Institutional frictions in 1973 prevented market makers from fully hedging options.

Evidence

If an options trader did not belong to a member firm of the New York Stock Exchange, stock transactions incurred, as noted above, significant commissions. The information on stock prices needed to price an option and to create and adjust a hedge was often not available quickly: at first, the electronic “feed” conveying prices from New York to Chicago was relatively slow. Purchases and sales of stock took time, and “to place a stock order, a marketmaker must leave the options trading crowd (or at least momentarily divert his attention from options trading activity), and, as a result, may lose the opportunity to make an advantageous options trade” (SEC 1979, pp. 139-140). — Donald MacKenzie, An Engine, Not a Camera, 740

Categorization

• XREF: connects to: A market shock forced Chicago options traders to adopt theory-based identity and hedging — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 745

Broader Connections

• A market shock forced Chicago options traders to adopt theory-based identity and hedging #corroborates (0.72) — Donald MacKenzie, An Engine, Not a Camera, 745