Donald MacKenzie

Donald MacKenzie teaches sociology at Edinburgh. Trading at the Speed of Light: How Ultrafast Algorithms Are Transforming Financial Markets will be published by Princeton in May.

Cookies, Pixels and Fingerprints

Donald MacKenzie, 1 April 2021

Data protection measures and policies designed to enhance competition are often implicitly at odds. It isn’t so very painful for a big corporation to implement a data protection regime that requires it to get its users’ permission for what it does with their data, because its data transfers will often be entirely internal; such a corporation may even welcome rules that stop it sharing data with other companies.

Pick a nonce and try a hash: On Bitcoin

Donald MacKenzie, 18 April 2019

Every time​ a bitcoin ‘miner’ is successful they create for themselves 12.5 new bitcoins, currently worth around $60,000. If they don’t succeed, they can have another go roughly ten minutes later – all day, every day. It isn’t surprising, therefore, that despite the sharp fall in bitcoin’s dollar price in 2018 there is still a lot of mining going on. You...

Just how fast? High-Frequency Trading

Donald MacKenzie, 7 March 2019

About​ half of all buying and selling on many of the world’s crucial financial markets is now automated high-frequency trading. HFT is ultrafast. Whenever I speak to someone who might know and be prepared to tell me, I ask them just how fast that currently is: in other words, what’s the minimum time interval between the arrival of a ‘signal’ – a pattern of...

How to Solve the Puzzle: On Short Selling

Donald MacKenzie, 5 April 2018

There’s a limit to how much you can learn while sitting at your desk reading the footnotes to balance sheets. Sometimes, a short seller has to become a field worker. Look at the website of Muddy Waters Research, for example, and notice the attention it pays to the physical world: precipitous, hairpin mountain roads down which huge volumes of timber would have to be hauled; satellite images of the possibly crumbling walls of a giant opencast mine; a solitary lorry idling outside what one might have expected to be a busy factory.

Short Cuts: Wall Street’s Fear Gauge

Donald MacKenzie, 25 January 2018

The​ VIX, or Volatility Index, is Wall Street’s fear gauge. I first started paying attention to it in the late 1990s. Back then, a level of around 20 seemed normal. If the index got to 30, that was an indication of serious market unease; over 40 signalled a crisis. The highest the VIX ever got was during the 1987 stockmarket crash, when it reached 150. In the 2008 global banking...

Sometimes,​ the most important – and perturbing – insights make their way into the world without fanfare. As yet, few have picked up on an analysis by the New York University economist Thomas Philippon of the history of the unit cost of financial intermediation. The unit cost is a measure of the efficiency of the financial system, and Philippon tracks its level in the United...

Dark Markets

Donald MacKenzie, 4 June 2015

‘Dark pools’​ are private, electronic share-trading venues in which a participant can bid to buy shares or offer to sell them without those bids or offers being visible to the market at large. For most of their history – they’ve been around for nearly thirty years – they have attracted little attention, but that has changed fast in the last couple of years....

On ‘Spoofing’: Spoofing

Donald MacKenzie, 21 May 2015

On 21 April​, the financial trader Navinder Singh Sarao was arrested in West London. The US authorities are seeking to extradite him to stand trial in Illinois after charges were issued against him by the US Department of Justice. The DoJ alleges he was in the habit of ‘spoofing’ futures markets, by entering orders without genuinely intending to buy or sell, and that this...

At Cermak: Cermak Data Centre

Donald MacKenzie, 4 December 2014

A data centre​ is a room or an entire building housing computers, network connection equipment and telecommunications links. Many data centres are built for the exclusive use of just one company, such as Google, but others host – and interconnect – systems belonging to many different users. One of the world’s largest multi-user data centres was once a high-volume...

Be grateful for drizzle: High-Frequency Trading

Donald MacKenzie, 11 September 2014

The beams are infrared, which means you can’t see them, but lasers are now flashing stock-market data through the skies over New Jersey. If they work well there, they might soon be flashing over London too. Lasers are the latest tool for high-frequency trading: the fast, entirely automated trading of large numbers of shares and other financial instruments. Originally, the data needed for high-frequency trading travelled almost exclusively via fibre-optic cables, in which signals move at about two-thirds of the speed that light travels in a vacuum.

