Financial Markets. Leonardo da Vinci programme project. „Development and Approbation of Applied Courses. Based on the Transfer of Teaching Innovations. FINANCIAL MARKETS AND. DEVELOPMENT. JOSEPH E. STIGLITZ. Stanford University1. I. INTRODUCTION. Eariier literature on the development process. Structure of Financial Market. – Different sectors and participants. – Different types of markets. 2. Investor Protection in Hong Kong. – Roles of different financial.
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Financial markets, from the name itself, are a type of marketplace that provides an avenue for the sale and download of assets such as bonds, stocks, foreign. markets, financial institutions, corporate governance, and the management of has published extensively on the history of financial markets, institutions, and. Every scholar on the financial markets has attempted a definition of the financial (or securities) markets (OTC or formal – the exchanges) and.
When markets are analyzed they tend to be producer markets, for example, markets for industrial products and nonfinancial services. Characteristically, the research glosses over distinctions between producer markets and financial markets in an effort to address the question of how economic activities are embedded in social structure Granovetter Yet differences between producer markets and financial markets are consequential for almost every level of analysis of markets.
Financial markets are not primarily concerned with the production of goods or with their distribution to clients but with the trading of financial instruments not designed for consumption. When more complex instruments are traded options, futures, etc. There are two aspects to the sense in which these markets are steps removed from the ordinary economy of production and consumption.
What are some examples of financial markets and their roles?
The first pertains to the instruments traded, which are not the funds investors provide but the shares and obligations they obtain in return for their investment and the contracts they enter into so as to protect these investments.
Thus financial market participants do not withdraw credit directly from a company when they sell company shares; what may happen is that the sale influences the value of these shares. The shares and other instruments are abstract entities which may not even be pieces of paper but merely an entry in the books of the respective parties; the value of these entities is determined by financial market activities and is only tenuously related to the underlying referent e.
The shift from concrete funds to abstract entities epitomizes the decoupling of financial markets from the ordinary economy of production, consumption, and exchange.
Historically, currency foreign exchange dealers provided services for importers, exporters, and others who needed foreign exchange to pay bills and pay for goods. They were intermediaries in conventional trading Introduction 5 oriented to the transfer of goods from producers to consumers. Caves, Frankel, and Jones Thus, most foreign exchange dealing today is speculation not motivated by a need for the product obtained but by the motive of gaining from expected price changes of the currency when it is resold.
Speculation and the seemingly endless circulation of the entities traded also differentiate other financial markets not only from producer markets, but also from merchandise and service trading, which is oriented toward the transportation of goods from one location to another and toward consumption at the end of the trading chain.
There is another sense too in which financial markets and the associated institutions differ from national economies: financial markets tend to be global markets, and the financial system can arguably be considered a global system. It is, if you wish, a structure of the world as one place rather than one of national societies.
Economies, on the other hand, have typically been localized; they are the economies of nation states. They depend on national regulatory frameworks and institutions, tax and social security systems, national policies and interventions. They use national currencies and presuppose the existence of a national central bank. Their localized character is reflected in national economic indicators and in the attention given to them.
Larger economic systems such as the European Union pose problems for analysts precisely because they do not correspond to this pattern; European statistics are often problematic since they average out the internal dynamics of localized economic activities and their causal dependencies on national frameworks of policymaking.
All this will become clearer in the first section of this book. Not all financial markets, one should add, are equally global. While currency markets are inherently transnational markets, bond and equity markets are not, though they have become increasingly global in the most recent wave of globalization. Some financial transactions are ancient; of others we have had evidence only more recently.
We need to distinguish here between the existence of public debt or of company shares with occasional trades and the emergence of financial markets and of stock exchanges. Financial securities were well known and privately owned in the eighteenth century in North America, but they were not traded Wright 21—2. Financial markets can only be assumed to exist when there are routinized, systematic forms of trading, relatively stable settings, a minimal degree of standardization of financial securities, and established cognitive procedures for their evaluation.
When stock exchanges emerged they involved, in addition, agreements about formal rules, an established organizational structure, and a regulatory framework for exchange activities. Economic historians agree that informally organized financial markets preceded stock exchanges and shaped the ways they were set up Michie For that reason, the social and cultural history of financial markets does not begin with the analysis of the institutional structure and dynamics of exchanges.
