Even legendary arbitrageur Thorp’s own trader balked at exploiting the crash’s price gap

Evidence

For example, Edward O. Thorp, whose work on option pricing was discussed in chapter 5, was involved in the 1980s in index arbitrage via the firm he co-founded, Princeton Newport Partners. He recalls great difficulty in getting his firm’s trader even to attempt arbitrage on October 20. He was able to persuade him only by threatening to do it on his own account and telling him “I’m going to hang you out to dry” because the firm would then get no share of the profit. The trader was able to make only around 60 percent of the short sales Thorp had instructed, but Thorp had anticipated this by telling him to attempt twice the theoretical quantity (Thorp interview). — Donald MacKenzie, An Engine, Not a Camera, 829

Categorization

• SHARE: Worth sending to the finance-enthusiast friend who reveres Thorp’s quant books — the human fear even at his own firm is a vivid counterweight to his legend.
• XREF: connects to: The 1987 crash exposed limits of arbitrage as a mechanism linking markets — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 822; The 1987 crash ended the Barnesian performativity of classic option-pricing theory — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 942; A theorist’s trading failure can vindicate a pricing model — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 1119

Broader Connections

• The 1987 crash exposed limits of arbitrage as a mechanism linking markets #exemplifies (0.85) — Donald MacKenzie, An Engine, Not a Camera, 822
• The 1987 crash ended the Barnesian performativity of classic option-pricing theory #complicates (0.78) — Donald MacKenzie, An Engine, Not a Camera, 942
• A theorist’s trading failure can vindicate a pricing model #complicates (0.75) — Donald MacKenzie, An Engine, Not a Camera, 1119