The Magic Lever: How the Banks Do It

Donald MacKenzie, 9 May 2013

Three years ago, the Bank of England set out to calculate a figure that does more than any other to shatter banking’s preferred image of itself. The figure made its first, understated appearance in March 2010, when Andrew Haldane, the Bank’s Executive Director for Financial Stability, included it in a talk in Hong Kong, then reappeared later that year in a chart buried at the back of the December issue of the Bank’s Financial Stability Report. The figure was the size of the subsidy that taxpayers give to British banking just by virtue of being available to bail out banks if things go badly wrong.

What goes on in stock markets appears quite different when viewed on different timescales. Look at a whole day’s trading, and market participants can usually tell you a plausible story about how the arrival of news has changed traders’ perceptions of the prospects for a company or the entire economy and pushed share prices up or down. Look at trading activity on a scale of milliseconds, however, and things seem quite different. When two American financial economists, Joel Hasbrouck and Gideon Saar, did this a couple of years ago, they found strange periodicities and spasms. The most striking periodicity involves large peaks of activity separated by almost exactly 1000 milliseconds: they occur 10-30 milliseconds after the ‘tick’ of each second.

The credit crisis has inured us to gigantic numbers – losses measured in billions or trillions of dollars – but we need to pay attention to its small numbers as well if we’re going to understand it properly.

You could walk around Mayfair all day and not notice them. Hedge funds don’t – can’t – advertise. The most you’ll see is a discreet nameplate or two. An address in Mayfair counts in the world of hedge funds. It shows you’re serious, and have the money and confidence to pay the world’s most expensive commercial rents. A nondescript office no larger than a small flat can cost £150,000 a year. Something bigger and in the style that hedge funds like (glass walls, contemporary furniture) can set you back a lot more. It’s fortunate therefore that hedge funds don’t need a lot of space. Two rooms may be enough: one for meetings, for example with potential investors; one for trading and doing the associated bookkeeping. Some funds consist of only four or five people. Even a fairly large fund can operate with twenty or fewer.

What’s in a Number? The $300 Trillion Question

Donald MacKenzie, 25 September 2008

Judged by the amount of money directly dependent on it, the British Bankers’ Association’s London Interbank Offered Rate matters more than any other set of numbers in the world. Libor anchors contracts amounting to some $300 trillion, the equivalent of $45,000 for every human being on the planet. It’s a critical part of the infrastructure of financial markets but, like plumbing, doesn’t usually get noticed. Only a handful of economists, and no other academics, have ever looked in any detail at Libor, and even the financial press didn’t show much interest in how Libor is calculated until this spring, when there was sharp controversy over whether these crucial numbers could be trusted.

Last November, I spent several days in the skyscrapers of Canary Wharf, in banks’ headquarters in the City and in the pale wood and glass of a hedge fund’s St James’s office trying to understand the credit crisis that had erupted over the previous four months. I became intrigued by an oddity that I came to think of as the end-of-the-world trade. The trade is the purchase of insurance against what would in effect be the failure of the modern capitalist system.

Zero Is a Clenched Fist: Trading from the Pit

Donald MacKenzie, 1 November 2007

The new financial trading floor of the Chicago Board of Trade is a striking sight, and Caitlin Zaloom describes it well. Opened in 1997, it occupies a ‘huge stone block’; the trading floor itself is ‘the size of Grand Central Station’, and has no windows or even a public entrance. The walls are ‘unadorned granite, shiny, cold and imposing’, with huge...

Many people, especially on the political left, instinctively dislike the idea of emissions trading. Among the roots of this dislike is a variant of what the economic sociologist Viviana Zelizer calls the ‘hostile worlds’ doctrine. Her particular concern is with the worlds of economic relations and personal intimacy. In that context, the ‘hostile worlds’ doctrine is that the intrusion of economic considerations corrupts intimacy, and conversely that kinship and other intimate relations need to be stopped from corrupting what should be impersonal economic transactions. Zelizer questions whether the hostile worlds doctrine is right: for example, is paid care of children or of the elderly necessarily inferior to that provided by kin? Is your relationship to your children really damaged by paying them to hoover the house or clean the windows?

