We present ht here, in three parts, a preliminary report on the book Speculative Capital, which contains the first comprehensive study of a new form of capital that dominates the economies of the 21st century. Throughout this report, we refer often to LiPuma’s book The Social Life of Financial Derivatives: Markets, Risk, and Time , an important text for understanding the contemporary economics of capital. For LiPuma, the derivative is a form of speculative capital and thus of value, and derivative markets are machines of accumulation welded to a circular capitalism. The capital markets , driven by derivatives, which in turn allow capital to be separated and reassembled and leveraged to dizzying heights, are held together by abstract risk, driven by nomadic, speculative opportunistic pools of capital,
LiPuma defines the social as a collective action, and specifically for the financial industry, the (covert) social means the movement of buying and selling assets, speculating on their future value based on the affirmation of the abstract risk involved, where this is only possible for agents in the markets, who already possess social dispositions regarding a rationality demanded in the financial industry, which constantly traverses the entire financial field, think for instance of the maximization of profit, the production of self-esteem, the competitive dynamic, the speculative ethos, etc. There is a relation between this financial habitus and the speculative possibilities that are intrinsic to the financial field; that is, the structures of the financial field are implemented in the cognitive and generative schemata of the agents, which is what they need in order to participate in the „game“ in the financial field. The real dynamics of the financial economy are based on the relation between the structure of agents‘ dispositions and the structure of the financial field and markets themselves, which in turn are the result of a set of competitive determinants.
For LiPuma, three preconditions are necessary for the study of the social in finance: An ontological presupposition, whereby the very study of the financial crisis shows that Marxist and neoclassical theories, both of which privilege the sphere of production, are themselves in crisis. Associated with the centrality of production a certain conception of totality, which today is replaced by the circulation and reproduction of capital markets, which relate the objectivity of totality and the performativity of agents.
The second condition is epistemological: categories lose their dialectics in favor of categories that represent a distributed economic field. The derivatives characterized by spreads are relational spaces that allow simultaneous movements in different directions to be possible. These movements through time-space appear, from a temporal point of view, as intervals or times of valuation characterized by speed, volatility, and recovery. This mobile configuration replaces the usual immobile configurations of points and positions, agents versus structures. When the economy is examined more from the point of view of spread or circulation, there is no hard opposition between production and circulation, material wealth and financial assets, investment and speculation, because all terms are mutually dependent dimensions of capital. This kind of circulation includes a specific implementation of the social, which in turn mobilizes a ritual to transform insecurity into security. Finally, it involves an immanent understanding of the sciences, insofar as the analysis of financial markets must have a relation to the methods and practices of the agents who construct such markets.
The derivative is not a thing that one holds in one’s hands, say, like a book; rather, it is essentially relational, or rather, it is a relation of relations. First, the relative volatility of the derivative in relation to the volatility of the underlying must be mentioned to characterize the derivative. In turn, the crucial of the replication of the derivative is the magnitude and speed of the volatility. In a sense, according to LiPuma, bets are made on the relation and a tango is played with time. So in a derivative contract, two counterparties „bet“ on what will happen to an underlying asset in the future, such as exchange rates or interest rates between the dollar and the euro. This bet is for a specific time period, which is clearly defined in the contract.
For LiPuma, derivative markets are both historically determined and arbitrary means of capital ascribing risk to value, with derivative markets in some ways separating circulation from production while generating new modes of interdependence and connectivity. This refers primarily to the fact that derivatives are not limited by or dependent on the structures of production. Derivatives are sui generis speculative capital – a form of capital used to manage the structures of a nomadic and opportunistic capital that circulates self-referentially in its own markets. The design of a derivative contract has no necessity in itself at first, it has the intrinsic value of an instrument that connects derivatives as a parallax and creates a globally fluid market for the capital to and synchronizes derivatives and also increases leverage. The derivative is an instrument whose foresight of the future helps generate the future it foresees. This dynamic has a self-referential and relative dimension: the volatility of the derivative can implement volatility in the underlying, which in turn increases the increase in the spread of the derivative. Without volatility, no derivative is conceivable, which means that if derivatives do not circulate, then they are simply worthless. In circulation, the quite contingent events based on socio-economic conditions are reduced to contextless risks and thus naturalized, that is, melted down to discrete, independent, and liquid risks that are exterior to the social
The derivative is a determinant form that can refer to all imponderables and uncertainties in the world, it involves a speculative ethos constituted between a culture of calculation and the illegibility of chance. There is a specific duality here between concretion and abstraction. Because there are a myriad of underlyings, there are few limits to the ways derivatives can be written.
For LiPuma, moreover, the derivative is a generic design scheme based on a time-based bet on volatility, on the division and recomposition of capital, and on the mixing of variable and incommensurable forms of risk, ultimately resulting in an abstract number that in turn functions as a social mediation. (For an economy driven by derivatives, metrics like GDP are meaningless). Derivatives represent economic totality as an in-determinate, disparate aggregation of globally replicating contracts based on abstract risk. (The size and principled boundlessness of derivatives today has enormous consequences for the organization of national labor markets and the conditions of collective reproduction of the economy. Speculation becomes the privileged ethos when the profits that result from it exceed the profits that result from the application of productive labor. Consider the real estate market, where the profits that relate to the house as a financial asset have long since exceeded the value of the house home as a material good or commodity, indeed are increasingly decoupled from the cost of the classic commodity house).
There is, similar to the movement of capital, the intrinsic need in derivatives markets to constantly invent new exotic or synthetic derivatives to identify and capitalize global money flows, that is, to subject them to the logic of leverage. In this context, derivatives are not to be understood as a commodity; rather, LiPuma refers to them as non-commodity commodities; they do refer to the commodity form, insofar as each derivative is particular and realized in money, but they are also, without exception, social meditations of the circulation of speculative capital.
For LiPuma, the derivative is a time-based bet on volatility. Derivatives monetize the risks for a specific period of time. The now (the beginning of the contract) is a virtual and spaceless moment, but crucially, the contract has a duration related to the future. Market participants do not care whether the „value at risk“ is real or fictitious. And derivative contracts are intrinsically performative in that they produce the conditions of their own existence, just as saying the word „promise“ produces the promise until it expires under certain conditions. The use value of the derivative consists in its dynamic replication, or, to put it another way, derivatives exist in the interval between inception and expiration, and in doing so they continuously create a new now and new wealth by opening and closing the gap between a realized price and a possible future. Derivatives fill a period in which wealth is created as a consequence of volatility, as a dispersion or spread of what they represent as an imaginary center of spreads. The design of the derivatives shapes the leveraging of this volatility, convexity here meaning that the variation in the price of the underlying and that of the derivative need not be symmetrical. A variation in the price of the underlying can lead to a disproportionate variation in the price of the derivative. Thus, a small variation in the price of the underlying can lead to a huge increase in the price of the derivative; recall that in the subprime crisis, a small number of defaults led to large losses for CMOs. The price movement of the derivatives can be disproportionately higher than that of the underlying assets. This is called the „Jensen imbalance.“ Here, the derivative cannot be reduced to an anticipated income stream or return, because the magnitude and speed of its volatility helps determine the magnitude of the return. The price thus refers to the expected future volatility of the derivative, measured as the degree of variance between the moment of the transaction and its maturity. The derivative price is thus centered around the relation between the expected volatility and the maturity.
Thus, the pricing of volatility takes place in time intervals, that is, time is compressed and contracted in the period between the inception and expiration of the derivative, although it should be noted that the speed of circulation is quite different from that of classical commodities. From the constant film of time, the derivative cuts out and shapes a certain interval of time, an interval that presents the future, which in turn interacts with the present, or, to put it differently, it is about the interpolation of the future, which leads at the same time to the expansion of the present, but also to its destabilization. Traders are condemned to anticipate a future they cannot know, and in doing so they follow the guidelines of financial theory, which tries to determine the future as a probabilistic distribution. This use and determination of time distinguishes the derivative substantially from the classical commodity. The buyers and sellers of a classical commodity can agree on a price because they ascribe different use values to the commodities they exchange. While the seller seeks to make a profit, the buyer desires satisfaction of his needs. It is different with the derivative, which is not a commodity and has no transparent value in the here and now; the only measure that motivates the transaction lies in the calculation of its future value. The derivative aims at a future, it can only be priced out because market participants assume a bid-asked spread, insofar as they reach agreement on the net value of the derivative, but differ in their expectations and speculative calculations regarding the future value of the derivative.
