"Based on fieldwork with derivatives traders, Miyazaki's Arbitraging Japan is a brilliant reexamination of finance that goes beyond simple sloganeering or calls for more (or less) regulation. Miyazaki's compelling and timely contribution to the anthropology, sociology, and philosophy of finance illuminates its actors' philosophical commitments and emphasizes its human and social aspects."--Bill Maurer, Professor of Anthropology at University of California, Irvine

"Miyazaki's superbly crafted ethnography, Arbitraging Japan, follows the lives of a small group of Japanese arbitrageurs as they create instruments designed to exploit the relentless generation of pricing difference emanating from the heart of financial markets. What starts as a technical exegesis on the operation of finance, yields a vibrant account of the dreams and the predicaments of our time. The narrative is restrained, perhaps even understated, and yet what is achieved is exhilarating."--Doug Holmes, author of Integral Europe: Fast-Capitalism, Multiculturalism, Neofascism

Hirokazu Miyazaki is Director of the East Asia Program and Professor of Anthropology at Cornell University.

Arbitraging Japan

Dreams of Capitalism at the End of Finance

By Hirokazu Miyazaki

UNIVERSITY OF CALIFORNIA PRESS

Copyright © 2013 The Regents of the University of California
All rights reserved.
ISBN: 978-0-520-27347-4

Contents

Acknowledgments, ix,
Introduction, 1,
1. Shakespearean Arbitrage, 24,
2. Between Arbitrage and Speculation, 43,
3. Trading on the Limits of Learning, 70,
4. Economy of Dreams, 89,
5. The Last Dream, 112,
6. From Arbitrage to the Gift, 133,
Notes, 153,
References, 169,
Index, 191,

CHAPTER 1

Shakespearean Arbitrage

In June 2005, at an Irish pub in Marunouchi, Tokyo's financial district, Sasaki, the head of a financial derivatives research and development unit at a Japanese megabank, showed me a document stored in his PDA. He had drafted this document for use in training the younger members of his unit. At the beginning of the document, Sasaki asserts, "The source of profit in capitalism is difference [sai]." He cites Venisu no shonin no shihonron (A theory of capital according to The Merchant of Venice), a 1985 book by Katsuhito Iwai (Iwai [1985] 1992), an MITtrained University of Tokyo economics professor and influential public intellectual. In this book, Iwai interprets the melancholy of Antonio, the play's protagonist, as a symptom of his eventual defeat by the force of money—that is, in Iwai's own terms, by capitalism's exploitation and elimination of difference (sai). Sasaki repeated Iwai's contention that in all forms of capitalism, from merchant capitalism to industrial and postindustrial capitalism, the source of profit has always been difference of one kind or another. If profit making in merchant capitalism is based on the difference in the prices of a commodity at two geographical locations, industrial capitalism seeks to exploit the "difference between the value of labor and the value of what that labor produces," while postindustrial capitalism seeks to exploit the difference in the price of information at two temporal locations, the present and the future (Iwai [1985] 1992: 58).

The financial derivatives business is the same, Sasaki argued. The value of a financial derivative product, whether a futures contract (a contract to receive or deliver an asset at a preset price on a preset date) or an options contract (a contract to buy or sell the right to receive or deliver an asset at a preset price on or before a preset date), is defined in terms of—or derives from—the value of its underlying asset, such as a company stock, a stock index, a commodity, or a combination of such assets. Any difference in the market price of a derivatives product and its underlying asset becomes a source of profit. The derivatives business, therefore, is all about the "creation of difference" (sai no sozo) between a derivatives product and its underlying asset, which Sasaki quickly paraphrased as the creation of "arbitrage opportunities." In Sasaki's view, arbitrage is the fundamental "principle" (genri) of capitalism.

