Knowledge Production in Financial Markets: Credit Default Swaps, the ABX and the Subprime Crisis

In 2008, the solvency of many of the world's leading banks came to hinge on valuations of portfolios of subprime mortgage-backed securities. This paper examines the ABX, a crucial new market (set up in January 2006) widely used as a guide to these valuations. The paper outlines the origins of the ABX, discusses the sometimes fiercely contested process of the standardization of the credit default swaps that underlay it, and outlines how the ABX rendered the subprime crisis visible to financial markets. Credit default swaps and the ABX are traded in a specific form of market that I call ‘the canonical mechanism’. Because canonical-mechanism markets are well regarded, it is easy when analysing them to slip into functionalism. Accordingly, this paper emphasizes the contested and sometimes precarious nature of canonical-mechanism markets, discussing disputes over how to standardize financial instruments, over the ‘fairness’ of prices and over the dependability of those prices as indicators of the economic value of financial instruments. Canonical-mechanism markets, the clashes of interests they can involve, the material ways in which prices are generated and circulated within them and their limits as generators of knowledge all need to be researched in depth.