Derivatives differ not only from classical commodities, but also from other forms of capital. Here, the derivative resembles those instruments that refer to debts or forms of capital that can be continuously valued. Nevertheless, the derivative differs from a bond, for example, in a significant way. The price of a derivative is linked to an underlying, but it prices out aspects that the underlying itself cannot price out, such as the specific risks of the underlying in relation to the risks that relate to the market as a whole. And derivatives can form prices that relate to clearinghouse errors, accelerating inflation, or a descent of yield curves. Derivatives also do not throw off accumulative gains over time like bonds do. Whereas bond profits accumulate over time, the value of a derivative declines over time or toward the expiration of an expiration date.
Furthermore, dynamic replication between volatility and liquidity is necessary for the derivative. The ability to exploit volatility is absolutely dependent on liquidity in the financial markets. In general, derivatives follow a difficult path, namely to increase volatility without it becoming so excessive and uncontrollable that it leads to a loss of liquidity. The collective confidence of market participants in the future liquidity of the market is essential here. Therefore, derivatives inherit the performative power of ritual to collectively set in motion the very thing that each individual agent anticipates. But liquidity in the markets keeps evaporating because they can’t remember their past mistakes. There is a spread and difference between risk and uncertainty that is itself volatile.
Even hedging includes a speculative moment insofar as it relates to the trajectories of future volatility of the underlying. However, the correlation hypothesized in hedging – if y moves up, then x moves down – is not understood by market participants as a parameter of the model, but as real. The hedge can therefore also mutate into a speculation. In this case, it is not a matter of reducing the risks, rather they are hedged only in order to increase the speculative capital, whereby the risk only counts quantitatively, as a calculation of a price, which is provided with a number. In this process, risks are separated from the conditions of their realization, and this has certain implications: Risk can now be defined in terms of volatility and measured as the probability of the relative variance of the derivative price. Volatility is itself measured into a logic of production. Derivatives now capitalize on the volatility they actively create.
For LiPuma, the relationship between the financial economy and the real economy is one of disruptive interdependence. While the real economy depends on avoiding disruption and volatility as much as possible, volatility is the lifeblood of finance insofar as it must necessarily be capitalized and increased, which in turn often enough serves the real economy, which benefits when volatility in financial markets is gradual and predictable, while jumps in volatility can in turn advance financial markets if they do not constrain liquidity. Derivatives thus also reconfigure the values of classical commodities, repricing them not in terms of the intrinsic value of the commodities but in terms of their uncertain future value. And this, in turn, also affects the structures of labor markets and the capital distributed in production. If a commodity is sold even before it is a worldly thing, then derivatives infiltrate circulation into production precisely by ascribing floating and contingent values to the commodity. To speculate on a commodity (real estate) driven by the derivative is to speculate on the spread between the directionality of prices and the spread produced by the derivative markets.
Thus, the exchange value of the derivative is not at all a function of abstract labor, but rather the expression of a social abstraction (of risk) generated in a given time interval. Moreover, the value of the derivative is based on information and the conditions codified in the contract, it is not in a commodity based on abstract labor, but in the labor required to establish the interconnectivity of capital circulating globally.
For LiPuma, the general problem of financial markets is to produce as much volatility as possible without volatility producing an impairment of liquidity. Thus, the intrinsic dynamic of markets lies precisely in the need to exercise arbitrage on volatility through financial transactions and to calculate the amount of risk (through leverage) necessary to produce, in turn, precisely the volatility that allows arbitrage to work. In this context, the tendency toward crisis-like processes implies that a decrease in volatility that leads to an increase in stability in production-related markets may just increase instability in derivatives markets. An expected fall in volatility reduces the profitability of arbitrage, which in turn motivates traders to compensate for the fall in profits by increasing leverage, so that outstanding positions become more difficult to hedge and small changes in the underlyings result in large changes in the prices of derivatives. If the derivative is systematically transformative, it is because it is a self-exploiting and expanding form of money capital, that is, speculative capital.
It is important to remember that the expansion of credit creation by private banks is an important resource of speculative capital, which in turn fuels the derivatives markets and may, but need not, also fuel the real economy. In any case, the growth of financial markets vreinforces the financialization of money. In the process, derivatives markets must be volatile enough to attract speculative capital, but they must know how to avoid the point at which the elasticity of volatility can become dangerous to themselves: They are, in effect, creating the disease against which they must immunize themselves. The logic of speculative capital consists in the perpetual reinforcement of the motive to create opportunities for differential monetization, or, let us put it differently, it must generate the capitalization of difference. And this logic is necessarily a mode of circulation based on risk in its derivative form, and it always refers to capital accumulation. The new circulatory regime of capital is not based on the power of states issuing legal money, it is culturally diffuse and contains a highly abstract violence that culminates in a speculative ethos, namely the abstraction of risk, a monetized subjectivity, and a reorganization of the relations between production and circulation. While financial circulation cannot replace industrial production, it does give it a new shape. The allocation of capital is increasingly dominated by financial and derivative interests. It is not the real economy that drives the financial economy; conversely, it is the financial economy that structures the real economy. That is, derivatives organize capital flows between different collateral, currencies, and money flows, and thus they necessarily have regulatory capacities and thus actually take over governmental tasks and functions and integrate politics into the economy. This can also be seen in the fact that governments have shifted from establishing social security entirely to guaranteeing the liquidity and solvency of financial markets (bailout). Yet the social in its contingency, which traverses the spacetimes of a social formation, remains a significant resource for derivative markets and for the mosaic of uncertainties that allows derivative markets to generate a sustainable market in the first place. (The social, whether it relates to money flows, currencies, or interest rates, remains the ontological gap between the price and value of a derivative, as participants must always agree on a derivative price to close a spread in the future, but differ in their views about the value of the derivative in a given time interval).
There is an interplay between the temporality of the calculation and the illegibility of the opportunity, and there are the ways in which this correlates with the leverage of the derivative form. The hedge of the derivative transaction represents an attempt to subject the relation „calculation and opportunity“ to arbitrage, in that the actors attempt to read the future. This arbitrage is now coded as mathematical probability, but it is always based on a retrospective interpretation of the markets, while the existential uncertainty remains. There are two ways of measuring the movement of a future-oriented derivative: either measuring historical volatility by tracing how the derivative and its price fluctuated in the past, or, by reading the implied volatility, assuming an anticipated price, and tracing this back to the present (discounting). Here, one then calculates the leverage of a given derivative using the Black-Scholes formula.
Credit, in terms of temporality, has to anticipate the creation of derivatives, which in turn serve as a hedge for credit, but also for the derivatives themselves or for the liquidity of an institution. The symbiotic form between credit and derivatives creates a temporal dynamic that, for LiPuma, reconfigures the ontology of money, whereby the production of money no longer correlates with the production and circulation of goods and services. For LiPuma, the growth of the dollar, which far exceeds the growth of production, as well as the fact that the velocity of circulation of money in production is falling, points to a fully circulative capital that often enough moves largely independently of production.
Speculative capital takes the form of derivatives because they unify in a single instrument various concrete risks, even if they merely mask the uncertainty that appears on the horizon. In this context, market makers design derivatives to liquidate the risks that appear in different concrete situations, and to use derivatives as an objectification of abstract risk. This form of monetary circulation differs substantially from credit and notional capital. Moreover, the financialized risk is separated from its social contexts and relations, i.e. a given situation is assumed to be risky, the risk must abstract from the social, economic and political conditions in order to translate it into an analytical and mathematical space, which is just assumed to be independent of the circumstances. In the process, generative and classificatory schemes (interest rate risk, credit risk, transaction risk, direct risk, counterparty risk, liquidity risk, etc.) have emerged over the last 40 years, and ultimately any variable that can be identified can become a risk. This nominalization implies that Finance sets each type of risk as an ontologically real object. In doing so, the respective types of risk are translated into an abstract form. The incommensurable and variable forms of risk are transformed into a singular form: abstract risk.
What is at stake here, as the Greek economist John Milios also noted, is not two separate forms, but two inseparable dimensions of risk involved in the trading of derivatives. Each derivative is qualitative in its individual case, particular in its capture of a particular ensemble of identifiable risks, and it is systemic insofar as the abstract risk co-produces the market as mediation. The concrete risks are necessary for socially generated volatility to occur, while the abstract risks synthesize in order for volatility to be priced at all. It is with the abstract risk that connectivity is first established. In abstracting from all the socio-economic context, abstract risks can compare and quantify concrete risks through mathematical formulas such as the Black-Scholes equation.