In the late 1980s, Sasaki was part of a group of young traders assembled inside the major Japanese securities firm I call Sekai Securities. Sasaki joined the team in 1988 from a doctoral program in mathematics. The team was originally formed in August 1987, following the government's decision to allow Japanese institutional investors to participate in overseas financial futures markets. The team's founder, Aoki, was the young traders' intellectual leader. Before establishing the team, Aoki had spent four years—from 1981 until 1985—in Sekai's New York branch. While in New York, Aoki learned to trade options. He was acquainted with an American trader who worked for a major U.S. investment bank and who, Aoki recalled proudly in his conversation with me in the fall of 1998, considered him "very promising" (yubo) and decided to teach him how to trade options on U.S. Treasury Bond futures. This American trader even allowed Aoki to use his investment bank's computer system to practice trading options. Later, Aoki wrote an introductory book in Japanese on options trading.

Aoki's stay in New York coincided with the time when proprietary trading was a highly profitable activity for U.S. investment banks. Aoki was introduced by his American trader friend to John Meriwether, who was then the head of Salomon Brothers' legendary proprietary trading team, the Government Arbitrage Group, and who later founded the hedge fund Long-Term Capital Management. Meriwether explained to Aoki that "relative value trading" was the primary strategy of U.S. investment banks' proprietary trading teams. When he heard about Meriwether's relative value trading, Aoki thought that arbitrage would become important in Japanese financial markets in the near future.

When Aoki was entrusted by Sekai's management to establish a team devoted to derivatives trading, therefore, his focus was sharply on proprietary trading and arbitrage. In the fall of 1988, the team consisted of four traders, two based in Tokyo, including Sasaki, the other two in Osaka, where futures and options contracts on the Nikkei 225 index had been recently launched. The team also included three system engineers, including Tada, who later became the head of the team, and two administrative assistants. Aoki immediately began to train these young mathematicians and engineers in basic theories and techniques of finance and Wall Street–style proprietary trading, and he instructed them to search for arbitrage opportunities. It was in this context that Aoki introduced the economist Iwai's interpretation of The Merchant of Venice to his proprietary trading team. Ultimately, the book would provide a philosophical foundation for the team as a whole. In this sense, Sasaki's handout offers a window into his reading and other intellectual practices associated with his trading career.

ARBITRAGING FICTION AND FINANCE

Before returning to Sasaki's handout and examining its content and background, I turn to Katsuhito Iwai's interpretation of The Merchant of Venice and Sekai Securities proprietary traders' response to it. In his book, Iwai seeks to offer a solution to the famous problem of Antonio's weariness, which opens the play: "In sooth, I know not why I am so sad." "What `sad role' does he have to play?" Iwai asks (Iwai [1985] 1992: 11). In order to understand Antonio's weariness, Iwai argues, it is essential to approach the plot of The Merchant of Venice in terms of the dynamic process of capitalism. From this standpoint, Iwai asserts, Antonio's weariness is a symptom not so much of his internal state of mind (p. 10) as of an external cause, the "irreversible" transformation prompted by capitalism (p. 13). By the "irreversible" transformation, Iwai means the ultimate defeat of communal Roman values, which Antonio represents, by the force of money, which Iwai sees as represented by Portia.

The Merchant of Venice has served as an important source of inspiration in a wide range of writings on money and finance, from economic analyses of financial markets (see, e.g., Markowitz 1999) to critiques of capitalism (see, e.g., Maurer 2005c: 136; see also Marx [1867] 1990: 399, 400, 618n30). Numerous efforts also have been made to interpret the play in terms of its economic and financial content. These interpretations have presented divergent configurations of ethnoreligious and economic values as represented by different characters in the play, as well as divergent thematic emphases, from usury (see, e.g., Draper 1935: 39; Pettet [1945] 1969), to exchange (see, e.g., Engle 1986; Newman 1987; Sharp 1986), to the importance of law in economic transactions (see, e.g., Benston 1991; see also Scott 2004; Sokol 1992; Spinosa 1994).

In his influential essay "The Wether and the Ewe: Verbal Usury in The Merchant of Venice," Marc Shell uses Shakespeare's play to demonstrate the parallel between financial and literary economies and his more general thesis concerning the "participation of economic form in literature and philosophy, even in the discourse about truth" (Shell [1982] 1993a: 4; see also Osteen and Woodmansee 1999: 15–16). In particular, Shell draws attention to what he terms Shylock's "verbal usury": "As the Jew uses moneys ... to supplement principal, so he uses puns to exceed the principal meanings of words" (Shell [1982] 1993b: 50). Shell goes on to show how Antonio starts using puns like Shylock and becomes a "usurer" himself (p. 72).

