It’s tempting to think of today’s Wall Street as a technocracy with a thin human overlay. Brokers flashing hand signals on exchange floors were long ago replaced by humming server farms. The white-shoe deal-making of years past has given way to a global, diverse, hardwired marketplace that, in many ways, is more science than art. We think of threats to the system’s fairness and stability in terms of rogue algorithms and synthetic derivatives, not human frailty.
This summer’s LIBOR-rigging scandal shattered that image. The London Interbank Offered Rate—the critical benchmark used to set interest rates on trillions of dollars’ worth of financial products, including most people’s mortgages and student loans—was exposed as a moving target, all too manipulable by a small handful of opportunistic traders.
“There’s an obvious flaw in the setup of the market,” says Tim Loughran, a finance professor at Notre Dame’s Mendoza College of Business. “If there’s a number and you can work it to your advantage to make a profit, wouldn’t you be interested in doing it?”