In a given market, a concrete risk (the fluctuation of currencies) is particular and generated by a fluid, heterogeneous circularity, but as an abstract risk it is an individuated dimension of a homogeneous and systemic mediation aimed at reproducing the market as a totality. Abstract risk aims precisely at what agents invariably and unconsciously do, namely, to imagine the market as a totality so that it remains liquid through countless iterations of price-setting and under circumstances that are perpetually changing, especially those that make the recalibration of prices possible in the first place. All the relations included in these relations are priced out on the financial markets, they circulate and are speculated on. In these processes, economic agents constantly fail to recognize the social dimensions of risk, precisely because the market appears to them as an objectified and formal construction. To summarize at this point, the abstract risks subsume the concrete risks and, as mediators, provide the liquidity that makes the derivatives market possible. Without the abstract risk, there is no liquidity and no derivatives market. The risk-driven derivative is the new means that sutures circulation by objectifying the risks (through abstraction and monetization) and thus creates and trades precisely the connectivity that capital requires so that perfectly anonymous agents and organizations can be brought together in markets based on risk-based transactions.
It is worth pointing out in this context that shareholder value is an important means of regulating firms, indicating the shift from commodity production to derivative, namely the equation of firm value with its market price, leading to continuously ongoing price-setting, assuming that the market is an objective and non-personal judge of firm value. Through its massive influence on credit, currencies and capital markets, speculative capital infiltrates finance into the real economy and seeps into the logos of reproduction of production. The movement of a company’s stock market value is now the key measure to generate shareholder value in particular. And this influences the temporal compression of the horizon of investors, whose short-term perspectives now massively influence production, precisely by creating relative separations between the time of allocation of capital and the time of production processes. The period in which a stock is held, usually only from quarter to quarter, is much shorter than the cycles of product turnover in industrial production. This is also important in that financialization has turned home owners into passive investors who must now entrust their savings to institutional fund managers. Moreover, the income from shares often enough exceeds the profits resulting from the sale of products to which those are related. Thus, the quantity of the sums of money that the fund managers manage increases their influence and power in the companies whose strategies must now be concerned with following the strategies of speculative capital regardless of the marketing of their products (long-term strategies or local ties to consumers).
Seen in this light, the logic of shareholder value consists in enabling the abstraction of speculative capital from the industrial body of the company and, at the same time, radically reshaping it, that is, seeing in every single aspect of the company a potential from which profits can still be teased out. Day and night, an army of analysts around the world searches for hidden sources of exploitation, i.e., aspects of the company that can be monetized in the future but have not yet been reflected in shareholder prices. Shareholder value is the logos of the derivative when related to the company’s environment. In this process, the distinction between capital and enterprise is increasingly obliterated, insofar as every aspect of the enterprise is directed toward monetization, toward the transformation of the enterprise as a social organization into a machine for the exploitation of capital. Corporate profit is now directly tied to the derivative profit logic of capital. The logic of shareholder value indicates the logic of the derivative: the directional and quantitative multiplication within a spiral movement that speculative capital itself designs.
In a sense, the share price itself can be understood as a derivative related to the underlying „company,“ with options running on the share price as derivatives on derivatives, so that financial markets themselves transform into places where the future of companies is decided. Unlike fundamental analysis, which captures the fundamental business of a company, technical analysis generates the company based solely on the trajectories and volatility of its share price. Especially for tech companies that are not yet producing products, technical analysis is a welcome tool to measure the risks implemented in the company right now. A major conflict of interest in the 21st century will be between speculative capital and the managers of industrial and commercial enterprises, and this goes far beyond the disruption of Fordism as assumed by most production-oriented theorists of Marxism such as Harvey.
Under the production regime, capital appears as money or commodity, depending on its place in the circuits. The rise of the derivative imbues capital with an additional dynamic, placing alongside credit as a means of payment a contract determined by risk, which in turn relates to credit. This development was latent in capital from the beginning. The self-valorizing value now appears objectified in the material form of a written derivative contract. Here, each contract and transaction is to be understood as a differential replication within a complex circulatory socio-economomic structure, with the social increasingly absorbed into the derivative structure.
LiPuma examines the various institutions of speculative capital in another section. The first is commercial and investment banks that speculate in derivatives markets. These firms own internal hedge funds that speculate with proprietary capital, that is, shareholder capital, using leveraged strategies to increase shareholder value. Other players include independent hedge funds, which are profiting from the demise of long-term strategies and rising volatility in capital markets. A relatively new player is the financial divisions of large multinational corporations, which are growing faster than the industrial divisions and are themselves speculating as non-banks in the money and capital markets. Then there are the U.S. government-backed companies like Fannie Mae and Freddie Mac. They have huge sums of money, some of which they invest in their own hedge funds to accelerate the accumulation of their speculative capital.
(Chesnais characterizes financialization with eight viewpoints: 1) The multiplication of capital as intellectual property. 2) Higher concentration of capital. 3) Financialization of non-financial multinationals. 4) The multiplication of credit through the shadow banking system. 5) The automation of financial capital in relative independence from material conditions. 6) The valorization of the financial capital, which it attributes to the fictitious capital alone, in relative independence from the industrial production. 7) The gluing of the social life by the money fetishism. 8) The subordination of labor to the financial system).
Social life has been increasingly globalized, fragmented and decentralized in recent decades without the involvement of the state. The global order today resembles a derivative market, it is omnivorous insofar as it encompasses all possible forms of economy, with the circulation of financial capital being the hegemonic dimension. And speculative capital spearheads global markets. On a superficial level, circulating financial capital decouples itself entirely from production, but also on a structural level, it also digs itself deeper and deeper into the processes of production, triggering crisis processes there by setting in motion a new way of producing and circulating wealth, through a transnational insurance machinery that constantly redesigns the design and distribution of the risks implemented in the circulation of capital. And this by means of a mathematical, statistical, digital apparatus and a specific form of knowledge that amounts to equating mathematics and economic reality. This leads to the financial models liquidating the point that separates the mathematical space as a Platonic-ideal sphere from the social space. This is important insofar as the analysis of derivatives cannot be separated from the production of knowledge and its circulation; indeed, an objectification takes place in economic theory that constructs the relational social objects as naturally appearing objects.
To discuss the social of financial markets, LiPuma examines the social embodied in the dispositions of actors working in financial markets, as well as the social of such institutions as hedge funds, the implicit social of derivatives themselves, and the social of the structures of trading practices. These are all objectifications of the social. The objectifications are present in socio-economic structures, which in turn are shaped by financial markets: The derivative, the market, the logic of speculative capital, the financialization of households through debt, the appearance of risk as a social mediation, the existence of new forms of temporality, an increasingly abstract form of structural violence, the dominance of circulation over production. Financial markets use all these structures to monetize images, information, currencies and assets of all kinds. The social, organized by the socio-economic structures, is institutionally implemented in the competition between actors. This competition relates to social status, conceptions of work, rites of passage, sensibilities and self-identity, fairness and images of emerging markets, speculative ethos, lifestyles determined by finance, reliance on mathematics, and finally the immersion of a derivative logic that naturalizes history and the social. The more successfully speculative logic is inculcated into the habitus of market participants, the more they collectively represent an unquestionable ensemble of viewpoints, generative schemas, and dispositions, and the more the social is also obscured by the field of their visions.
The first résumé might be as follows: Market participants surrender to the very markets they themselves actively produce and reproduce through the embodiment of generative schemas embodied in their work regimes. The construction of the social as an abstract object identified and qualified by risk reduces the social to the financialized calculus. The social is thereby further obscured even by those analyses that construct financial markets as a spectacle, an external reality best understood by observing the behaviors of market participants regarding the trading of assets-behaviors that produce the knowledge participants need to profitably deploy in the very reality described by theory.
Finally, financial markets are held together by an asocial instrumental rationality. Underlying this is again the logic of abstract risk, crystallized in a number, that of the derivative price. Affirmative knowledge about financial markets is condensed in assumptions about rational agents, in the standardization of information, and in the idea of the closedness of a perfect market. For LIPuma, it is the „efficient market hypothesis“ that represents at its core what he calls „illusio,“ insofar as it serves as a premise for the scholastic analyses and as a stopping point in the financial market game. The illusio refers less to theoretical inconsistencies than to certain forms of misrecognition that always remain components of the real relations of the production of financial circulations as well.