One must also investigate forms of interaction, social relationships, and cognitive and technological patterns that indicate the existence of more or less informal financial markets. Sociologists and economic historians have distinguished at least two patterns of market emergence. The first pattern, proposed by Max Weber, is that of functional differentiation. Weber ties the rise of financial markets to the emergence of modern, large-scale commerce Weber : In the seventeenth century, wholesale merchants began to exchange certificates of the ownership of goods and brought only samples to the market.
This saved transportation costs and expanded the circulation of goods. In time, certificates began to be traded independently of the goods.
When early modern states turned to financing their wars through public debt instead of costly private debt, this innovation gave financial markets an additional and decisive impetus Neal ; Carruthers Previous trading in paper certificates facilitated the move to trading government bonds, which states unloaded on the market. The growth of maritime trade—a costly enterprise— led to the emergence of joint-stock companies in the late seventeenth century; their shares added to the supply of trading instruments.
The second pattern of market emergence has been proposed by Winifred Barr Rothenberg, who ties the emergence of financial markets to the separation between property rights and exchange rights.
Rothenberg 5 shows how in eighteenth century rural Massachusetts, in a cash-poor economy, in the absence of a banking network and of other financial institutions, members of rural communities issued mortgage deeds as financial securities without renouncing their property rights. The deeds were issued for the sole Introduction 7 purpose of exchange; they were designed to facilitate trades in agricultural products. Over time, mortgage deeds were traded and accumulated without any reference to the underlying agricultural products, and a network of informal exchange relationships was thus established.
In Western Europe, financial markets emerged in the late seventeenth and early eighteenth centuries in Amsterdam, London, and Paris. The Paris Bourse was created already in by royal decree.
In contrast, the London Stock Exchange was not completely institutionalized until Michie The first formal stock exchange in North America was founded in Philadelphia in Markham Before that, there had been an incipient financial market in Philadelphia in the s, but on a comparatively modest scale.
Initially, financial transactions were conducted in the street and in the pubs and coffee houses where merchants came together. After the institutionalization of stock exchanges, the formal market moved indoors while the informal market continued to trade in the street.
This situation continued until well into the twentieth century. In the nineteenth century, several formal exchanges existed in parallel in New York city; they specialized in various classes of securities oil, mines, cotton, listed or unlisted, etc. For most of the nineteenth century, trading in derivatives was not regulated by law, and was therefore practiced mostly in informal markets.
In the second half of the nineteenth century, markets underwent a process of technological remaking. While financial markets had benefited from communication technologies such as the telegraph and the telephone since the s and the s, respectively, what developed in the s were custom-tailored technologies for the recording of security prices and for their simultaneous display in several places.
This process was not free of tension; there were conflicts over the access to market technologies, to financial news, and to price information. Since then, financial markets have been reshaped repeatedly by revolutionary new technologies, a process that is ongoing. Several European stock exchanges have recently become entirely automated; the now empty trading floors of the Paris Bourse are occasionally used for staging fashion shows.
The technological remake of financial markets in the nineteenth century had a number of consequences. The introduction of price recording technologies promoted the standardization of price information. Official price quotations appeared in London and New York in the late s; with this innovation, producing business analyses and company statistics became more feasible and popular.
As a further consequence of price standardization, one of the first market indexes was created by Dow Jones in Shortly afterward, security ratings and systematic financial analyses of industrial stocks were introduced. Technological innovation, along with processes of economic expansion, urbanization, and international 8 Karin Knorr Cetina and Alex Preda migration have contributed further to the speed of transactions and the expansion of markets throughout the nineteenth and twentieth centuries.
This expansion has been accompanied by the cross-border integration of these markets, manifest in the increased speed of capital flows, the growing interdependence of markets, and their previously mentioned concentration in global centers. Outline of the Book Economic sociology, we said, has focused very much on the production side of the economy.
Lie The studies collected in this volume extend this tradition and that of recent or ongoing work not represented in this volume e. Hertz ; Miyazaki ; Zaloom Section I, Inside Financial Markets, looks at the transaction practices in various financial markets, at market globality, and at mechanisms of market coordination and integration—followed by a reflexive study of how women fare in this world as reflected in popular culture.
