Arbitrageurs’ price gaps drove stock buying, not panic or sentiment

Evidence

Later, there was speculation that the purchases were “part of a desperate attempt to boost the Dow and save the markets” (Stewart and Hertzberg 1987, p. 23). If that were so, the choice of instrument was shrewd. Like the other stock-index futures, Major Market futures had been trading far below their theoretical values. Their rapid rise took them to a premium, to prices above theoretical values. As the news reached New York, it was a much-needed fillip to morale. Within a few minutes, at around 12:45 P.M., it was followed by some orders to buy stocks, as arbitrageurs began to restart trading to lock in the profits that the premium offered despite, as one of them later put it, feeling “terrified of the market” (Stewart and Hertzberg 1987, p. 23). 17 of the Major Market Index’s 20 stocks were also in the Dow Jones 30-stock industrial average, so the purchases were largely in the stock of corporations whose prices shaped the publicly most salient market index. — Donald MacKenzie, An Engine, Not a Camera, 838

Categorization

• XREF: Connects to the broader performativity thesis: arbitrageurs acted on the futures-stock relationship created by the models’ pricing, a concrete instance of a model-driven causal pathway. — connects to: Traders’ arbitrage activity made the pricing model appear empirically true — Donald MacKenzie & Yuval Millo, Constructing a Market, Performing Theory, 126