A Price is a Social Thing: Towards a Material Sociology of Arbitrage

Abstract

Arbitrage is a form of trading crucial both to the modern theory of finance and to market practice, yet it has seldom been the focus of study outside of economics. This article draws upon four initially separate ethnographic and interview-based studies to sketch a ‘material sociology’ of arbitrage. (The article follows financial market usage in viewing ‘arbitrage’ as trading that exploits discrepancies in relative prices, trading which is seldom the entirely riskless arbitrage posited by finance theory.) Prices are physical entities, and the extent and speed of the mobility of these entities are crucial to arbitrage. Traders' bodies sometimes need to be trained to conduct arbitrage, and the relative placement of different bodies can be crucial. Arbitrage generally involves a theory of the similarity of different assets, and material representations of relative value are often required in order to check the theory's plausibility. Arbitrageurs need to convince themselves and others such as investment-bank managers — and sometimes traders working for different organizations — of the correctness of the theory. Among the reasons this is necessary is that an arbitrage position often incurs losses before it becomes profitable, and those who provide arbitrageurs with capital have to be persuaded that those losses are indeed temporary. Patterns of trust and information exchange among known others are thus consequential, and arbitrage also has wider social aspects, manifest for example in deliberately constructed barriers to the short sales often required for arbitrage. Sometimes, too, arbitrage impinges on informal norms of proper conduct in markets.