Noise: Living and Trading in Electronic Finance by Alex Preda

Abstract

Reviewed by: Noise: Living and Trading in Electronic Finance by Alex Preda Paul Miranti (bio) Noise: Living and Trading in Electronic Finance. By Alex Preda. Chicago: University of Chicago Press, 2017. Pp. 264. Paperback $35. In this brilliant study, Professor Alex Preda extends our understanding of the sociological significance of "noise trading," an important concept in financial economics advanced by Fischer Black in the 1980s. Black's term was used to describe the activities of a large mass of retail traders who typically lacked access to reliable information and depended instead on uncertain data to guide their speculative activities. In spite of such limitations, Black believed noise traders were essential because they provided liquidity to the market and thus facilitated its basic price discovery function. What was puzzling was the persistence of noise trading in spite of its poor record of profitable transacting, and the disadvantages the noise traders experienced in competing with the better informed and financed traders working at the larger financial houses. In evaluating electronic trading's social context, Preda sought answers to three broad questions, primarily by interviewing retail traders. First, [End Page 650] how were individuals recruited and trained for trading careers? Second, what was the existential significance of trading for market players? And third, what was the nature of social relationships that emerged in the electronic market environment? Besides their role in helping to allocate economic resources, Preda believes that retail traders provided significant social benefits to the electronic market and ancillary activities. One aspect of this was the formation of "quasi-formal" organizations that facilitated the creation of useful linkages beyond the immediate bounds of the market. These included, for example, university trading clubs and banking institutions eager to engage promising graduates. Retail trading served as a school for novices who gained knowledge and experience and, in some cases, gravitated to financial institutions to pursue careers within the ranks of the more prestigious professional traders. Retail trading absorbed some former professional traders whose careers at leading finance houses had come to an end. The knowledge wants of the retail trading population also provided entrepreneurs opportunities to offer, among other products, specialized training, data and market links, transaction clearing services, trading algorithms, and proprietary strategies. One of Preda's major conclusions is the intriguing discovery that trading represented a means for the noisy retail traders for achieving greater personal autonomy. The acquisition of money per se was not the principal goal; instead, it functioned as a facilitator in the constant quest for personal freedom. This existential concern was broadly perceptible in the outlooks of a diverse spectrum of interviewees, ranging from university neophytes who desired to begin careers in finance through trading to individuals alienated from their previous work experience by insensitive bosses or unfulfilling work circumstances. From this perspective, the basic purpose of the market and the host of financial houses, schools, and other allied activities seemed geared primarily to giving retail traders the "opportunity to participate in collective answers to issues relevant to individual freedom" (p. 233). The social relationships in the complex electronic trading context were built around human and machine interaction. Preda asserts that electronic trading encouraged the formation of small groups, whose function he likened to light beams that were utilized to search for information and resolve collective concerns pertaining to individual freedom. Such enlightenment could reveal multiple solutions to these challenges. What was discovered usually depended on how the group light was cast. Moreover, relationships that developed in the market had at times broader social consequences. Preda is especially interested in evaluating how trading values and experiences were "re-grounded" to affect significantly social circumstances beyond the bounds of financial transacting. Preda's research demonstrates how sociology can be fruitfully applied [End Page 651] to discover hitherto unrecognized patterns of social dynamics that has relevance for better understanding the context of financial economics. In addition, Preda's findings, particularly with respect to trader beliefs, point to the possibility of their future restatement in the form of testable hypotheses that could be evaluated statistically. Paul Miranti Paul Miranti is a professor in the department of accounting and information systems, Rutgers Business School, New Brunswick and Newark, New Jersey. Copyright...