Affectual Noise in the Pits

Specialists often cite factors peculiar to the floor, such as the ambient noise level, as important elements in their trading decisions.

ANANTH MADHAVAN AND VENKATESH PANCHAPAGESAN[1]

WHILE ELECTRONIC TRADING—and its materiality of multiple screens and ubiquitous Bloomberg terminals—has transformed the practice of contemporary finance over the past two decades, the sights and sounds of physical, open-outcry trading continue to dominate our cultural imaginary. The ringing of the opening bell at the New York Stock Exchange (NYSE), so cherished on the day of an initial public offering—the business reporter on the floor of the exchange, moving among the discarded paper littering the floor, weaving his or her way through the totems of screens and electronics, surrounded by the din of an unintelligible language—the shock of unexpected market movements captured in the faces of traders on the floor or in the pits, fear and anxiety that no psychochemical pill could relieve: these are the moments we recall in conjunction with the world of trading, affectual moments that suggest rather than signify. Yet the trader’s tableau is now primarily one of numbers, graphics, and text: the visual rather than some combination of senses, a single modality rather than the intersection and interference of multiple ones. Such images—for they are primarily images—are to be found in the recent independent film Margin Call (dir. J. C. Chandor, 2011), where the key moment of crisis is revealed through unseen graphs and values on a bank of computer screens. When drastic measures have to be taken in response to these numbers, endless rows of computer screens on the so-called trading floors are the primary visual accompaniment (along with the skyscrapers housing the firms) to the unseen voices on the phone that mark the decline of the firm.

This shift has taken place among a move toward algorithms that enable primarily electronic forms of trading as well as technological apparatuses such as the Bloomberg or Reuters terminals that provide ready access to real-time and historical financial information.[2] Yet the transition has not been without conflict and controversy, as the anthropologist Caitlin Zaloom has so ably demonstrated in Out of the Pits: Traders and Technology from Chicago to London. Zaloom’s ethnography details how the Chicago Board of Trade (CBOT), one of the largest and most prominent derivatives exchanges in the world, and now merged with the Chicago Mercantile Exchange (CME), dealt with pressures to move toward electronic exchanges and away from open-outcry trading.

Because my interest in the sonic practices of finance is intertwined with open-outcry trading, I want to explain this practice in some detail.[3] An open-outcry pit, such as that found on the floor of the CBOT, pairs buyers and sellers through a bodily practice of trading involving extreme behavior. Orders to buy and sell a particular derivative, such as a grain future, stock market index, or bond contract, come into the floor and are routed through clerks to a series of brokers who line the top of the pit. In the case of the CBOT, the pit is an octagonal space with a series of raised steps. Hierarchy of power is reflected in position on the steps; movements of traders up and down do not come easily and are the result of actions by younger traders to raise their status in the pits, such as getting the attention—sometimes through physical altercations—of more experienced and well-regarded traders on higher steps. Here the metaphor of moving to higher rungs of a career ladder has an obvious spatial referent. Within the pit are traders of varying levels of ability and experience. Yet there are always those known as the “market makers” or “locals” in the parlance of the CBOT. These are traders who are not necessarily affiliated with large financial firms but who trade with their own capital. Their purpose is to provide market “liquidity”; that is, they are obligated to buy and sell contracts no matter the state of the market, no matter how low it falls. Locals hope to make a profit through speculation, that is, correctly guessing short-term moves up or down in the market. The goal is to not make a large profit by holding a position for a long period of time but rather to make a number of small profits through short-term holdings, sometimes on the order of seconds. Besides the locals, other traders in the pit are affiliated with particular firms and receive a cut of the profits through a commission-based system.

Because of the number of potential buyers and sellers for the particular contracts, getting the attention of a particular party is of the utmost importance to ensure the best possible price. Although garish jackets and ties, foam inserts in shoes to increase height, and physical heft provide some of these signals, hand signals and the voice are the primary tools of the trade. Particular configurations of the hand in conjunction with the head and torso present data regarding a potential trade; such signals are specific to the various exchanges.[4] Coupled with the hand signals are shouts of pairs of numbers, the order of which differs depending on whether the traders wishes to buy or sell. This din, this noise, presents a cacophony to an untrained ear yet a carefully constructed system to the experienced trader. Zaloom comments on these paired aspects of pit trading:

The presentation of market numbers in voice forces traders to cope with the immateriality of the bid or offer. A number is rarely shouted once. Because each bid or offer hangs in the air for only a second, the trader barks the number into the pit repeatedly to make sure he is identified with it. At the same time he holds out his hands, fingers extended into numerical signals, to bring a concrete visual presence to his bid or offer. The sounds of repeated numbers form the cadence of the market and can convey urgency or boredom. In receiving the numbers that others bring to the market, traders appeal to “feeling.” This word, encompassing all sensory information, is one traders use to characterize their knowledge of the market.

