Flaunt the imperfections : Affective governance and London’s Alternative Investment Market

Abstract

The literature of financial market design is predicated on the efficient market hypothesis (EMH), advocating transparency, liquidity, and universal information with a view to capturing efficient prices. This dominant understanding of the ‘perfect market’ is highly influential and has been played out in the technological transformation of ‘main board’ exchanges since the 1980s. Yet recent history provides a counterfactual: the 1995 formation of AIM, the London Stock Exchange’s junior market. AIM employs an alternative – but effective – mode of market organization based on market imperfections. Our historical sociology shows how AIM’s structure draws on affect – reputation, social relationships and practitioner knowledge to organise market governance; design choices were shaped by existing market relationships and practices as well as the institution’s strategic commitments and organisational path dependencies. While finance literature remains sceptical of AIM’s ‘privatised regulation’ we argue that the market’s design should be understood as fit for purpose: capable of producing informationally efficient prices. We characterize AIM as having a ‘Whitean’ design structure, compared with the ‘Fama’ design structure of senior markets. We conclude that the ‘Fama’ model is just one possible configuration of a financial market, and that a ‘Whitean’ producer market is also a viable design option.