If Shell demonstrates the blurred boundaries between finance and fiction, and money and language, Iwai demonstrates the way money seeks to eliminate difference of all kinds. The focus of Iwai's argument is the idea of difference and his view of capitalism as the repetition of a single form of exchange that "mediates" (baikai) and eliminates difference (Iwai [1985] 1992). Antonio's long-distance trade serves as the prototype of this recurring form. Iwai draws attention to Antonio's role as both a man of "ancient Roman honour" (The Merchant of Venice III, ii, 294) and a merchant engaged in long-distance trade (Iwai [1985] 1992: 17). Iwai points out that Antonio's dual belonging to the Roman world of communal brotherhood, on the one hand, and to the world of merchant capitalism, on the other, is made possible by the dependence of merchant capitalism on spatial distance between communities engaged in trade (pp. 18–20). Long-distance trade is predicated on the existence and "arbitration" (chukai) of a difference in the price of a commodity in two distant locations (pp. 17–18). Iwai's ensuing discussion of The Merchant of Venice focuses on how such exploitation of an initial difference in price eventually eliminates that difference and, through an equalization of price, demands a search for further difference elsewhere (pp. 67–68).

Iwai sees a similar exchange relation in the practice of money lending in Venice. In Iwai's view, the confrontation between Antonio and Shylock stands for the antagonistic and yet "mutually interdependent relationship" between Venice's two separate communities, Christians and Jews (p. 29; cf. Auden 1991: 61). For Christians, who were prohibited from lending money at interest, Jewish money lenders were indispensable (Iwai [1985] 1992: 23–29). To Iwai, the practice of money lending in Venice was like long-distance trade in that both capitalized on the distance between two communities. Iwai also draws attention to how the practice of money lending itself is predicated on the existence of a difference of a sort, that is, "the difference between the present value of money and the future value of money" (p. 25).

In juxtaposing long-distance trade with money lending this way, Iwai highlights not only the parallel between merchants and usurers often pointed out in commentaries on the play (see, e.g., Cohen 1982; Shell [1982] 1993b) but also the process of replicating (or re-creating) difference that is central to the dynamism of the play and to capitalism. In Iwai's terms, this dynamic transformation of capitalism is best depicted in the figure of Portia. He explains that Bassanio's journey to Belmont to win Portia, one cause of which is Antonio's financial debt to Shylock, is itself a replication of long-distance trade (Iwai [1985] 1992: 47–49). In Iwai's analysis, however, Bassanio's quest for Portia ultimately unleashes the full force of money (pp. 54, 59).

For Iwai, Shylock's initial offer not to charge Antonio interest but to lend him money as a "friend" ("Supply your present wants, and take no doit/Of usance for my moneys" [I, iii, 135–136]) anticipates the breakdown of the boundaries between Venice's two communities (pp. 29–30). In the famous trial scene, Shylock demands that the bond be honored, while the Duke of Venice asks for mercy. Portia, who presides over the trial disguised as a legal scholar, plays the "trickster" role to complete the exchange between mercy and law (pp. 34–39). Iwai asserts that "the principle of equivalent exchange or the logic of law [as expressed in Shylock's repeated reference to the bond] was given from the Jewish community to the Christian community whereas `mercy' was given from the Christian community to the Jewish community. However, as a result of this exchange, each of the two communities thus mediated was deprived of its own distinctive quality and its integrity as a community was lost" (p. 39).

In Iwai's view, Portia is a symbol of money: "The first `work' of Portia, that is, now freely circulating Money, was to travel secretly from Belmont to Venice and intervene in the trial about the human flesh as a trickster. In that trial, Money, that is, Portia, mediates the difference between the Christian and Jewish communities and accomplishes an exchange of a sort between them" (p. 59). Iwai's point is that Portia's method is long-distance trade (p. 59). In the trial, Iwai points out, Jessica, another symbol of money, ends up receiving part of Shylock's assets (p. 60). Antonio emerges as an embodiment of obsolete "ancient Roman" values as Bassanio, Gratiano, and Lorenzo each unite with Money. Iwai therefore sees the cause of Antonio's weariness in his defeat by capitalism (p. 69).

