teller machines (ATMs) a ‘passing technology’.¹ Not so (or at least not in the foreseeable future) is the unanimous conclusion of 20 British managers in financial and non-financial intermediaries with direct responsibilities in self-service technology (and management of ATM fleets), who were asked to opine on that sentiment between March and January 2008. Although the use of cash has decreased to ‘historical’ low levels, its use remains steady while the ATM remains the undisputed vehicle for people to acquire cash (as opposed to transactions at the bank retail branch or ‘cash back’ at food retailers).² One interviewee opined:

When I joined the bank [in 1973], I was against ATMs. We didn’t know that ATMs were the future. I thought the technology was a little early and thought we could use retail establishments as the vehicle to provide cash to customers. Supermarkets in the United States at that time used to have excess cash as they used to cash checks for people. The question was how to provide on-line, real-time support.

(Interview, 8 September 2009)

Can we identify the key characteristics of techno-innovation in the era of deregulated financial services? This is an important question particularly now when many are laying the blame for the emergence of a ‘credit crunch’ in 2008 on ill-managed innovations that fuelled growth in contemporary financial services (see Tett 2009). This chapter draws together findings from a programme of research examining the role of technology in the transformation of work practices in the financial sector, and their entanglement with risk and regulation. Examples from multiple longitudinal field studies are used to explore the following questions: What inspires innovation in financial services? How are processes of techno-innovation managed? What are the expected and unexpected consequences of techno-innovation?