Larger trading crowds produce more volatile prices than smaller ones

Evidence

Nor did the social structure of the Chicago exchanges cease to matter once the International Monetary Market and Chicago Board Options Exchange became large and successful (by 1978, more than 100,000 options contracts, each corresponding to 100 shares, were traded on an average day on the latter).’ Baker (1981; 1984a,b) examined the pattern of trading and the behavior of prices in two options trading “crowds,” one large and one small. After taking account of the volatility of the underlying stocks, Baker found that contrary to standard economic predictions, option prices were more volatile in the larger crowd, an effect he explained by the tendency of this crowd to fragment into subnetworks when trading was intense. — Donald MacKenzie, An Engine, Not a Camera, 692

Nor did the social structure of the Chicago exchanges cease to matter once the CBOE became a large and successful market (by 1978, more than 100,000 contracts were traded on an average day: Falloon 1998, pp. 225–27). Baker (1984a, 1984b) examined the pattern of trading and the behavior of prices in two CBOE trading crowds, one large and one small. After taking account of the volatility of the underlying stocks, Baker found that, contrary to the predictions of economic theory, option prices were more volatile in the larger crowd, an effect he explained by the tendency of this crowd to fragment into subnetworks when trading was intense. As one trader told him, “In the really large crowds that are really active, it’s possible to get trading in very different prices. [Why?] It’s noisy; you can’t hear” (quoted by Baker 1984b, p. 786). The small crowd, in contrast, tended to remain stable in membership, and always small enough for easy communication. Prices in it tended to remain stable, even as trading became more intense. — Donald MacKenzie & Yuval Millo, Constructing a Market, Performing Theory, 88

Categorization

• XREF: Contradicts standard market microstructure assumptions that more participants mean more efficient, stabler prices. Ties to performativity’s claim that market structure shapes outcomes.
• QUESTION: Worth chasing: does crowd-size price volatility persist in modern electronic trading, or was it specific to open-outcry acoustics?
• corroborated: 2 independent passages support this claim — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 692; Donald MacKenzie & Yuval Millo, Constructing a Market, Performing Theory, 88