Thus, LiPuma sees a structural similarity between the financial trader and the poker player that consists in a socially produced greed that counts only the money, where there is never a limit to the desire to keep acquiring money because it is itself the means to keep the game going. This socio-specific form of greed, which dominates the behaviors and thinking of market participants, is based entirely on the acquisition of money. There is a performative creation of the financialized subject through the permanent repetition of the acts of acquiring money, driven by a deep-seated, unconscious compulsion whose manifestation in the everyday practices of financial actors takes the form of an asocial drive.
To further understand the social, it is necessary to consider the extraordinary gap between the economic models needed to model the market and the justifications for using these models. At this point, it is necessary to state the paradox that, on the one hand, financial economics requires the investment, confirming the dependence on a set of financial models that are there to determine the risk (models that systematically embrace the forces of social uncertainty), and that, on the other hand, it requires a performativity that is the condition for the success of the models and the continuation of the markets. Thus, the actions of isolated agents are intrinsically collective. Trading in derivatives and speculating on their future value, which require that agents acknowledge the unpredictable abstract risk, are possible for the agents themselves only if they themselves adopt certain dispositions, which in turn are related to plural forms of rationality (the maximization of profit, competitive dynamics, self-esteem, speculative ethos, and even a certain nationalism). These dispositions, which mediate every purchase and sale of derivatives and, moreover, the past with the future, are based on the relation between the organization of these dispositions, which are constitutive of the habitus of agents, and the structure of possibilities, which are constitutive of the financial field at every conceivable moment. The financial field and the specific markets require the cognitive and generative schemas that agents implement in their attempts to grasp the field and the markets. For LiPuma, the markets have a performative dimension that supports their inherent ritual embodied in social practices. The derivatives, then, are to be understood as relational objects that function within the social imaginary of the markets. They exist only insofar as they are objectified in the practices of agents and can be interpreted as such.
Throughout the text, LiPuma is also always concerned with analyzing a thoroughly monetized subjectivity based on the permanent acquisition of money. This is peculiar to the relation between markets and market participants willing to play the speculative game. What really motivates traders to invest in the game is more complex than the neoclassical definition of an agent maximizing utility or the popular notion of anthropologically based greed.
Constantly, LiPuma also addresses the issue of „liquidity.“ Liquidity is more than just a metaphor for the monetary fluidity of the market; rather, it concerns the capacity of the economy to circulate capital, i.e., the free-floating circulation of monetary capital is a necessary condition for the existence of the economy in the 21st century. Constitutive of this economy today, then, is the circulation of speculative capital, moreover, the use of the new information technologies to shape and accelerate the flows of capital and, finally, to advance the technologically assisted production of the knowledge that informs market participants in their decisions to trade speculatively and globally, around the clock. Liquidity is often used as a synonym for the social relations that allow agents to construct the collective enterprise that is the market: a market that always has the counterpart for a counterparty, a market that is homogeneous and permanently provides the volatility that first enables the recalibrations necessary for the market to continue. There is a necessary link between the contingent and often unpredictable financial events and the construction of the market as a totality. Derivatives markets are necessarily dependent on liquidity.
Unlike traditional commodities such as houses and other products, derivatives have no intrinsic value; they also have no ordinal use value. For LiPuma, they are a zero-sum bet on extrinsic income between competing parties. In this context, market participants must have absolute faith in the liquidity available in the markets and in the pricing mechanism based on non-arbitrage. In the last financial crisis, liquidity in credit markets all but evaporated in a short period of time. Financial institutions hoarded capital instead of investing it, fearing that their counterparties might already be insolvent and thus derivatives pricing inefficient. Even market makers were gripped by the fear that the next financial event might already indicate the insolvency of their competitors. As a result, market participants quickly lost confidence in each other and eventually in the markets themselves. First, deleveraging took place in the U.S. with respect to mortgage loans and the derivatives related to them. Lenders suffered from the accelerating accumulation of non-performing assets that rendered their balance sheets almost meaningless, affecting a whole range of financial institutions, from hedge funds and insurance companies to government-backed organizations and mutual funds, whose derivatives related to mortgage loans quickly lost value. The specter of insolvency was raging, and a deep uncertainty took control of financial agents and their institutions. Thus, financial institutions went insolvent not because of a lack of assets and capital, but because of a lack of liquidity. It was, and it is important to remember this, the invention of derivatives based on liquidity that turned even houses into financial assets.
Securitization is a synthetic form of circulation that takes place by means of instruments based on calculating, controlling and capitalizing facts and quantities such as interest rates, insolvencies, currency risks and derivative prices. Derivatives are not anchored in production, but are grounded in circulation – in and through money flows, which in turn are related to liquidity. In the sphere of production, money is considered the general equivalent that measures the value of commodities; in the world of circulation of derivatives realized in money, money is entirely related to itself, whereby not only do derivatives circulate self-referentially, but even still the underlying is transformed into an abstract relation. Since all market participants operate with a similar set of models, concepts, and motivations, they imagine the fabrication of derivatives as a simple expansion of a recognizable type of instrument, which in turn means for the community that derivatives are efficient to manage as a resource for profits at any given time, precisely because derivatives are an accepted model that accurately predicts the volatility of prices or the behavior of market participants.
Speculative capital has the very effect of creating markets with increasing volatility and higher risks. In the process, the circulation of speculative capital achieves a certain autonomy, characterized by the invention of derivative instruments, the abstraction and transformation of uncertainty into quantifiable risks, and the proliferation of speculative capital itself. These processes set in motion accelerating complexity and increasing connectivity, so that financial institutions become increasingly interdependent, although this very fact remains largely invisible. This „quantum interdependence,“ in which the fate of the individual is tied to the fate of the collective, is also a result of traders‘ demand for ever greater liquidity. And this liquidity in turn allows for higher leverage, with the cost of lending based on the lender’s perception of how easily and efficiently it can repudiate loans or compensate for default in the event of potential default. If lenders have positive confidence in liquidity in the markets, then the cost of leveraging the transactions falls while the opportunities for speculative capital rise. And connectivity, which relies on the collective confidence of market participants in the smooth functionality of markets, will also rise with it. At the same time, 90% of derivatives today are traded on the unregulated OCT markets, which means that they are not standardized products.
In terms of time, circulatory capital perpetuates the treadmill effect. What may be rational for traders in the short run may be irrational and destructive from a systemic perspective. The structural dynamics of securitization chains are well known from other texts; they result in the need to constantly increase the leverage of portfolios by borrowing short-term money at low interest rates to raise the money to finance longer-term CDOs at higher rates. This was possible during the last financial crisis because two cycles of leverage were related: Homeowners leveraged their homes as financial assets and managers leveraged their portfolios, driving the two sewn-together markets into mutually fueled instability through directional dynamics. If each high reached in the various financial markets represents a new plateau from which speculative capital seeks to eliminate the possibility of falling profits, then this is precisely what leads to the crisis as a systemic failure, although the various insurance companies have repeatedly and continue to claim that systemic failures do not exist.
LiPuma identifies three factors that were key to the financial crisis: Securitization strategies were inherently tied to a period of euphoria, from mortgage lending to derivatives. Since all systems involving humans are intrinsically social, the potential for errors inherent in the system cannot be reduced to individual actions or the dispositions of agents. Finally, the contemporary capital economy is tied to the treadmill effect, insofar as the pressures generated by competition in financial markets push capital ever closer to its own precipice. Socially collective dispositions are also created in the process, which steer the behavior of individual actors in a particular direction.
The central argument LiPuma elaborates in the section on the temporality of speculative capital is that derivatives markets self-referentially set in motion a temporal progression by which abstract risk is pushed to a level where even small turbulence in the markets can lead to systematic collapse. Thus, the propensity for instability that induces crisis also builds on the temporal dynamics of markets. There is a directional dynamic that points to increasing complexity and instability in markets, which LiPuma tries to explain with the treadmill effect. This must necessarily address the problem of time, namely the discrepancy between abstract time and the time of agents, times that are substantially different. Moreover, the financial field has a variety of temporalities that are intertwined.
Some times in particular indicate the social in financial markets. First, there are the historical trajectories, as financial economics has changed dramatically in its structures since the 1970s, for example, when it comes to the invention of new financial products, structures, and forms of speculative capital that are in turn internalized by actors as speculative ethos. The crucial feature here for LiPuma is the historical rise of circulatory capital as a co-evolution of speculative capital, hedge funds and other genuinely speculative investments, and derivatives driven by abstract risk. At a granular level, this evolution concerns a new form of temporality that extends beyond finance and its influence. There is a temporal dynamic to report in financial markets whose direction is toward entropy, indicating that crises are intrinsic to derivatives markets. At the same time, the simple linear models still used by quantitative analysts can hardly capture the complex and abstract temporalities in financial markets.