The body is a key interpretive instrument for the pit trader. Listening to rhythms of the numbers as they run in the pits leads traders to judge the market as “heavy” or “light,” likely to rise or fall according to their sensory estimations. Beyond creating the basis for individual traders’ economic judgments, the ambient noise of the pit affects the market as a whole. Economists studying the CBOT pits found that increased sound levels lead to higher trading volumes and foreshadow periods of high volatility in the pits.[5]

Zaloom’s final sentence makes reference to one of the few academic studies regarding the role of sound in open-outcry trading. In the wonderfully titled article “Is Sound Just Noise?,” Joshua Coval and Tyler Shumway ask whether the sounds of shouting in the pit (proxied in their study by the measurement of ambient sound level in decibels) might convey information that is not necessarily available on the computer screens that were then beginning to dominate trading: “we ask whether there exists information that is regularly communicated across an open outcry pit but cannot be easily transmitted over a computer network. Any signals that convey information regarding the emotion of market participants—fear, excitement, uncertainty, eagerness, and so forth—are likely to be difficult to transmit across an electronic network.”[6] As Zaloom intimated, Coval and Shumway found that the ambient sound level of the pits did have predictive impact in a number of areas (such as the “depth” of the market, “information asymmetry,” and the “cost of transacting”). Their conclusion reads not only as a paean to the specificity of the open-outcry pit but also as a cautionary tale of accelerated moves to electronic trading:

A key implication of this research is that in the trading arena, machine may not be a perfect substitute for man [sic]. Current electronic trading mechanisms are clearly not equipped to convey the kinds of signals for which a sound level is likely to proxy. Certainly computer terminals can be outfitted to offer some conveyance of nonmarket signals. But their ability to replicate the variety of signals that can be communicated in a face-to-face setting—for example, fear in a trader’s voice—is likely to be limited. As a result, as trading volumes migrate to electronic exchanges, much of this information will be lost. The welfare implications of losing this information merit further study.[7]

Coval and Shumway clearly suggest the importance of affect conveyed by the noise in the pits via their evocative set of nouns: “excitement,” “uncertainty,” “eagerness,” “fear.” For Coval and Shumway, the intensities gestured toward by these words cannot be signified by changes in numbers on a screen. They note this via a particularly striking image: “For instance, a trader who tries to unwind a large short position by waving his arms and jumping up and down in an open outcry exchange might have difficulty communicating such eagerness across a computer screen.”[8] Through a focus on sound and gesture, Coval and Shumway attempt to understand whether the situations they discuss provide actionable information to other traders.

Their interest in evocative sounds and gestures is of a piece with recent discussion surrounding affect within the humanities and the social sciences. An introduction to a series of essays on affect describes it thusly: “affect is found in those intensities that pass body to body (human, nonhuman, part-body, and otherwise), in those resonances that circulate about, between, and sometimes stick to bodies and worlds, and in the very passages or variations between these intensities and resonances themselves.”[9] Such an expansive definition of affect is indebted to the work of Deleuze and Guattari, specifically their Spinozist concept of affect as a capacity or intensity between and within bodies. A key point of contention in these debates surrounding affect is the question of intentionality, or to put it more broadly, how much of affect is potentially precognitive or presocial. Here the interference with scientific evidence itself becomes a problem. For example, Ruth Leys has recently taken affect theorists such as Brian Massumi and William Connolly to task for relying on both an anti-intentionalist paradigm and questionable (and dated) scientific results. Yet Massumi noted in his touchstone work that affect is not presocial (and thus not anti-intentionalist):

Intensity is asocial, but not presocial—it includes social elements but mixes them with elements belonging to other levels of functioning and combines them according to different logic. How could this be so? Only if the trace of past actions, including a trace of their contexts, were conserved in the brain and in the flesh, but out of mind and out of body understood as qualifiable interiorities, active and passive respectively, direct spirit and dumb matter. Only if past actions and contexts were conserved and repeated, autonomically reactivated but not accomplished; begun but not completed.[10]

Perhaps more appropriate critiques come from Constantina Papoulias, Felicity Callard, and Clare Hemmings. Papoulias and Callard note that there is a disjunction between the rhetoric of affect theorists like Massumi and the recourse to the language of definitive scientific evidence: “Even as affect theory shows how a biology of afoundational foundations can be imagined, the language through which the findings of neuroscience are invoked by cultural theorists is, paradoxically, often the language of evidence and verification, a language offering legitimation through the experimental method.”[11] Hemmings, critiquing both Massumi and Sedgwick, argues that affect cannot be autonomous and therefore outside of social signification; in fact, it is precisely because it is not autonomous that it has political power.[12]

