The financial industry as the social space of market efficiency |
Posted: January 25, 2022 |
I wil show how employees consider that efficient markets correspond to the social space of the financial industry, where they are recognized as enacting the figure of the investor. This is what state regulation presupposes when it takes up the circularity of financial theory and requires that efficient thought leadership markets be composed of qualified investors whose actions are defined by the application of standardized financial theory itself. The market is defined as efficient in different ways, as we have seen. It is sometimes considered already efficient, sometimes the consideration is that it will be so in the future, and sometimes these two views are combined in a contradictory way. The word market can be used with different meanings in everyday practice outside the financial industry. Within it, it is also used to designate the financial industry in different ways. Here I want to explore those meanings that connect with the concept of market efficiency because they are important for the way in which the distributive effects of the financial industry are legitimized. In particular, I want to highlight two sets of practices where employees recognize their professional space as the efficient market. First, they do so when they consider the information that circulates in the financial industry to be reliable in the sense that it can contribute to the definition of the true value of financial assets. Second, they do so when they designate other colleagues or part of their professional space as the market in the context of the definition of value. The presupposition that the social space of the financial industry is the efficient market organizes the use of data for valuation, as well as the circulation of concrete tools used in valuation and investment. Some specialized media like Reuters and Bloomberg and some newspapers like the Financial Times and the Wall Street Journal are often seen as mandatory references for employees when forming a personal opinion. At Brokers Inc., the first task of salespeople and traders when they arrived at the office in the morning was to analyze the news available in these media. They explained that it was a way to know “what the market is saying” and “what the market knows.” These media were thus considered a voice of “the market” that it was important to listen to—in particular, because it summarized the news concerning, for instance, a listed company, an economic sector, or a geographical region that had to be integrated into valuation and investment. But these media were also a way to know what news was going to be used by rest of the financial industry, designated as “the market.” The word market is thus used to designate the social space of the financial industry, considered a source of reliable knowledge and the totality of participants who are using this knowledge. The idea that data is reliable because it is produced by the market also depends on the idea that it is obtained with expert methods officially recognized within the financial industry. Using the DCF method to determine fundamental value requires analysts to forecast the activity of listed companies and their economic context. Large brokerage firms, rating agencies, and large investment management companies usually have a department of economists who formulate these opinions. The employees of Acme, for instance, received a monthly internal letter announcing the forecasts of the company’s economists concerning GDP growth, inflation, and other macroeconomic data. Employees were expected to use these predictions in their own valuations because they constituted the official opinion of the company. But as the reports themselves noted, this data often came in large part from other, more legitimate organizations, such as the Bank of International Settlements (BIS), the Organization for Economic Cooperation and Development (OECD), the International Monetary Fund (IMF), or the “big four” major auditing companies. Acme’s economists appropriated and eventually modified it slightly. In the case of Brokers Inc., analysts used reports published by organizations like the OECD or the IMF, among other sources recognized as legitimate within the financial industry. Among these sources, certain financial media played a central role. This was particularly the case with what is called the “analysts’ consensus” published by Bloomberg. This company, owned by the former mayor of New York City, provides a closed network of computer terminals that links tens of thousands of finance employees around the world and allows them to communicate by email. This was the means used, for example, by Brokers Inc. salespeople to send information to the fund managers and by their traders to send and confirm transaction orders. The Bloomberg network is also a source of economic and financial information, including the prices of financial assets, and offers its own statistical treatment of this data. For example, it provides a calculation of what is called the “beta” of listed companies—i.e., the relationship between the stock and its index of reference, following the calculations formalized in the capital asset pricing model. In addition, Bloomberg collects forecasts from financial employees on many issues and establishes what is called the “analysts’ consensus” or “market consensus” by averaging the numbers thus collected. These forecasts can concern, for instance, inflation for different time horizons in the United States, unemployment in Spain, or GDP growth in China. Most financial analysts do not have the time or even the expertise to produce these numbers themselves. At Brokers Inc., the “analysts’ consensus” produced by Bloomberg were thus used systematically. While these forecasts were not endowed with the kind of truth that prices produced by an efficient market were supposed to have, they were considered much more accurate than data produced by a single employee or even by a small team. Indeed, this data was supposed to be much closer to “the market” and thus a reliable source of information because it was understood to result from the accumulation of the opinions of a large number of maximizing investors—i.e., a source similar to that which is supposed to lead to market efficiency. The idea that the social space of financial professionals is the space of market efficiency could also apply to the tools used to conduct valuation and investment. In order to do valuation using the DCF, Nicolas, the senior analyst at Brokers Inc., systematically used an Excel file produced by a professor at New York University and freely available on his website. In order to use this file, the analyst just needed to fill in the available accounting data for the company he was evaluating and the forecasts about its future and that of the economy. The file directly provided a result in the form of a theoretical price. Nicolas explained, as it seemed quite obvious, that he could have created this file himself, since it simply reproduced the mathematical relations between numbers that were indicated in any manual of financial analysis. However, using this file saved him time, and the fact that it was posted by an NYU professor guaranteed that it was well designed—and most likely better than what he could have done by himself. The quality of the file’s author and of the institution that employed him gave the tool, and therefore the standard reasoning that it contained, additional legitimacy in establishing the true value of listed companies.
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