(Bloomberg Markets) -- In 1972, Donald MacKenzie won a medal for being the best mathematics student at the University of Edinburgh. But the previous year, he’d taken a course on the sociology of science that changed his life. The young Scot had always preferred the self-contained truths of pure math, but the class sparked a pivot to something entirely different: the messy, morally ambiguous study of human society.
Since then, the now 74-year-old sociologist has written about nuclear missile systems, mathematical proofs in computing, cryptocurrencies and online advertising. Among Wall Street’s bookish set, he’s known best for writing the other book about high-frequency trading. Seven years after Michael Lewis’ bestseller Flash Boys portrayed traders as wily villains who used blink-and-you-miss-it speed to beat one another, MacKenzie made them wonky again. In 304 dense pages, Trading at the Speed of Light: How Ultrafast Algorithms Are Transforming Financial Markets, published in 2021, digs deep into the history of market structure and HFT.
His respect for the industry’s often soporific technicalities has earned MacKenzie regard from its notoriously secretive practitioners. Stéphane Tyč, the co-founder of McKay Brothers LLC—which rents out wireless networks to HFT firms that need to blast their signals to the market faster than the competition—called MacKenzie’s study “monumental” and Flash Boys “soft porn.” (MacKenzie interviewed Tyč for his book.)
On the day of our Zoom interview, MacKenzie seems a world away from the trading rooms of New York and Chicago, speaking via a choppy internet connection from his home in East Lothian, a rural county east of Edinburgh. “Technology is such an important part of modern life,” says the University of Edinburgh professor. “I hope my academic work brings some additional pieces of the jigsaw—things you don’t necessarily look at if you’re a sociologist interested in the classically sociological topics like norms, values, social roles and the like.”
His two books about finance largely read like journalistic nonfiction, with the occasional dose of academic sociology: the “material politics” of the cables and equipment that enable trading at Einsteinian speed; the “Barnesian performativity” of economic theory.
His big theme is how social forces shape technologies—including markets—and vice versa. For example, the futures and securities industries have different regulators partly because they report to different Senate committees. Divergent rules and market structures have in turn shaped an important trading signal: the tendency for S&P 500 futures to move before the index’s shares. In other cases, the interplay between society and tools is more disturbing. As he wrote in his 1978 Ph.D. dissertation, some of the earliest British pioneers in statistics focused on analyzing correlations because they were eugenicists interested in heredity.
His 2006 book, An Engine, Not a Camera: How Financial Models Shape Markets, traces the way the Black-Scholes mathematical model for pricing options may have caused prices to move closer to its projections, making derivatives look legitimate rather than casino-like. As the book’s title implies, the famous formula wasn’t simply a picture of options trading as it already existed—it helped shape that vast global market. Similarly, MacKenzie asks if the classic theorem of economists Franco Modigliani and Merton Miller—stating that it doesn’t matter how firms finance themselves—removed the stigma of high debt, leading companies to issue more bonds. These questions are hard to settle. But it’s not hard to find other examples of economic or mathematical concepts shaping behavior in finance. In the aftermath of the collapse of crypto exchange FTX, the founders’ risk tolerance was often traced to their love of expected-value calculations, as if those had molded their personality.
“The reality of finance is there’s an awful lot of mental energy spent on outracing, outwitting and influencing others”
If MacKenzie’s books lack the stark drama of Lewis’, it seems intentional. In Trading at the Speed of Light, MacKenzie says he’s interested in the mundanity of moneymaking. Floor traders used to benefit from being taller. The Chicago Mercantile Exchange eventually banned platform shoes (for safety reasons). In the HFT era, some firms spend seven-figure sums protecting their equipment from bird poop that could block a signal.
While there’s little to no moralizing in his books, MacKenzie is aware he’s devoted his career to studying industries often deemed to be a colossal waste of brilliant minds who’d be better off curing cancer or demystifying quantum mechanics. When he won an award for his lifelong work in 2022, he asked if all the banalities of finance such as the HFT arms race have sucked up the gains from technological advancement, without making Wall Street any more efficient. “The reality of finance is there’s an awful lot of mental energy spent on outracing, outwitting and influencing others,” he says.
But he’s not nostalgic for the time when open outcry trading—the kind done on exchange floors, now almost extinct—often meant literally screaming. Before this century “there were ways in which insiders enriched themselves at the expense of ordinary investors,” he says, like keeping bid-ask spreads or fund management fees unnecessarily high. “Modern finance is in many, many respects better than the financial system that [it] replaced, but it retains this certain self-referential character, which I think is a bit unhealthy.”
MacKenzie’s latest project reflects his qualms. He’s taking a deep dive into the replacement of print ads with online advertising, where real-time auctions run by the likes of Google and Facebook allocate slots tailored by algorithms to you. Like HFT, it’s a process faster than the blink of an eye, and only the tiniest of profits are made on each transaction. There are power struggles: between Google and newer decentralized systems that collect bids right on your phone; between the social media giants and Apple Inc., which has made it harder for them to identify iPhone users.
MacKenzie is able to persuade insiders in the most sensitive industries to speak to him, often anonymously. He mostly starts by approaching the heads of each firm, he says; HFT is “not actually as secretive as its reputation suggests.” But MacKenzie also has the advantage of time. His projects have all lasted more than five years. He’s wrapping up his latest book, on adtech, and doesn’t know what’s next. I suggest artificial intelligence, which he dismisses as too obvious: “Just as in financial markets, it can be dangerous to follow the crowd.”
Lee covers quantitative investing for Bloomberg News in London.
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