In Chapter 1, The Embeddedness of Electronic Markets: The Case of Global Capital Markets, Saskia Sassen addresses the technological transformations behind the emergence of global markets and the growth of capital flows since the early s—as indicated by a number of highly telling statistics. These developments ensure, Sassen argues, the consolidation of an upper stratum of select financial centers, forming the top layer of the 30—40 global cities through which the global financial industry operates, and a weakening of national attachments for the elites and firms which make up the stratum.
The Architecture of a Flow World with regard to a specific case, that of the foreign exchange markets, which by all accounts are the most genuinely global and the largest market worldwide in terms of daily volume of trading. The chapter draws a distinction between network markets and flow markets, arguing that foreign exchange markets Introduction 9 have become decoupled from networks and exhibit a scopic architecture based on reflexive mechanisms of observation and projection that project market reality and enable it to flow.
The chapter also spells out the characteristics of a flow market. Daniel Beunza and David Stark Chapter 4 , How to Recognize Opportunities: Heterarchical Search in a Trading Room, also look at arbitrage trading, but from the perspective of how a Wall Street trading room of a major international investment bank is organized for the process of price discovery. Beunza and Stark conceptualize the trading room as a kind of laboratory characterized by heterarchy, that is, a flattened hierarchy where the evaluative principles and information of one trading desk can be exploited by other desks in a process by which intelligence is distributed across desks.
The authors show how trading involves heterogeneous principles of valuation and collaborative efforts which have received hardly any attention hitherto in the literature on trading but see Heath et al. Chapter 5 Jean-Pierre Hassoun , Emotions on the Trading Floor: Social and Symbolic Expressions, also focuses on the financial trading floor—from yet another perspective, that of the role and management of emotions in trading.
Drawing extensively on the metaphors traders use, Hassoun provides a typology of market emotions, which he associates with the contexts in which emotions emerge—those of performance, violence, and gaming and gambling.
The final chapter in this section Chapter 6 , Barbara Czarniawska on Women in Financial Services: Fiction and More Fiction, provides a reflexive commentary on the way financial markets are exclusionary and represented in this way in popular culture. She finds that risk-taking women who try their hand at masculine pursuits come to sticky ends in the plots of such fiction, confirming conventional stereotypes expressed by male traders when they assert that women have no place in financial markets.
Section II, The Age of the Investor, turns from trading and the architecture of markets to the historical and contemporary construction and selfunderstanding of investors. While governments, firms, and markets all refer to the investor and conduct their business in the name of the investor, there are few sociological investigations of investor attitudes and investment behavior. Preda argues that investment, originally denounced as a kind of gambling, became legitimate during the first wave of globalization — ; it began to be seen as intrinsic to human nature and a human right regardless of social status.
The process involved a reconfiguration of the investor as a person in possession of these rights and of certain cognitive and technical skills a kind of scientist that allowed him or her to pursue his or her financial goals in universally valid and rational ways. Using a survey of more than 3, affluent and semi-affluent investors in six Western European countries as a basis, De Bondt shows how investment strategies and the perceived attractiveness of asset classes are influenced by the values and beliefs of investors— and by their self-confidence, financial sophistication, and trust in expert advisors.
This returns to the topic of investor rights, which Swedberg examines in the context of a case analysis of recent corporate scandals.
Financial Markets Reports
Swedberg starts from the sociological assumption that interests are always socially defined or constructed and that interests can only be realized through social relations. This analysis differs from the greed-centered psychological analysis of corporate scandals predominant in public discourse.
Swedberg calls on economic sociology to pay more attention to the dynamic of interests in economic behavior, arguing, with reference to Weber, that interests are a dynamizing factor in economic and general behavior. Section III, Finance and Governance, presents two kinds of sociocultural processes: those which mediate and control market transactions Chapters 10—12 and those through which financial markets affect the structure and organizing principles of corporations Chapters 13 and Abolafia takes the reader into the normally closed meeting room of the Open Market Committee of the Federal Reserve System.
Analyzing meeting transcripts, Abolafia details the interpretive politics of the Fed during a period of a major policy change. The chapter identifies the temporal structure of Fed meetings and the framing moves that participants use to contest existing policy frames and project new ones.
