Trading up

Collective values in a Manhattan trading room and their role in recovery after the World Trade Center attacks

'If the economy of the US is the body then what was going on in those sky scrapers was the brain. I had training in financial economics but that didn't really give me any sense of what was happening in there.'

 In the late 1990s Daniel Beunza, an economic sociologist, would travel past the World Trade Center daily. He was already studying financial markets and the imposing twin towers piqued his interest, making him determined to get under the skin of a Manhattan-based financial organisation.

wall street signAfter several failed attempts he was granted rare access to the trading floor of an international bank based in the World Financial Center –  an office complex that stood in the shadow of the World Trade Center. The bank, pseudonymously referred to here as  "International Securities", allowed him to observe, at first-hand, the trading strategy known as "arbitrage".

Arbitrageurs make money by buying securities on one market and selling them on another. It is a creative strategy which hinges on the possibility of interpreting securities in multiple ways and produces profits by associating previously disparate markets. The two securities have to be similar enough to hedge exposure, but different enough that other traders have not seen the resemblance and realised the opportunity before.

While traders got information about the market from their Bloomberg screens, the knowledge to interpret this and make their complex calculations came from spontaneous conversations with traders at nearby desks who used different strategies and different principles of valuing companies.

In fact the trading room was designed to encourage innovation through these interactions. The traders did not always sit next to the same people, there was a low monitor policy so people could see one another and the manager sat in the middle of the trading room to reduce status difference and promote the idea of open communication.

The creativity and social cohesion that Dr Beunza observed were key to understanding how arbitrageurs made their money and beat the market, but these qualities were also to prove important in a totally unexpected way. In the aftermath of the 9/11 attacks on the neighbouring World Trade Center he observed how they became essential to the survival and rebuilding of International Securities and other similar financial companies.

Fortunately no one at International Securities was hurt in the terrorist attacks but their building was badly damaged. The traders were forced to move to the only premises available to them – a basement in the bank's back office in New Jersey. Two days after the market re-opened on September 19, Dr Beunza and his research colleague David Stark – professor of sociology at Columbia University – were back among the traders, but this time in a suburban corporate park.

Within the constraints of the temporary space, the desks had been arranged to reproduce the layout of the original trading room. The traders only had single line phones, home laptops, reduced connectivity and single screen terminals. But they made it work. They managed to talk to other banks, enter orders, and connect to the market.  Instead of waiting for the trading engine to be restored or for a new server to be delivered the traders innovated and combined old and new technologies.

The kind of distributed intelligence and flat hierarchy that were so important in the day to day operation of the old trading room now became key to the organisation's response to the crisis. Some traders became clerks, others manual operators but this change in role status did not detract from their status as traders.

Managers played a reassuring role – even when they were not always reassured themselves. They managed uncertainties, assuaged fear and created conditions for new solutions to emerge.

Dr Beunza explains: 'We picked up on the critical ability of the company to grow the parts that it was missing.

'At the time there was a lot of discussion in the management literature about 'preparedness' which boils down to having two of everything – two trading rooms, double servers and so on. But that didn't quite capture what we saw.

'Instead the bank had an amazing ability to reconfigure people's roles so that when there was a technological link missing they would take on that role. So that's what we call generative redundancy. You fill the gaps.'

On the agency trading desk, for example, junior traders manually performed operations that were previously automated by the trading engine effectively taking them back to the trading technology they had five years before.

The importance that the human element played in recovery is poignantly underscored by Dr Beunza's research into the response of other companies to the terrorist attacks.

He found that the strong social ties of one trading room had been crucial to getting the technology up and running again in an unexpected way. Although it had backed up data in two off site locations so many people had died that no one knew the passwords, so the remaining staff had to guess them.

An executive said: 'We sat around as a group, and talked about where they went on vacation, what their kids names were, what their wives names were, what their dogs names were, you know every imaginable thing about their personal life.'

Daniel Beunza remarked: 'At the very top of our very individualistic society there are these organisations that remarkably stress collective values. This is a fantastic paradox. The reason for this is that the complexity involved in trading derivatives means that there are interdependencies across everybody in the organisation. You cannot manage those relationships through formal structures. So in a trading room you use the shared space, along with other measures, to create a seamless set of social ties and generate trust across everyone in your organisation.'


Useful links

The organization of responsiveness: innovation and recovery in the trading rooms of Lower Manhattan, Socio-Economic Review (2003) 1, 135 – 164 [opens in new window]

Dr Beunza is one of the authors of Socializing finance, a blog about the sociology of finance. 

For full details of Dr Daniel Beunza's research and publications see his profile in the LSE Experts Directory: Dr Daniel Beunza