After all, it is the temporality of abstract risks that underpins and drives financial markets. In order to generate profits in the zero-sum game between two counterparties (one’s profit is the other’s loss, at the microeconomic level), it is necessary to anticipate the direction of volatility, which is dictated by abstract risk. Building on the consensus of market participants and the direction of volatility, which is influenced by certain components of abstract risk, profits generated in markets depend on recalibrating prices in the desired direction. In doing so, agents indulge in a narrative that tells of it being the derivatives themselves that are priced out. The derivative is identified as the agent doing the pricing and thus the social circumstances of the recalibration of price movements are hidden. Moreover, it is hidden that the constant recalibration of the derivative occurs in the face of a flow of uncertain economic and political events. This temporal contingency can only be nullified if one assumes, so to speak, a completely pure arbitrage, which, however, is precisely excluded by the models.
Thus, along with volatility or price fluctuations, time is one of the important variables that design and define the derivative contract. With their design, derivative contracts are within a predefined temporal parenthesis. Financial economics reduces temporality in financial markets to an abstract and formal time that is assumed to be reversible, certain, and belonging to a transhistorical logic of maximizing utility. However, this contrasts sharply with the current practices of actors in financial markets, who constantly overwrite and discount the temporality of mathematical models. Lastly, LiPuma points out the temporality of jobs in financial firms. It must be analyzed in the context of examining the financial habitus of agents.
Derivatives markets are inherently unstable to the point that their volatility often rises to extreme levels. Their cycles move with increasing levels of leverage (growing risks), complexity, and instability. Derivatives markets are internally driven by the so-called treadmill effect, which also means that they become increasingly unstable toward the end of a cycle; they self-referentially generate a time increment with increasing levels of abstract risk, to the point where even small turbulence can generate a systemic breakdown.
The more extensively extremely high profits are realized in financial markets, the more speculative capital flows into the markets, forcing intense competition among financial firms, which in turn drives market participants‘ motivations to increase leverage. LiPuma calls this the pathological progressive impulse of modern derivatives markets. The treadmill effect and its regulation lie at the heart of the economics and culture of financial circulation.
In October 1987, with stock markets in free fall, especially in Asia, LiPuma sees the treadmill effect in all its glory for the first time. He traces this effect in detail using the Asian crisis as an example: Starting with portfolio insurance taken out to hedge (by means of options) the fall in stock prices, and ending with the collapse of liquidity in the markets (a mass of sell orders no longer meets any demand). The short positions were intended to offset the losses in the equity markets. But as more and more futures contracts were sold, the treadmill effect set in. Buyers insisted on a reduced price for the derivatives, thus increasing risk, and they hedged their long-term ffecture contracts themselves by selling underlying stocks. This in turn lowered security prices and initiated a new round of dynamic hedging. When stock trading collapsed, the stock index futures could no longer be read or priced, so no specific value could be assigned to the futures contracts that were at the heart of dynamic hedging. In such a case, restoring liquidity to the markets can only happen through external, that is, non-market initiated, intervention.
The lure for derivatives trading is the promise that their return is much higher than that on government bonds or on investments in productive capital. This funnels more and more participants into the markets, increasing both the demand for derivatives and volatility, through the introduction of extremely mobile speculative capital, what is now euphemistically called fast or hot money.
In these processes, copying successful strategies and ideas is a common pattern of behavior among market participants, so that a few lucrative trades quickly become the trades of the masses (crowded trades). For individuals in the markets, short-term, competitive trading is perfectly rational, often enough simply copying the shareholder postures of such firms as Citigroup or Goldman Sachs, or compellingly expecting high returns such as those of hedge funds Greenlight Capital or Citadel Investment Group.
For the banks and financial institutions of large corporations, shareholder value is reflected in the stock prices of their companies, with the trajectories of those prices captured in quarterly reports and conferences. The key metric variable for the rise in shareholder value is the accelerating growth in Revenues. This relates to both the amount of assets a fund manager manages and the rate of return on a portfolio. LiPuma sees three key characteristics for the structure of incentives implicit in these processes: they are short-term, organized competitively, and completely saturated in monetary terms. Everything is centered around the short-term organized competition between the participants located in the financial field. Under these conditions, no trader is allowed to miss a derivative position that is considered profitable, no matter what risks might emerge in the future.
Lucrative trades in the markets today immediately attract huge flows of monetary capital, with seller yields falling as demand increases if certain market participants demand the same position. It is a characteristic of financial markets that there is a compression in time with which the acceleration of trades leaves a firm’s margins and returns thin. The traders‘ response to this is to increase their leverage, to which in turn the mass of traders must respond by applying the same strategies. An important point of the treadmill effect is simply that the market’s progression requires market participants to constantly increase their risk appetite. Unanticipated risks and problems can therefore lead to gigantic swings in volatility that feed off each other. These swings in volatility are exaggerated when hedge funds, which are highly leveraged, rely on long-term paper such as mortgage loans, but have quick money to invest in the short term.
What may be rational for the players in the short term in this context becomes a problem for the market as a whole. Financial crises are not simply consequences of random outbursts, as Nicholas Taleb assumed with his „Black Swans,“ but they are results of a structural tension/stress or disturbance that is intrinsic to the temporalities of financial markets. In this context, external news may well accelerate the crisis processes. The duration of the decline in liquidity, in turn, corresponds to the structural vulnerability of markets, to which highly leveraged derivative positions contribute, and which are particularly susceptible to accelerated liquidations.
Central to the temporal dynamics in financial markets is the category of risk, for this is the essence for the specific form of betting articulated for speculative capital with derivatives. And this creates a social field characterized by the fact that the market participants must necessarily include the risk structure in their habiti. The systemic risk is then indicated in the loss of confidence in the solvency of counterparties and is realized as a mutual restriction of liquidity. A movement is set in motion whereby the realization of a certain level of profitability becomes the base level of that time frame to which future referencing will occur. No matter what happens in the markets specifically, the systemic dimension of risk, related to the market as a whole, can trigger a crisis. This is the modus operandi of finance and derivatives, insofar as risk is at the same time a concrete speculative and a socially generated activity that imbues the market with its systemic cohesion. In this context, the price decline of derivatives during a crisis is by no means due to mispricing; rather, the price of concrete risk expresses the temporality of systemic risk. Mispricing indicates the internal structural state of markets driven by the treadmill effect. In this process, two necessary tendencies conflict, namely the need to increase risk and the need to hold together the integrity of the market. These two opposing tendencies produce an intrinsic-structural tension that is sui generis social and, at the same time, intrinsic to the logic of speculative capital itself. This intrinsic logic does not imply that the market follows a linear logic and must collapse systemically, but it does establish the possibility of crisis processes that are intrinsic to financial markets.
Structurally, the temporality of financial money flows focuses on short-termism, indeed on the short-term that is just possible. This is also reflected in the permanent search of speculative capital for new arbitrage opportunities, a situation in which opposing positions neutralize the risks or the time-lag between the beginning of the derivative position and the set expiration date. These mechanisms set in motion the directionality and compression of time, whether in terms of derivative positions or the attempt to exploit the speculative capital as optimally as possible.
Thus, it must be stated that time itself constitutes a form of abstract risk. Or, to put it differently, time is a ubiquitous form of risk that applies to every type of derivative. In production, agents minimize externally generated risk by extending time horizons. In contrast, an inverse set of risk conditions determines circulation. Since every derivative has an expiration date and the time period involved in it has no external referent, time is both a source and a quantifiable dimension of risk. For speculative capital, minimizing risk means compressing or neutralizing the effects of time, and this involves factors such as volatility, market instability, and the emergence of contingent events. But this compression of time also possesses a qualitative effect: speculative capital generates an end in itself through the means of connectivity, the derivative; the derivative serves as a source of profits and its own reproduction. The resulting culture and economy of finance produce new social forms such as that of abstract risk, new technologies such as the pricing of derivatives through mathematical models, and new self-referential contractual arrangements. Factors such as self-referentiality, the compression of time, and the monetization of risk generate derivative markets whose construction of time maintains no necessary relation to the markets of underlyings or, for that matter, to the temporality of institutions, including financial institutions.
There are two different views in financial theory on how to treat the future; first, an economic model that asserts that uncertainty in financial markets itself has no future because financial theory has the adequate tools and technology to effectively manage the future and can translate a future that is initially classified as uncertain into a probabilistic model that effectively treats quantified risks. The second view concerns the practical treatment of the future by agents in financial markets. This concept is grounded in the habitus of the agents. In their practices, traders constantly override prices and the terms set out in contracts, renegotiating and recalibrating price by referring to the changing flows of contingent events through the prisms of their views of markets and the world.
