What Do Traders in Emerging Markets Want? Just Ask Them

Traders and investors monitoring stock prices at RHB Investment Bank in Kuala Lumpur Photograph by Sanjit Das/Bloomberg

It was not hard to distinguish the sociologists from the financiers. The sociologists had beards. On Friday, in a hall above the New York Stock Exchange where mayors and capitalists once ate breakfast together, about 50 academics gathered to discuss the sociology of market microstructure, or why financiers do what they do.

For the last 70 years, we have looked to economists to explain how markets work. The kind of economics popular among graduate programs has focused on what academics call “quantitative” data, which you might call “numbers.” Other social sciences have been left with “qualitative” data, or “talking to people.” Sociologists, with their tradition of interviews and ethnographic studies, know how to talk to people. I was told once (by an economist) that the quickest way to offend an economist is to call him a sociologist. Both disciplines, though, poke at the same problem: How do people make decisions?

What emerged from sociology day at the NYSE was that talking to people is a good way to move forward when the numbers alone leave you stuck with more questions. Aaron Pitluck, who focuses on the sociology of finance at Illinois State University, presented research he’d conducted among brokers and portfolio managers in Malaysia that suggested answers to a question that has eluded economists.

Foreign investors in developing markets “crowd” in and out of trades. They move together. But every trade needs a counterparty. You can’t sell unless someone’s buying, and counterparties are even more crucial in a small market that hasn’t got a lot of liquidity. Economists had noticed that local portfolio managers sometimes made the same trades as the foreign investors—and sometimes took the foreign trades, acting as counterparties. But economists didn’t know why. So Pitluck went to ask some questions.

Through 90-minute interviews with 40 Malaysian brokers and portfolio managers, Pitluck discovered that locals think almost all foreign investors are idiots. (My word, not his.) While Malaysian investors closely watched foreigners in their own markets, in no case did any of Pitluck’s subjects make a trade because a foreign investor had. Foreigners weren’t distinguishing among companies, only buying baskets of the 20 largest companies to increase or decrease their exposure to the entire country. “I mean,” said a local, “they are not serious investors!”

Portfolio managers in Malaysia know well that crowds of  foreigners lag the local market. This leaves open an opportunity to move as the stock does, on the often correct assumption that foreigners won’t jump in until after a swing is well underway. “[Foreigners] are always late in the game,” said a broker, “by the time [the foreigner] thinks that Malaysia is actually investable, we’ve probably run another hundred points. So we always laugh—when the big foreign fund managers get back in, the locals get out.”

But this doesn’t explain why locals sometimes trade with foreigners. Pitluck discovered that a few large international funds had earned the respect of the Malaysian market; even then, these were seen not as sophisticated investors to mimic, but as providers of a further piece of information. Just because two people make the same trade at the same time, they’re not necessarily making it for the same reason. Foreign investors, managing their own exposure to the Malaysian ringgit, might come to the same conclusion on a stock as a local investor while looking at the effects of a currency swing on local exporters.

Pitluck closed his presentation at the stock exchange with a plea for econometricians (the economists who focus most closely on numbers) to take a closer look at qualitative methods. There were no econometricians in the room, but after the conference a couple of sociologists stood talking at the door of Bobby Van’s, a Wall Street bar. A financier, or at least a guy without a beard in a nice suit, made a close study of their behavior. He wanted a drink. “Keep moving inside,” he ordered, “don’t stop to talk.”

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