A market shock forced Chicago options traders to adopt theory-based identity and hedging

Evidence

However, a sudden surge in stock prices in April 1978 caused huge losses to market makers who had sold large numbers of insufficiently hedged calls, and some were forced out of the market: those who had sold the 280s lost their Mercedes, so to speak. Gradually, Chicago options market makers began to develop a distinct self-identity in which careful pricing and hedging were important. On the agricultural futures exchanges, the stereotypical belief was “I got the trade ‘cause I’m faster than you, buddy.” In New York, it was “I got the trade ‘cause I’m here” that is, because I am the designated specialist. In the Chicago Board Options Exchange’s growing self-perception, it was “I got the trade ‘cause I thought it out” (Doherty interview). — Donald MacKenzie, An Engine, Not a Camera, 745

Categorization

• XREF: The trader self-identities (‘faster than you’ / ‘I’m here’ / ‘I thought it out’) parallel Callon’s notion of how economic discourse shapes actors’ self-understanding, and connect to MacKenzie’s broader performativity argument. — connects to: Academic theory directly motivated the creation of the organized options exchange — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 651; Institutional frictions in 1973 prevented market makers from fully hedging options. — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 740; Option pricing theory did not describe markets but remade them in its own image — Donald MacKenzie & Yuval Millo, Constructing a Market, Performing Theory, 182 (+1 more)
• SEED: Contrasting the three exchange self-identities is a vivid essay angle on how market microstructure inscribes different notions of virtue in traders.

Broader Connections

• Option pricing theory did not describe markets but remade them in its own image #expands (0.80) — Donald MacKenzie & Yuval Millo, Constructing a Market, Performing Theory, 182
• Spanning multiple options markets forced firms to adopt pricing models #expands (0.80) — Donald MacKenzie & Yuval Millo, Constructing a Market, Performing Theory, 121