The first conception, by shifting the focus away from uncertainty to risk, has transformed the infrastructure of theoretical knowledge over the past 40 years. The creation of a speculative ethos that encourages actors and institutions to take high risks corresponds to the assumption that there is some certainty about the future of markets. The view inscribed in economic models is that the temporality of derivative instruments is subject to scientific control because derivatives have exact expiration dates and it is possible to forecast fluctuating volatility.
The notion that derivatives are immune to contingencies eliminates the historical and the social. However, it is the financial crises that repeatedly demonstrate that derivatives markets are in environments of uncertainty. Uncertainty is a distilled and multivariable form, unlike risk as a measurable variable. However, it is assumed that the model of the market constructed by financial theory is identical to the model that actors use in their practice, and that the model allows actors to know and predict the future because the model represents risk mathematically correctly. The assumption is that there is a true price and there will always be counterparties in the markets who buy derivatives. For LiPuma, however, there is an extraordinary discrepancy between the abstract assumptions of financial theory regarding safety in the markets and the experience of traders who face great uncertainty in the markets in very real terms. Therefore, there is a confusing mixture between the model designing the economic reality and the reality of the economic model. Moreover, the universe of probabilities and their correlations is itself an unknown probability.
The crucial question that arises when examining the social of financial markets is this: how can a market reproduce itself via acts of replication of the derivative? Mainstream analyses of financial markets are all too quick to forget that the market is not a simple setting in which actors execute particular transactions, but a means or framework through which actors‘ transactions become possible. In contrast, financial theories presuppose a market that by its nature has an ontological integrity that transcends space and time. Ayache has challenged this orthodox view of the market. For Ayache, derivatives markets continuously transact contingent events whose contingency makes them inaccessible to the probabilistic models that underpin the financial mathematics of derivatives. Thus, derivative markets are themselves part of derivative pricing theory, something that conventional financial theories criminally neglect.
Standard mathematical methods cannot capture the singular financial events, but only interpret them retrospectively. Derivatives traders, however, need the probabilistic models only to go beyond them. Unlike markets hypostatized by financial theory, current markets constantly recalibrate prices. In fact, there is no price as the spread between ask and bid. This spread must be continuously reconciled if markets are to exist at all and remain liquid: The market price is the input, not the output, in every conceivable pricing model. Traders continuously overwrite the market in ways that the models are incapable of capturing. And this „rewriting the market“ is embodied in the traders‘ habitus, which is the inscription of the constituent that structures the constituent. By referring to Bergson, Ayache can say that the reality of the contingent event is equal to the reality of the market.
Nothing exemplifies the constitution of the market and motivations today more than speculation. The drive to permanently generate this kind of derivative bet, which is what has characterized the Euro-American financial markets in particular since the 1970s, could never have circulated in these vast dimensions if there had been no specific derivative framework: a real social entity whose realness is felt and known because it conditions, frames, orients, and channels the motivated actions of the actors.
The question is how „we“ arrived at this collective belief in this type of totality that is considered a template for the creation of specific markets. How does the financial field produce and reproduce the collective agents? And how does what the agents do in the markets lead to a totality called market? In this regard, the standardization and formalization of actors‘ practices is part of the main strategies in markets that they use to totalize themselves.
The more institutionalized a market is, the more visible it becomes to the public. Thus, the stock market has become the paradigm for the functioning of all markets, while the very design of OCT markets has few similarities with the stock market, and this is significant because it is exponentially larger (by a factor of 100), more global, and more directly implemented in the workings of the real economy. Traders can compete, assimilate and quickly respond to the volatilities of bid-ask spreads and price fluctuations in this space of operations, which is the market, because they have ever already assumed and presupposed the market as a totality. Traders see an analogy and affinity between what they do and a professional athlete who, when playing the game, must assume the totality of the game and trust their deeply inscribed sensibilities to play the game well.
So how can the derivatives market be problematized? How are the contingent transactions executed by the actors to be assessed, whose completion is predicted by the collectively assumed condition of the existence of a market that produces the transactions by means of these realizations? The dynamic recalibration requires a socialized subjectivity that consists in the belief of the market participants that there is a totality called market, even if it is assumed only as an abstract space for calculations that stimulates their motivations and even still traverses their bodies. Derivatives markets have no tradition and no laws; they are historically singular inventions whose existence cannot be separated from liquidity. Intrinsically, at the microeconomic level, they are a zero-sum bet between competing counterparties over an extrinsic matter.
A derivatives market must design and deploy its own principles of formation. It must now be clarified how the ritual inscribed in the social relations of buying and selling performatively objectifies the derivatives market. This performativity is necessarily prospective and not retrospective, prospective in the sending of bid and ask prices (which deploys liquidity), but retrospective in the execution of a trade (which deploys counterparties and new price movements). Therefore, the market and its determination must be conceived both as a system/totality and as a work/practice of reflexive actors. A market is a specific social space designed for particular modes of practices by actors, i.e. behaviors (the use of speculative capital to bring risky derivatives into circulation) held together by the connectivity of the cognitive and motivational structures (competition, self-esteem, profit, risk) that in turn also drive these behaviors.
The burning question here is why the determinacies that lead to specific markets entail, at least temporarily, markets that are regular and rational, but do so only partially, insofar as rationality is repeatedly replaced by periods of heightened volatility, sometimes so high that liquidity evaporates and the systemic failures of markets emerge with all consequence. So why are the regularities of markets often so irregular? (It is important to point out again at this point that the market is not a category of objects, but a set of social relations. If this is ignored, then, as in prevailing economic theory, there is a persistent non-reflexive naturalization of the market, insofar as relational categories are treated as object-categories, a kind of ontological error. An important feature that distinguishes relational categories from object categories is their social and historical determination).
Thus, there is quite a bit more to investigate when grasping the market as a social relation than merely analyzing it as an imagined totality. Relational categories such as the market, in fact, become objectified and institutionalized in a way that leads to totality or system. The creation of a collective, that is, socially imagined totality, requires the conjunction of quasi-ritual forms of objectification and processes of institutionalization in which the construction of the financial habitus also takes place. If derivative markets are specific instruments of circulating relations qua relations, through social entities such as contracts, then the market that conditions this must itself be a determinant.
The social logic of finance, on the one hand, creates the general form market that acts as a totalizing framework for the specific sets of relations, and, on the other hand, shapes the connectivity necessary for specific markets, in which the actions of the actors reproduce the concept of market with the production of these markets.
From the point of view of concrete social relations, derivative markets are to be understood as processes through which actors objectify the totalities in which they participate. The question now is which invisible aspect reproduces the whole called market. The reproduction of the market is the non-intended consequence of actions whose effectiveness presupposes its existence. Derivative markets do not only have a superficial performativity that can be observed in the bets that create derivatives, but they also have a deeply performative structure in which actions are grounded in a determinate social imaginary of this or that market that stabilizes and reproduces the market with respect to the precondition of its totalization.
Finance keeps the word exotic ready in case derivatives are written for the purpose of an extremely hrisky profit maximization that transcends the actors‘ notions of the limits of the market: What often seems like a surreal treadmill is the repair of a directional dynamic of derivatives markets, not only in the direction of increasing leverage, but also toward increasing complexity, insofar as the marketing of the products of speculative capital requires constant expansion beyond the boundaries of the market. Everyone wants to become, as one hedge fund manager puts it, a profit monster. In this regard, large companies with high monetary capital, the corresponding knowledge, and high interconnectivity have a clear advantage.
Finally, there is a form of performativity in and with which each market participant imagines the market, namely similar to everyone else. The technologies used in the financial system, from high-frequency trading to algorithms to mathematical models, have the effect of obscuring the underlying social that serves to reproduce markets, while at the same time increasing the sensitivity of market participants to make objective and quantifying judgments about their behavior. The objective and autonomous character ofT echnology becomes a simulacrum for the autonomous and objective character of the market. Technology connects actors to the extent that they understand it themselves as the epicenter of their social lives. It is often assumed that people have no choice but to sit for hours in front of the screen on which charts and trades flicker. Overall, this is anonymous socialization. And this involves an existential performativity, the attribution of a very specific socialization, i.e., a mutually expected repertoire of beliefs, desires, and strategic judgments concerning the market and the behavior of market participants, especially with respect to counterparties whose self-representation requires nothing more than the electronic trace of a trade on a screen. Market participants assume that these structures are reciprocal and recursive, insofar as others would frame their behavior in the same way as theirs, no matter how anonymous the others, and this even in the face of the fact that the transaction that appears on the screen is computer generated. One simply assumes that trading programs reflect the intentional intentions of actors. Trading programs and the ideas of their programmers, like the views of traders, have a general and standard utility value that traders use to shape exchange values and make profit.
