The Persistence of Organizational Deviance: When Informal Sanctioning Systems Undermine Formal Sanctioning Systems

Organizations adopt formal sanctioning systems to deter ethical violations, but the formal systems’ effectiveness may be undermined by informal sanctioning systems which promote violations. I conducted an ethnographic study of six trading crowds on two financial exchanges to understand how informal and formal sanctioning systems, which are grounded in different interpretations of equity, interact to affect trader deviance from rules established by the financial exchange (exchange deviance). To deter informal trader norms that conflict with exchange rules, the exchanges formally prohibit traders’ informal sanctions. The exchanges, however, underestimate traders’ informal sanctions related to ostracism and social rejection, which are not only difficult for the exchanges to detect, but also interpersonally hurtful and harmful to trader performance. Consequently, the traders’ informal social sanctions lead to secondary sanctions from trading firms. Ultimately, the informal sanctioning system evades the formal sanctioning system by exploiting what the exchanges deem to be minor rule violations.