A lycée in Lyon, 1944. A young Polish refugee is hiding in the school. His identity papers are forged, and deportation to the death camps may await him if he is caught. His attention, however, is not on the dangers outside but on a mathematics lesson. When he first started taking the classes, ‘he sat uncomprehending before the meaningless words and numbers on the...

Empty Cookie Jar: Ethnoaccountancy

Donald MacKenzie, 22 May 2003

The Four Seasons hotel, Houston, 20 January 2000. The investment managers and analysts packed into the ballroom are paying only partial attention to the presentation by the Enron Corporation. On the New York Stock Exchange, Enron’s shares have been rising all day, by as much as $2 an hour. It is now mid-afternoon, New York is about to close, and the members of the audience know that the...

The Imagined Market: Money Games

Donald MacKenzie, 31 October 2002

Economics is a world-shaping, not just a world-describing , endeavour. The discipline thus matters not just to economists but to the rest of us, whose world is being shaped.

For nearly a decade, heated debates about science have split academia and sometimes spilled onto the pages of newspapers. Although the ‘science wars’ were well underway by 1996, they came to wider attention in that year when Alan Sokal succeeded in publishing his brilliant pastiche in Social Text. Sokal’s hoax implicitly condemned – and a fair number of further books...

The investment partnership Long-Term Capital Management was set up in 1993 by John Meriwether, previously a successful bond trader and then senior manager at the US investment bank, Salomon Brothers. Meriwether recruited to LTCM, from Salomon and elsewhere, an impressive team of experienced traders and specialists in mathematical finance. Much of its trading was with leading banks, and it largely avoided risky ‘emerging markets’, preferring well-established ones such as those in government bonds of the leading industrial nations. The fund avoided speculation based on hunches. It built carefully researched mathematical models of the markets in which it traded, and invested in a way designed to achieve insulation from market movements, seeking small pricing anomalies from which it could profit. Although it had to borrow large amounts and commit money on a large scale to make an adequate return from these anomalies, LTCM scrupulously measured and controlled the risks it was taking.

Humming, Gurgling and Whistling

Donald MacKenzie, 11 December 1997

In July 1785, Thomas Jefferson, then American Ambassador to France, paid a visit to the dungeon of the Château de Vincennes. Its three-metre-thick walls had previously imprisoned Diderot and the Marquis de Sade. Now, however, it housed the workshop of a gunsmith, Honoré Blanc, and a dozen assistants. As Jefferson watched, Blanc sorted into bins the pieces of 50 musket flintlocks: ‘tumblers, lock plates, frizzens, pans, cocks, sears, bridals, screws and springs’. From the parts in the bins, Blanc assembled several working gunlocks.‘

Wasting Assets

Donald MacKenzie, 23 January 1997

It always helps to see the ordinariness of things. Despite the end of the Cold War, nuclear weapons remain very un-ordinary in the popular mind. The world’s nuclear arsenals still contain over twenty thousand warheads. Yet nuclear weapons are an ordinary technology and can, like other technologies, become obsolete. They can, perhaps, be abolished. There is even a meaningful sense in which nuclear weapons can be disinvented.


Short Selling

5 April 2018

Donald MacKenzie writes: Certainly, some people made a lot of money betting against mortgage-backed securities. But their activities didn’t stop the bubble, and in some ways inadvertently exacerbated it. They couldn’t borrow those securities to short sell them in the way described in my article. As described in Michael Lewis’s The Big Short, they had to take out what are called ‘credit...

The Fear Gauge

25 January 2018

I wrote about VIX, the Wall Street ‘fear gauge’, in the LRB of 25 January, addressing in particular the question of what was maintaining the VIX at such a low level. A week after publication, the processes I discussed began to go into reverse. Then, on 5 and 6 February, the reversal became dramatic and the VIX rose to well over 30 (it had been under 10 as I was finishing the article), accompanied...

Hereditary Genius

A.W.F. Edwards, 6 August 1981

We are all prisoners of our backgrounds as well as slaves to our genes, and no field of science is riper for sociological investigation based on this premise than the development of biometry, and...

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