It has been noted often enough that market participants reify and personalize the market and, moreover, describe market movements through a series of metaphors, but what is crucial at this point is simply that there is a discrepancy between an abstract, asocial agency and an everyday space of traders in which transactions and their utility are to be maximized, assuming here the social totality called the market. It is about how concrete financial relations in all their social specificity produce and reproduce a social imaginary totality. This is the market as a means for the rational agent maximizing utility. But such a market has never existed because agents must adopt intelligent and institutionally coordinated concepts and dispositions to survive in markets at all. Markets are organized on a systemic level; they are necessarily more and different than the sum of their individual parts. One cannot capture the systemic properties of markets by merely analyzing the actions that take place in the market. While it is not the case that the individual actions of actors are unimportant, it is precisely because they produce a differentiated dimension of social reality that they presuppose a certain socio-economic structure of the market and of the imagination about it. ,
The financial market is a social imagination, a deeply institutionalized imagination including the persons who possess trust in this imagination and bodies that inscribe a knowledge, plus ratified names, registered companies and a codified history: By constantly problematizing belief and trust, the commentators of the märkte invoke without knowing it a performativity normally attributed to religion: ritual. For LiPuma, the market is thus a social totality, a practically relational construct and a kind of analytical object constructed by the sciences.
For LiPuma, the totality (of the market) is nothing more than an ontologically real-social fiction, fictional because it is contingent and socially created, and real because it grounds real world events. In this, performativity is not limited to ritual or certain linguistic events, but is implicit in the reproduction of all social forms and structures of circulation in the economy. The rise of derivative logic as the principle of derivative production (based on the separation and recomposition of capital) determines the generative scheme (design of exotic derivatives) that traders adopt, which in turn serves to performatively reproduce derivative markets. To account for circulation, the temporality of reproduction, and the logic of financial practice, one must keep in mind the power of risk, uncertainty, and volatility.
The ritual of a financial event is performatively successful if it reproduces the integrity of the form or structure of markets and thus maintains liquidity, no matter what volatility is involved in the unfolding of circulation. The problem here is reproducing the shape of a form, given the volatility and risks/uncertainties of future volatility, and regarding the strategies implemented in it. Performativity re-objectifies the form of the form, i.e. a transformed form that appears ideologically as maintaining the integrity and identity of the market. Insofar as financial circulation makes all social forms fluid, these forms must constantly re-objectify themselves. The unification of performativity and objectification together lead to a reconceptualization of totality that moves from crystallized forms to ones that must be permanently re-objectified.
This continuous process of re-objectification has its own social consequences, i.e. the formation of form is positional, perspectival and provisional. A derivatives market is provisional insofar as its financing, agents, and liquidity are constantly changing; it is positional insofar as its definition as a market relates to other markets; and it is perspectival insofar as its integrity depends on the positions of the individuals who find themselves in the financial space. The objectified forms here serve as real and fictional spaces in which the flows of money are brought forth as well as destabilized, by means of the performativity they re-objectify. It is also necessary for agents to maintain their collective belief in the integrity of form despite the destabilizing effects of circulatory forces.
LiPuma repeatedly emphasizes the problem of the functionality of markets and the derivative. If the derivative is to function as a speculative bet, whether it is on capital or on collateral for a loan that leverages the bet, then one needs an energetic market. The derivative has value only if there is a market in which it can circulate. Finally, the functionality of the market also depends on the willingness of market participants to produce a stream of liquidity in the face of uncertain volatility. The market is a real social fiction that agents produce and reproduce quasi-automatically through their collective belief in it. The blending of the real and the fictional via the collective belief of the agents as well as the trust in the functioning totality indicates that markets have a performative aspect. Liquidity here consists in the representation of the social on the financial field, indicated by the objectification of the counterparty on one side and the assumption of risk on the other side of the deal.
Let us come to what LiPuma calls the speculative ethos. For him, this is a concept, a disposition, an attitude toward the world, and a measure of the self-interest that drives market participants to bet on the uncertainty of the future. Speculation with derivatives represents a new way of dealing with uncertainty and therefore requires the speculative ethos, which succeeds in valuing and valorizing the speculation. This is the superficial form of a socio-economic structure in which dealing with risk appears as a necessary, objective and non-personal requirement for actors to cope with prevailing conjunctures.
The speculative ethos is driven by those who, as competitors and entrepreneurs, sometimes even creatively confront uncertainty and transform it into risks in order to make profits. It derives its logic, practicality, and coherence from the fact that the culture of financialization determines the speculative character who consciously and often enthusiastically makes bets to achieve capital gains and to be symbolically more than just one star among many. For derivatives traders, the speculative ethos unleashes an impulse that directs all their immersion and sensibility toward the market. The ethos mediates between speculation as an abstract principle of derivative markets and speculation as a practical matter for participation (as a tradeable sensibility).
Machines, models, laws, and the positions within firms, that is, the techno-economic assemblage determine the machines of trading and mediate the expressions of the traders‘ speculative impulses. This assemblage, in its self-referential function of channeling and constraining the impulses of traders, is what first makes the centrality of ethos knowable. Speculation with derivatives represents a new way of dealing with uncertainty that virtually calls for an ethos to value and valorize speculation.
A high level of speculation is always related to the profitability of volatility, as long as the uncertainty in the markets does not evaporate liquidity. Speculation does not fear a god, but the absence of buyers. The participation of actors in markets, betting against each other, and defining competence and competitive success that can be measured by the quantifiable measure of money, all overdetermine what LiPuma calls the speculative ethos.
The concept ethos, moreover, refers to sensibilities and dispositions that are deeply embedded in persons, indeed are definitely part of their being and behaviors, that they are ultimately inseparable from that being. The ethos by no means evokes a certain behavior in a mechanistic manner, rather it is a collectively held and collectively circulating attitude that pushes for economic actions that exert a gravitational pressure on the agents, who also always remain the object of diverse influences. The speculative ethos is also, in a sense, a lifestyle that expresses very specific dispositions and characteristics to be able to act in a certain way, precisely by mediating the relationship between the structures of the financial field and the possibilities of an event. With the collective endorsement, it valorizes itself,
Speculation has two signatures of time that relate to risk: There is an intra-temporal dimension that consistently assigns risk to the generation, movement, and marketing of the product, and there is an inter-temporal dimension that ensures the continuity of the systemic conditions necessary for logistics, production, and markets. Speculation can exist in both time registers, which in turn correspond to two spatial registers: That of risk, which affects all of social life from work to play, and that of competitively organized risk in the derivatives markets themselves. Thus, if risk occupies such a central position, then there must be sthe speculative ethos, whose origins go back to the dawn of capitalism and the generation of relative surplus value, but which today operates on a completely different plateau under the matrix of derivatives markets.
Speculation with derivatives, based on the abstraction of risks, represents a new stage of uncertainty that calls for an ethos that values and valorizes speculation: To the point where risk appears as necessary, objective and impersonal. For traders, speculation lies at the intersection of a culture of hard work, mathematically calculated rates of risk and return, the capacity to price out derivatives in a nuanced way, and the willingness to make extremely risky bets on risk. Traders leverage enormous pools of nomadic, opportunistic, and speculative capital. Interestingly, the speculative ethos often hides behind itself, insofar as the assumption of derivatives markets as rationally regulated and calculating machines is widespread, forgetting that trading in derivatives markets is a practice in the most basic sense of the word. There is always a collective excess of trust involved, as well as the belief of market participants that every single transaction is about the possibility of their lives. Speculation, on the other hand, is about collective rather than individual behavior, insofar as monetary risks are taken by individuals only insofar as they presuppose that others will do so as well and that there are stes counterparties who will respond to certain offers from certain actors.
Today, on the one hand, commodity relations and conditions of reproduction (houses, health, education, etc.) are becoming increasingly financialized; on the other hand, the rise of derivative markets and the forms of abstraction, logic, and motivations they generate are at stake. Houses were transformed into financial assets, indeed into underlyings, before the financial crisis of 2008. The speculative ethos transformed itself into a new class of assets as owners learned that their houses themselves became bridges that transformed the status of how one is now into how one will be in the future.
