Economic theory, not trader demand, forged the proposal for the stock-options exchange

Evidence

It seems that reading about this economic analysis of options in the magazine Institutional Investor (Malkiel and Quandt 1968) was what drew the attention of a key member of the CBT, grain trader Edmund O’Connor. Options were desirable but traded only ad hoc: might the CBT not profitably standardize them and trade them in a busy, efficient Chicago pit? To help explore and build legitimacy for this idea, the CBT hired consultants, Robert R. Nathan Associates, who had studied the grain futures market for the Department of Agriculture. Nathan Associates turned to Malkiel, Quandt, and their colleague William Baumol for a report on the impact of an options exchange on “the public interest.” Options, the trio argued, “enrich the investor’s repertoire of strategies by allowing him to realize a different set of payoffs than he would have realized in their absence.” Just as the possibility of carrying an umbrella was an advantage to the pedestrian, “the more strategies are available to the investor, the better off he is likely to be” (Nathan Associates 1969, vol. 2, pp. 14 and 20). — Donald MacKenzie & Yuval Millo, Constructing a Market, Performing Theory, 63

Categorization

• XREF: Directly fits the reading purpose on performativity: finance theory making the market it described. Connects to Callon’s notion of economics performing the economy. — connects to: Economic theory succeeded in derivatives markets partly by making markets conform to it — Donald MacKenzie & Yuval Millo, Constructing a Market, Performing Theory, 9; Economic theory helped restore legitimacy to banned financial derivatives — Donald MacKenzie & Yuval Millo, Constructing a Market, Performing Theory, 9; Academic theory directly motivated the creation of the organized options exchange — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 651 (+4 more)
• ADDENDUM: Parallel to how academic/botanical ‘theory’ shaped the tree-infrastructure article: expertise recruited to legitimize an institutional project.

Related

• Academic theory directly motivated the creation of the organized options exchange (similarity 0.92)
• Economic theory succeeded in derivatives markets partly by making markets conform to it (similarity 0.89)
• Option theory infrastructure allows derivatives markets to exist at current scale (similarity 0.85)
• Efficient-markets theory helped legitimate options trading that regulators had long banned (similarity 0.84)
• Option pricing theory did not describe markets but remade them in its own image (similarity 0.83)
• Fairer option pricing let 1970s exchanges prosper where predecessors failed (similarity 0.82)
• Economic theory and actual market practice cannot be radically separated in derivatives (similarity 0.81)
• Option pricing theory serves as the test case for performativity. (similarity 0.81)
• Economic theory helped restore legitimacy to banned financial derivatives (similarity 0.81)
• Organized options trading alone could explain post-model price convergence to Black-Scholes (similarity 0.80)
• Markets can be performatively constructed by agents who are not atomistic homo economicus (similarity 0.80)
• Consulting economists reframed options as legitimate investor strategy for regulatory approval (similarity 0.80)
• Efficient-markets and random-walk theory legitimized options against their scandalous reputation. (similarity 0.80)
• Selling options on held stocks was argued to violate the efficient-market hypothesis. (similarity 0.80)
• Economists defended options by arguing they expand investors’ strategic repertoires (similarity 0.80)

Broader Connections

• Academic theory directly motivated the creation of the organized options exchange #corroborates (0.88) — Donald MacKenzie, An Engine, Not a Camera, 651
• Economic theory and actual market practice cannot be radically separated in derivatives #expands (0.80) — Donald MacKenzie, An Engine, Not a Camera, 1182
• Pure rational self-interest cannot explain founding a derivatives exchange #corroborates (0.78)
• Option pricing theory did not describe markets but remade them in its own image #expands (0.75) — Donald MacKenzie & Yuval Millo, Constructing a Market, Performing Theory, 182