Watching Foreigners: How Counterparties Enable Herds, Crowds, and Generate Liquidity in Financial Markets

Forthcoming in Socio-economic Review, 2014

28 Pages Posted: 22 Jun 2013 Last revised: 17 Sep 2013

See all articles by Aaron Z. Pitluck

Aaron Z. Pitluck

Illinois State University - Sociology

Date Written: June 15, 2013

Abstract

This article provides a new view on the old problem of herding in the global south by foreign portfolio investors. It advocates a liquidity perspective that problematizes the capacity for a herd to form because of the absence of sufficient counterparties willing to trade. Drawing on ethnographic interviews with local professional investors in Malaysia (a substantively and theoretically important stock market) the findings are non-intuitive relative to the common-sense expectations of the information asymmetry and identity-based herding literatures. Although locals watch their foreign competitors closely, and therefore could imitate their trades, these small, local finance firms find few reasons to imitate these powerful international actors. Instead, locals enable crowds of foreigners because they are willing to be counterparties even when they perceive the foreigner’s trade as savvy, highly skilled, or informed. The conclusion explores implications for herding, global capital flows, and social structures that may generate liquidity in business-to-business markets.

This article can also be downloaded from the Oxford Journals website.

Keywords: developing countries, financial markets, globalization, herding, liquidity, Malaysia, strategic interactions

JEL Classification: F65, G11, G23, Z13

Suggested Citation

Pitluck, Aaron Z., Watching Foreigners: How Counterparties Enable Herds, Crowds, and Generate Liquidity in Financial Markets (June 15, 2013). Forthcoming in Socio-economic Review, 2014, Available at SSRN: https://ssrn.com/abstract=2282579

Aaron Z. Pitluck (Contact Author)

Illinois State University - Sociology ( email )

Campus Box 4660
Normal, IL 61790-4660
United States

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