The question is why, at a particular moment in the history of capitalism, the speculative ethos became mainstream. Subjects are imagined here as the embodiment of a self-fulfilling prophecy, and this by means of new means that evaluate and valorize the subject. The speculative ethos constantly induces and promotes confidence in markets. The speculative ethos that traders perform is the product of the embodiment of a field, LiPuma notes with Bourdieu, that is, the introduction of the structures of markets into strategies and practices. The subject of speculation oscillates constantly between the statistical calculation of the sciences, the transcendental property of a species of financial instruments, and a regularity that market participants establish with their immersion in the market itself. It is the same with risk, which at first appears as a statistical calculation, for example in a portfolio at-risk. The mathematical calculation defines the level of speculation in a portfolio to predict the maximum cost in case of losses. Risk is thus an important property of certain financial instruments. This transcendental view has its counterpart in the assumption that finance can control and quantify risk through formal equations. To think that quantitative measurement fully encompasses the speculative, however, would be to slide from the model of reality to the reality of the model.
Another dimension of risk involves cultural market makers who embrace risk as an intrinsic property of their practices of trading. To do so, they require adaptive potentials to situationally manage risk and the level of speculation in a constantly changing market. Speculation as a cultural form now refers to the model of agents‘ actions insofar as an identifiable regularity is described, and to a model of their behavior insofar as it guides and influences agents‘ actions.
In Marx, it is not value, as LiPuma thinks, but the spread contained in labor power that is arbitrage. If arbitrage means taking advantage of simultaneous and at the same time differential trade , that is, pricing out the same commodity, then it follows that surplus value represents an example of a bet that has two different values. The first value is the average necessary social value, the second is the surplus generated by the greater productivity of a new innovation. The capitalist derives an advantage from this difference. What is assumed here is an identity between production and circulation, with arbitrage referring to both. However, there is a distinction to be made today, as production-driven capitalism draws arbitrage from labor power, while circulation-driven capitalism draws arbitrage from the objectification of abstract risk.
For financial markets and speculation, the relationship between temporality and volatility is central. Hedging is a strategy that compensates for risk by taking an opposite position to one that exists in the market. Risk or speculation is the luminous area where markets and their players bring volatility and time into a calculated relation of profit and loss. Speculation is thus based on the implication that the creation of a specific relation (between an objective transaction realizing success and the chances of profit and loss given by volatility and time) is crucial to understand the monetary calculus.
To do so, it is necessary to deconstruct the semiotic hierarchy present in speculative transactions. Every speculative bet begins with a sign or instance. It is about how the difference present in derivatives makes a difference. One cannot identify and manage risk by considering only a singular event; rather, to do so, one must typify the event or sign. To make a calculation, actors must take the sign with Peirce as the „indexicol icon“ of a type. And the relation between sign and type must be transparent, so that, for example, a currency swap can be analyzed with a mathematical model generated for swaps. Moreover, the mathematical derivation of derivatives pricing requires the notion of an efficient market as a totality. On the one hand, the provision of a closed, safe, and efficient space called the market separates the forms of risk from their generative contexts, so that, for example, political events that affect derivative price movements can be treated as and mixed with other market-oriented risks. This type of decontextualization allows agents to pool and price out incommensurable risks, which LiPuma analyzes in several sections as abstract risk. Assuming efficient totality, it is probably reasonable to assume that all instances of pricing models are „indexical icons“ of one type. A derivative, e.g. a currency swap, may typify the projected volatility on the basis that the future volatility reproduces the past volatility of the relationality (e.g. dollar.euro) contained in the derivative. The technology of risk is based on leverage and convexity; the object of speculation is the volatility funcion of abstract risk.
For LiPuma, the logic of speculation is three-dimensional. The first dimension concerns the social ontology within which each instance occupies a place given by totality. Second, this logic shows that agents can identify a risk position. Uncertainty is transformed into risk and at the same time the mundane sources of risk are identified and thus the aggregation of different risks occurs.
The trinity event, type and totality constitutes moments of objectification, which in turn is generated to accelerate the processes of circulation. If there is an anchor in speculative capital, it is the celebration of risk, measured in the volatility of the derivative with respect to the value at risk. Regarding subjectification, LiPuma draws on Pierre Bourdieu’s habitus theory, noting that the more symbolic capital needed for recognition in a particular field, the more specific labor is also needed to shape the career. Work transforms into the epicenter of the self. This is further driven by a view that equates the enterprise with self-production. In the financial industry, a new regime of work has definitely been created in recent decades. There is a flow of labor moving from production to circulation and this toward a speculative, short-term, morally indifferent, and economistic regime of labor.
The habitus refers to a reality in which agents inhabiting a social field necessarily assume certain dispositions, sensibilities, hierarchies of values, and generative schemata of thought precisely through their participation in the field. Agents embody the habitus of the field in ways determined by the simultaneity and incorporation of the cognitive and the corporeal. In this, financial firms are in a quasi-schizophrenic status; on the one hand, they require collaboration, but on the other hand, they also require competition, and this internally.
LiPuma speaks of a completely monetized subjectivity. It is about the evolution of a specific socio-economic mode of labor whose cutting edge, embodied in the derivative trader, lies in the creation and valorization of a subjectivity based on the permanent acquisition of money. The important question here is how the cultural and economic conditions create a specific structure of desire with which money stands as a generative symbol for all other ambitions. How does the digit of money lead to an indexical icon that determines a person’s self-esteem and self-concept, or how does it become the psychic trophy of a winning team, so that the generation of money becomes the exclusive motivation of work? Actors‘ desire for money and the belief that money is the crucial, if not sole, object of desire that overrides all other motivations appears rational because the social history of finance has naturalized and normalized both desire (greed) and its interpretation (animal spirits). For those for whom money is solely valid for their self, there is never enough money. What derivative finance has done is simply to valorize this mode of subjectivity by linking it to the liquidity of the market and speculation as a social good. For the integration of the habitus, there are three phases to report, namely the separation of agents from normal life, a tradition that insists on the embodiment of a new ensemble of ideas and dispositions, and the introduction of agents into new knowledge systems. The lifetime of employees now becomes part of the enterprise and determines the desires and happiness of individuals. There is an unquestioned loyalty to the company and, even into scheduling, a will to always be available, with the smartphone functioning as an „iron link“ tying one to the job. At the same time, employees are barracked in their bank houses by creating in-house restaurants, for example, where they are isolated so that they only interact with each other. Company-owned car services, sold as a privilege but used to extend work hours, channel the geography of life. Friends outside the banks are replaced by those who function inside the banks. Most banking houses now block their employees from accessing social media. The message here is that actors can only gain full monetization of their subjectivity by staying away from social environments that might disrupt their work.
Added to this is the generation of competition aimed at nothing more than the production of profit, which reinforces the fixation on money as the only measure of the value of the self. The relentless focus on money normalizes and naturalizes this fixation. In this, LiPuma sees a ritual embodied. Finance cultivates the worldview that in the space of circulation, all persons, like assets themselves, are contingent and disposable. Thus, it is precisely persons from the higher levels that are constantly shifted, from banks to hedge funds, from governments to banks, etc. LiPuma describes the financial field as a Venn diagram composed of a set of circles of varying sizes, crisscrosses that are inherently permeable and overlap extensively. Socially, this results in dense networks of interconnected financial relationships.
Within the financial organizations themselves, contrasts prevail, so that it may well be that the traders of one house are betting against products that the brokers have sold to the clients of their house. Traders, in turn, see the quants as nerds who lack any spirit for trading. There is a volatility in these relationships themselves, the tension between a personification of a mathematical model that knows only the rational agent and the trader living in real time who gathers information that the mathematical model does not provide and who is hypersensitive to the intensity and magnitude of the ripples of prices and volatility.
The financial field, and jobs in particular, are institutionally related to the compression of time, to the extent that deals are fabricated, acted out, and realized under high pressure.
For those who are fully integrated into finance, the execution of one deadline after another has the effect of making the clock and calendars appear as the enemy, and this again exemplifies the compression of time. Companies program their employees to accept the speed of transactions unquestioningly, as an index of the value of work and of trust and subservience to the company. The temporal structure of the financial workplace guarantees that the actors hardly have any free time, cannot even enjoy their successes, whatever the quality of their performance. The central moment here is the exploitation of the momentum, which is immediately followed by the liquidation of the momentum. This is not contradicted by the theories of animal spirits, which are themselves deeply rooted in the belief in a rational agent.