By looking at interpretive politics as an interactional process that relies on a repertoire of moves, the chapter exemplifies the social process of meaning construction in finance and provides a template for the mediating role of interpretive reasoning processes in other areas. In Chapter 11, The Return of Bureaucracy: Managing Dispersed Knowledge in Global Finance, Gordon Clark and Nigel Thrift shift the analysis away from such mediating interpretive processes to the question of how banks exercise control over trading rooms and financial market transactions.
The authors describe a bureaucratic process of control through risk management that is dependent upon assessing dispersed knowledge about market conditions and response within the firm and across the globe.
In financial markets more than in most other kinds of firms and industries, this kind of bureaucratic control is seen to be essential to corporate financial integrity and performance; indeed, the authors argue that it may also be essential to global financial stability. Chapter 12, Enterprise Risk Management and the Organization of Uncertainty in Financial Institutions, continues to explore risk analysis, but with a broader focus. Michael Power shows how new instruments of risk analysis, based in sophisticated financial metrics, have gained global prominence and are being adopted as regulatory tools for financial markets by national and international bodies.
Power also argues, in line with Clark and Thrift, that risk analysis tools are adopted to increase the internal control of corporations. They find that the new model, the shareholder concept of the firm, which emerged between the s and the s, could not be traced to internal functional demands but came from institutional investors, financial analysts, and hostile takeover firms which began to articulate a new ideal that suited the interests of these three groups.
Rocket scientist , a financial consultant at the zenith of mathematical and computer programming skill.
They are able to invent derivatives of high complexity and construct sophisticated pricing models. They generally handle the most advanced computing techniques adopted by the financial markets since the early s.
Typically, they are physicists and engineers by training.
IPO , stands for initial public offering, which is the process a new private company goes through to "go public" or become a publicly traded company on some index.
White Knight , a friendly party in a takeover bid. Used to describe a party that downloads the shares of one organization to help prevent against a hostile takeover of that organization by another party.
Smurfing , a deliberate structuring of payments or transactions to conceal it from regulators or other parties, a type of money laundering that is often illegal. Bid—ask spread , the difference between the highest bid and the lowest offer. Pip , smallest price move that a given exchange rate makes based on market convention.
Financial Markets, Industry Dynamics, and Growth
Enhancing income: Financial markets allow lenders to earn interest or dividend on their surplus invisible funds, thus contributing to the enhancement of the individual and the national income.
Productive usage: Financial markets allow for the productive use of the funds borrowed. Financial market slang[ edit ] Poison pill , when a company issues more shares to prevent being bought out by another company, thereby increasing the number of outstanding shares to be bought by the hostile company making the bid to establish majority.
Bips, meaning "bps" or basis points. A basis point is a financial unit of measurement used to describe the magnitude of percent change in a variable. One basis point is the equivalent of one hundredth of a percent. Quant, a quantitative analyst with advanced training in mathematics and statistical methods.
Rocket scientist , a financial consultant at the zenith of mathematical and computer programming skill. They are able to invent derivatives of high complexity and construct sophisticated pricing models. They generally handle the most advanced computing techniques adopted by the financial markets since the early s. Typically, they are physicists and engineers by training. IPO , stands for initial public offering, which is the process a new private company goes through to "go public" or become a publicly traded company on some index.
White Knight , a friendly party in a takeover bid. Used to describe a party that downloads the shares of one organization to help prevent against a hostile takeover of that organization by another party.Basel: Bank for International Settlements. Zelizer, V. The existence of such markets allows participants to sell claims and risks they no longer want, and to pursue additional profits through clever trading.
They generally handle the most advanced computing techniques adopted by the financial markets since the early s. While there are many specific examples of the stock market, the NYSE example above is the best.
While financial markets had benefited from communication technologies such as the telegraph and the telephone since the s and the s, respectively, what developed in the s were custom-tailored technologies for the recording of security prices and for their simultaneous display in several places.
Historically, currency foreign exchange dealers provided services for importers, exporters, and others who needed foreign exchange to pay bills and pay for goods. Hertz, E. State borrowing continues to be strong today, though now it is more oriented toward deficit management and investment spending.
London: Hodder and Stoughton Ltd.
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