The Merchant of Venice, according to Iwai, is a story about the mechanism by which money increases itself: "Profits originate from difference between two value systems. Profits are born out of difference" (p. 58). This basic mechanism of profit making applies to all forms of capitalism: merchant, industrial, and postindustrial (p. 58). Here Iwai makes the difference among different kinds of capitalism itself disappear. He also argues that in capitalism the source of profit needs to be sought on an increasingly abstract terrain, because profit making eliminates all obvious differences (pp. 67–68).

In light of the long-standing debate about the play, Iwai's interpretation of it can be disputed point by point. For example, Iwai's understanding of the contrast between Antonio and Shylock as representatives of ancient Roman values and capitalist values, respectively, is perhaps too one-dimensional. Likewise, the antagonism between Jewish and Christian communities in Venice is perhaps exaggerated. Moreover, Iwai's structuralist equation of Portia with Money also problematically eliminates Portia's agency. Finally, Iwai's tendency to reduce the plot to a single theme and procedure repeated over and over may not do justice to the complex and ultimately unresolved quality of the play (see, in particular, Cohen 1982).

Yet Iwai's interpretation of the play inspired Aoki, the founder of the Sekai Securities proprietary trading team, and his traders, including Sasaki, in a particular way. As I have already noted, Iwai's central argument is that profit making in all forms of capitalism lies in the continual search for difference, which Sasaki interpreted as equivalent to the continual search for arbitrage opportunities. Aoki recalled in July 2005 that he had been struck by Iwai's insight that the source of profit in capitalism is difference: "It made the scales fall from my eyes." Aoki was impressed by Iwai's insight about how the working of the principle of arbitrage in Shakespeare's play demonstrated arbitrage as a time-tested principle and strategy, reaching all the way back to the age of merchant capitalism. In this view, the principal means of profit making in capitalism is arbitrage, and all forms of trading are variations of arbitrage. Sasaki told me that his handout reflected this understanding of capitalism that he had "inherited" (keisho) from Aoki.

What struck me when Sasaki told me about Iwai's interpretation of the play was his indifference to the reductionist tendency of Iwai's interpretation. Shakespeare's play is widely known in Japan, and Japanese elites such as Aoki and Sasaki, who were educated at the country's highly competitive secondary schools and universities, would be familiar with the play's details. However, neither Aoki nor Sasaki had much to say about those details, or Iwai's choice not to address them. Their attention focused, rather, on Iwai's general observation that the source of profit making in capitalism is difference, which, in the traders' own terms, is equivalent to arbitrage opportunities. How did the economist's engagement with Shakespeare's play generate this effect?

For Aoki and Sasaki, the originality of Iwai's observations lay not so much in his interpretation of each scene of the play as in the overall effect Iwai's argument seems to have generated: it reduces The Merchant of Venice to a demonstration of a single economic principle—the identification, exploitation, and elimination of all differences. What Aoki and Sasaki saw was the logic of arbitrage replicating itself across different levels of Iwai's interpretation of The Merchant of Venice. Arbitrage as the core principle of capitalism consistently searches for new difference to exploit. As arbitrage eliminates difference, it also eliminates the agents of arbitrage. For example, Antonio and Shylock, practitioners of two different kinds of arbitrage (long-distance trading and money lending) recede to the background as Portia mediates the exchange between the two. In Iwai's interpretation, even this arbitrageur extraordinaire, Portia, ultimately loses her identity as she completes her various arbitraging moves and becomes merely a force of money.

Following this reading, one may add that Iwai also implicitly replicates arbitrage as his own interpretive strategy. Iwai's interpretation itself arbitrages the difference between fiction and finance—it analyzes arbitraging moves in the play as it arbitrages the play itself. The play, and its distinctiveness (or, difference), disappear in Iwai's theory of capitalism. Iwai's interpretive arbitrage strips the play of everything but the principle of arbitrage. One may conclude that Aoki and Sasaki's indifference to the missing details in Iwai's interpretation was an effect of Iwai's own interpretive arbitrage.

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