The Holy Spirit and Performativity : Institutionalization of noise trading in the Turkish market

Tarim, Emre and Muradoglu, Gulnur (2017) The Holy Spirit and Performativity : Institutionalization of noise trading in the Turkish market. In: Chains of Value, 2017-05-04 - 2017-05-05, University of Edinburgh. (Unpublished)

Abstract

Retail investors are associated with practices of cognition and valuation that are generally labelled noise trading. Simply put, noise refers to information not relevant to intrinsic/cash flow value of a company. Using such information runs counter to financial theorization and practice (Shleifer and Summers 1990; DeBondt 1998). Unsurprisingly, noise trading is also associated with behavioural biases and errors, such as overconfidence, overreaction and underreaction to information, which are linked to high trading turnover and volatility in markets (Barber and Odean 1998; Barber et al 2009; Statman et al 2006; Kaniel et al 2008; Foucault et al 2011). Despite these theoretical and empirical insights into retail investor activity, we do not know the role of retail brokers in facilitating this trading frenzy and institutionalizing noise trading as a valuation practice. We explore the institutionalization of noise trading with a case study on retail brokers in Borsa Istanbul who facilitate around 70 % of the annual trading volume. Our exploration focuses on the daily advisory practices of brokers. We are informed by extant practice research that focuses on the organisational routines as generative systems that consist of material devices, performances-actions, and patterns –outcomes (Feldman and Pentland 2003). We observe that the retail brokers have at their disposal a range of universally used valuation devices such as charts, comparative value metrics, and intrinsic valuations, and computer screens on which they observe other actors and markets in real-time. Nevertheless, what characterizes their use of these material devices is an interpretative and calculative tinkering to explain and forecast short-term movements in specific shares and/or indices. The short-term focus is underpinned by the organisational goal of generating profit for clients and fees for brokerage firm. The tinkering on the other hand is underpinned by the affordances and justifications it generates for short-term trading without any meaningful commitment to a specific valuation device. Despite the tinkering, the interpretative and calculative patterns we identified in the brokerage sites are to a considerable extent dominated by an interpretative model of the Istanbul market-namely, framing it as a globalized market that moves in tandem with select developed country markets. We call this model the Holy Spirit, owing to its ubiquity and persistence in the interpretative and calculative tinkering of brokers. As a novelty, we test the truth value of this vernacular model of the Istanbul market or whether this model actually perform the market (a la MacKenzie 2006). Our qualitative and quantitative findings cast light on the institutionalization of noise trading in the Istanbul market. References Barber, Brad M., and Terrance Odean. 2001. ‘Boys Will Be Boys: Gender, Overconfidence, and Common Stock Investment’. The Quarterly Journal of Economics 116 (1): 261–92. Barber, Brad M., Terrance Odean, and Ning Zhu. 2009. ‘Do Retail Trades Move Markets?’ Review of Financial Studies 22 (1): 151–86. De Bondt, Werner F. M. 1998. ‘A Portrait of the Individual Investor’. European Economic Review 42 (3–5): 831–44. Feldman, Martha S., and Brian T. Pentland. 2003. ‘Reconceptualizing Organizational Routines as a Source of Flexibility and Change’. Administrative Science Quarterly 48 (1): 94–118. Foucault, Thierry, David Sraer, and David J. Thesmar. 2011. ‘Individual Investors and Volatility’. The Journal of Finance 66 (4): 1369–1406. Kaniel, Ron, Gideon Saar, and Sheridan Titman. 2008. ‘Individual Investor Trading and Stock Returns’. The Journal of Finance 63 (1): 273–310. Shleifer, Andrei, and Lawrence H. Summers. 1990. ‘The Noise Trader Approach to Finance’. Journal of Economic Perspectives 4 (2): 19–33. Statman, Meir, Steven Thorley, and Keith Vorkink. 2006. ‘Investor Overconfidence and Trading Volume’. Review of Financial Studies 19 (4): 1531–65. MacKenzie, D. (2006) An Engine not a Camera: How Financial Models Shape Markets. MIT Press.