The material production of virtuality: innovation, cultural geography and facticity in derivatives markets

Abstract

In the existing literature, the ‘virtual’ nature of financial derivatives is often commented upon, but how these products are brought into being has seldom been examined in any depth. This article analyses the development since 1970 of organized financial-derivatives trading in the US and UK (in particular, of derivatives exchanges and of the British financial spread-betting industry), with the goal of examining the ‘material production of virtuality’. The article explores the similarities and differences between technological innovation and innovation in derivatives; discusses the role of the ‘internal’ cultures of financial markets and of the wider culture (in particular, the legal traces of hostility to gambling); and analyses the requirement of ‘facticity’ for the measure underlying a cash-settled derivative, focusing in particular on the most important such measure, British Bankers’ Association LIBOR (London interbank offered rate).

Keywords:

• financial derivatives
• financial innovation
• social studies of finance
• spread betting
• LIBOR (London interbank offered rate)

Acknowledgements

I am deeply grateful to those who permitted me to interview them for this research, which was supported financially by a Professorial Fellowship awarded by the UK Economic and Social Research Council (RES-051-27-0062). Helpful comments were received from James Clunie, Marieke de Goede, Iain Hardie, Michael Pryke, Susan Smith, David Steen, Stuart Wheeler and Economy and Society's referees. I should emphasize, however, that the views expressed are mine, not theirs.

Notes

1. Most computer systems employ both fast ‘main memory’ (the contents of which programs can access and modify), which in the early years of computing was expensive and limited in its capacity, and ‘secondary storage’, which is slower, not directly accessible but of larger capacity. In the late 1950s and early 1960s, computer scientists learned how to design operating systems that automatically transfer data between the two in such a way as to free programs from the limited physical capacity of main memory by giving them access to an ‘address space’ (‘virtual memory’) that is much larger.

2. US Court of Appeals, Federal Circuit, 149 F.3d 1368.

3. See <http://fedcir.gov/about.html> (accessed 4 December 2006).

4. It is also worth noting that the extent to which Chicago's competitive ethos translated into the actuality of fierce competition was in fact variable, as beautifully demonstrated by Baker (1984a, 1984b).

5. On weather derivatives see Pryke (forthcoming). The potential demand for longevity derivatives – still largely in the planning stage – arises from the desire of pension funds to hedge the risk that their members may live longer than anticipated.

6. Greater precision is unfortunately impossible, because derivatives data from the Bank for International Settlements do not specify the rate underlying interest-rate derivatives.

7. See, e.g., <http://www.igindex.co.uk/>