Exchange market microstructure determines how well put-call parity prices are maintained.

Evidence

The socio-spatial structures of different exchanges, however, affected the ease with which the mathematical relation between put and call prices was maintained. The first exchange to join Chicago in trading options was the American Stock Exchange (Amex). The social structure of trading on the Amex differed from that in Chicago. Like the New York Stock Exchange, the Amex had “specialists” who maintained “books” of buy and sell orders and matched those orders. When options trading began at the Amex, the specialist system was extended to it, while in Chicago the privileges of the specialist were anathema because of the tradition of competitive market makers with equal formal rights. … In Chicago, market makers quickly learned how to profit from discrepancies between put and call prices, and violations of put-call parity were typically evanescent. In busy classes of options at the Amex, however, it was found necessary to have two specialists (both members of the same firm), one taking responsibility for trading in calls and the other for trading in puts. … Apparently there were many more breaches of put-call parity on the Amex, and these could be exploited by traders who stood between the two specialists monitoring the prices at which each would deal. “What a dream world that was… They [the specialists] didn’t know … what [the other specialists were] doing. They were doing okay on their own, but they didn’t coordinate… He’s the call specialist, you’re the put specialist. And you don’t even stand real close to each other.” — Donald MacKenzie, An Engine, Not a Camera, 756

Categorization

• XREF: Directly feeds the performativity thesis: the mathematical model (put-call parity) is realized or not depending on the social architecture of the trading floor. — connects to: Market microstructure shapes whether arbitrage opportunities persist or vanish — Donald MacKenzie & Yuval Millo, Constructing a Market, Performing Theory, 94; Market microstructure shapes price behavior independently of underlying fundamentals — Donald MacKenzie & Yuval Millo, Constructing a Market, Performing Theory, 88; Put-call parity derives from an equal-payoff portfolio construction. — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 1565 (+4 more)

Broader Connections

• Put-call parity derives from an equal-payoff portfolio construction. #responds-to (0.80) — Donald MacKenzie, An Engine, Not a Camera, 1565
• Traders’ arbitrage activity made the pricing model appear empirically true #corroborates (0.75) — Donald MacKenzie & Yuval Millo, Constructing a Market, Performing Theory, 126
• Modern financial markets are deliberately designed entities #corroborates (0.75) — Donald MacKenzie, An Engine, Not a Camera, 1235
• Fundamentally unrelated market phenomena can suddenly move in lock-step within a global microstructure #expands (0.72) — Donald MacKenzie, An Engine, Not a Camera, 1088
• Global markets are assembled through microsocial patterns of relatedness and coordination #expands (0.70) — Donald MacKenzie, An Engine, Not a Camera, 1086