Karin Winroth

Formal ties in financial networks: professional clusters in financial services marketing

Purpose – The purpose of this paper is to investigate the role of formal ties in the marketing of financial services and thus provide evidence concerning the relationship between formal ties and the customer appeal of banks and investment banks. Design/methodology/approach – The paper uses correspondence analysis to study formal ties between financial market actors and relates them to customer rankings. The formal ties are described as intra-, inter- and extra-organizational ties. Findings – The authors find that there are several formal ties between financial market actors and provide compelling evidence illustrating how the attractions between financial service providers are related in several ways to the existence of formal ties between market actors. Research limitations/implications – The research is limited to formal, as opposed to informal, ties. The authors examine the essential implications of such ties. Practical implications – In practice, banks and investment banks should consider the implicat...

Bankers — Matchmaking and Midwifery

Where do they come from, the shares that populate the stock exchanges, the Reuter-screens, and the pages of the financial press? It is time to go back stage and visit the ‘construction department’ of investment banking: corporate banking. Such a visit is problematic, however, since corporate banking practices are much less public than the practices of the expert groups discussed previously. Indeed, corporate banking practices are highly insulated even from these other parts of investment banking. Nonetheless, we will not only provide an overview of how these experts work (in this chapter) but also follow corporate banking expertise at work in a specific project involving the introduction of a new share on the stock exchange (in Chapter 7). This will allow us to examine the role of corporate banking in structuring contemporary business life and in organizing stock markets by constructing and reshaping shares.

Brokers Selling Investment Advice

Twenty-five years ago, the stockbroker was literally in the centre of the stock market. Standing on the actual market floor, following the stock prices on large notice boards, moving physically between telephones used to contact investors and the trading zones in which they shouted out their ‘desires and intentions to buy or sell’ (Baker, 1984:789). This was the familiar open-outcry auction system. Although these markets may have come across as chaotic — at times they probably were — Baker’s classic study suggested that they nonetheless contained relatively stable patterns of social interaction among the brokers. Behind the scenes, away from the bustling trading floors, you could also find a few analysts providing support to the brokers in the form of in-depth analyses of firms and industries. The brokers would assign specific tasks to analysts working for their brokerage firm when and if they felt that this was called for. Typically, however, the broker’s own knowledge of the firms and industries behind the stocks they traded was sufficient to get the work done.

Understanding Investment Banking Practices

This book is about stock markets and the professionals that engage with them. Not long ago, financial markets were epitomized by the stock exchange, a physical floor where traders communicated about, and engaged in market transactions on behalf of, buyers and sellers. Developments during the past 25 years or so, however, have fundamentally reshaped the financial markets; these include the liberalization of national regulatory frameworks and the transformations caused by digitization (Sassen, 2005). The result has been a tremendous growth in the number of transactions, the number of products, the number of markets and, not least, in the value of financial assets worldwide.

A Brief History of Investment Banking

The origins of investment banking are many and they reach far back in time. As noted by Fleuriet (2008) few of those working in contemporary investment banking know its origins. In this chapter we approach investment banking by offering a brief account of a long history of organizational developments and innovations that, among other things, produced investment banking as we know it today. This history will show that the analytical stance applied in this book is supported by historical evidence. The history of investment banking is one of interaction between bankers, businessmen, investors, ideas and technical solutions. Through their actions, these actors co-constitute investment banking while enacting exchanges of securities.

Traders Activating the Stock Markets

Many of the financial experts interviewed for this study have brought up the complex personality needed to be a successful trader. In the literature, traders have been compared to test pilots in the US Air Force, which implies that both categories either ‘have it’ or not; that they need to be made out of ‘the right stuff’ (Bruegger, 1999). For traders, the central abilities seem to be to comprehend the rapid shifts occurring in the various markets with which they engage and to have the nerves to function under pressure. Due to their close and frequent involvement in transactions on specific financial markets, traders are seen as operating at the centre of the market mechanism (Abolafia, 1996). Their role has been further accentuated by the rapid growth in both the number of financial transactions executed and the value of the securities transacted. Even though there is a wide range of securities on sale in contemporary financial markets, the stock markets remain central to the financial industry. Figure 3.1 illustrates the value of shares traded annually on the global stock markets since 1995. The periods of rapid growth leading up to the dot-com crash in 2000 and to the global financial crises in 2008 can be clearly seen.

Behind the Scenes — Management, Risk and Compliance

In previous chapters, representatives of the four expert groups have often described themselves as entrepreneurs, suggesting that their work is like having ‘a business of their own, within the business’. The image they convey is one of competent professionals being given considerable leeway concerning how to plan and conduct their work. The focus is said to be on delivering (financial) results rather than on following specific procedures. They also suggest that this state of affairs is conducive to high performance in situations where you need to respond quickly and flexibly to external changes and adjust to the specific needs of your clients. As part of this characterization, managerial activity is regularly downplayed, for example: ‘as long as we deliver, they do not interfere’. This description of investment banking practices is hardly unique for our study and has led some observers to characterize investment banks as ‘self-designing organizations’, emphasizing the entrepreneurial facet of the experts’ work (e.g. Eccles and Crane, 1988).

Organizing Investment Banking

How is investment banking organized? In this chapter, we directly address the first of our two major research questions. As shown in previous chapters, specialized expert groups contribute to jointly perform investment banking. As suggested in Chapter 1, the outcome of this joint performance — investment banking — needs to be both innovative and coordinated. Our account of investment banking, as well as previous studies, thus leads us to address a series of traditional issues in organizational analysis. Is it possible for investment banking to be spontaneous, innovative, coordinated, as well as controlled? If so, how? What constitutes the ‘self-designing’ process that Eccles and Crane (1988) claim to be characteristic of investment banking? What constitutes the activities of bricolage that Engelen et al. (2010) argue is necessary for ‘improvised financial innovation’? How is investment banking organized to enable the ‘creative adoptions’ described by Beunza and Stark (2005)? And how is this type of organizing coupled with the explicit attempts by management to coordinate and control?

Enacting Stock Markets

How do investment banking practices contribute to shaping stock markets and, by extension, the financial markets at large? To answer this question, we go beyond the inter- and intra-professional interactions discussed in Chapter 9 to discuss how the expert practices of investment banking and the construction of share identities affect other actors. Eccles and Crane (1988:53) stress that investment banks are ‘managed from the outside in’; that they are organized to handle the external network of investors, corporations and competitors that forms as a consequence of the intermediating functions performed by the expert groups. While we acknowledge the porous boundaries of investment banking organizations and their close links to these groups of actors, we emphasize how investment banking practices drive, rather than are driven by, such external constituents (Folkman et al., 2007).

The Birth of a Share

Having provided an overview of corporate banking practices, we now follow the gradual realization of a project that resulted in the birth of Dolly Ltd. Involving two major Scandinavian investment banks and combining a merger, a spin-off and an initial public offering (IPO), project Dolly is an unusually suitable case for tracing the activities of corporate banking. This case study, which offers a good fit with cursory descriptions of securities offerings processes (Wilhelm, 1999), allows us to follow at close range many of the practices identified in Chapter 6. Due to confidentiality issues, the identities of the involved corporations have been masked, as has the industry to which they belong. Drawing on this case and the insights from Chapter 6, we conclude by expanding our discussion on how corporate banking practices construct share identities. Let us enter into the nursery of the financial markets!