Following Hemmings, then, the power of the affective events described by Coval and Shumway arises from their very embeddedness within the structures of contemporary finance. One would not understand the wildly gesticulating trader as suggesting an adverse event unless one has internalized the means by which the market functions. Flailing arms in the pits become affective only when they are linked to the loss of money. Hesitation in a trader’s voice is only accepted as fearful if one understands the context of the event. Though such affective events may function in a fashion that bypasses certain cognitive processing, this can only occur if at some prior time the events were linked to an affective intensity. In this sense, both Leys and Massumi are right: the intensities discussed by Coval and Shumway might be more direct than watching numbers on a screen, but this directness only happens as a result of prior social and ideological interpellation.

Like Coval and Shumway indicate, it might be possible to augment existing electronic trading terminals to help convey “nonmarket” signals such as the ambient sound from the pits. Indeed, such services exist specifically for the day trader. Contributors to day trader forums such as “Elite Trader” have discussed a number of different potential sources provided by companies such as Trade the News.[13] These services are not cheap; Trade the News costs upward of $175 a month, and a new service called TrueSquawk has plans starting at $125.[14] Such feeds come directly over the Internet without the need for specialized hardware. These sounds additionally can come in much more complicated and specialized forms known as squawk boxes. Audio from the trading pits can be heard and controlled through equipment designed specifically for this purpose. They show up in fiction as well: in the novelist Robert Harris’s recent financial thriller titled The Fear Index, the character Quarry, at a pivotal moment in the narrative when his firm’s automated trading system begins to go awry, “pressed a switch and picked up the live audio feed from the pit of the S&P500 in Chicago. It was a service they subscribed to. It gave them an immediate feel for the market you couldn’t always get just from the figures.”[15]

Other types of “squawk boxes” have had more pernicious effects. Rather than a feed of sounds and commentary from the pits, squawk boxes within large firms are “internal intercom systems used by broker-dealers to broadcast institutional customer order information to traders and sales traders at the broker-dealer.”[16] In other words, these squawk boxes are basically continually open intercoms that enable employees at the firm to assist with customer trading activity without having to continually retelephone others who might be able to help. On reflection, access to the content of these conversations could be extremely useful for investors outside of the firm, as it would provide information about potentially large upcoming movements in a particular financial instrument.[17] In 2007, Merrill Lynch was sanctioned by the U.S. Securities and Exchange Commission (SEC) for providing unaffiliated day traders with unauthorized access to these squawk box feeds:

The [Merrill Lynch] retail brokers called the day trading firm and placed their telephone receiver next to the equity squawk box for the entire trading day. As a result, the day traders received real-time access to the equity squawk box and the confidential order information transmitted over it. The day traders compensated the brokers for access to the confidential order information through kickbacks in the form of commissions and cash. The day traders used the information to trade ahead of the customer orders and many times profited when the price of the security moved in their favor because of the market impact of the institutional customer orders.[18]

Merrill Lynch was forced to pay a fine of $7 million and implement appropriate controls over any future access to a squawk box or “squawk-related technology.”[19] This particular SEC action was prior to the most recent financial crises; however, access to these types of squawk boxes was also a key sticking point in attempts to strengthen regulations in the wake of revelations over inappropriate derivatives transactions. Because most of the volume (in numbers of trades and in size of the position) of exotic derivatives contracts still takes place over the counter (OTC), or through lightly regulated transactions between individual entities, and not on an open market, squawk boxes have been considered a necessary component of trading to discover the current prices for these instruments. Yet like the move from open-outcry trading to electronic exchanges, a similar move has been suggested for most OTC derivatives contracts—a move that would silence these types of squawk boxes as well—in the name of market transparency: “The more transparent a marketplace, the more liquid it is, the more competitive it is and the lower the costs for corporations that use derivatives to hedge their risks.”[20] Paradoxically, however, these changes in the regulatory environment will perhaps silence the very signals—in digital form yet unquantifiable—that contribute to the transparency so desired.

Taken together, these cases of affectual sonic noise function within varied situations of human responses to the dynamics of systems. The fields of individual traders and the market interfere during temporal conjunctions where orderly operation breaks down: interference becomes sonic, a signal that can precipitate further action. Information and affect intertwine, becoming difficult to disentangle. As the pace of trading increases, however, affectual sounds can only be directed toward past events, toward the noise of computational processes that produce their own conditions for the accumulation of profit or loss.

How Noise Matters to Finance by Nicholas A. Knouf is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License.

Powered by Manifold Scholarship. Learn more at manifoldapp.org