Market microstructure shapes whether arbitrage opportunities persist or vanish

Evidence

Amex “specialists” maintained “books” of buy and sell orders and matched those orders. On the CBOE, market makers quickly learned how to profit from discrepancies between put and call prices, and violations of put-call parity (Stoll 1969) were typically evanescent. In busy classes of options at Amex, however, it was found necessary to have two specialists (both members of the same firm), one taking responsibility for trading in calls, the other for trading in puts. There were many more breaches of parity, and these could be exploited by traders standing between the two specialists: “What a dream world that was … they didn’t know … what each other [was] 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 (Carusillo and Struve interview 1). — Donald MacKenzie & Yuval Millo, Constructing a Market, Performing Theory, 94

Categorization

• XREF: Connects to the reader’s interest in performativity and financial theory — the put-call parity violation shows market design (specialist coordination) determining whether the theoretical no-arbitrage relation actually holds in practice. — connects to: Market microstructure shapes price behavior independently of underlying fundamentals — Donald MacKenzie & Yuval Millo, Constructing a Market, Performing Theory, 88; Exchange market microstructure determines how well put-call parity prices are maintained. — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 756; Arbitrage erodes the profitability of exploiting the index inclusion anomaly — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 462 (+7 more)
• SHARE: A finance-theory-versus-market-structure anecdote worth sharing with anyone interested in market microstructure and why arbitrage pricing relations hold in some venues but not others.

Related

• Exchange market microstructure determines how well put-call parity prices are maintained. (similarity 0.90)
• Market microstructure shapes price behavior independently of underlying fundamentals (similarity 0.83)

Broader Connections

• Exchange market microstructure determines how well put-call parity prices are maintained. #exemplifies (0.93) — Donald MacKenzie, An Engine, Not a Camera, 756
• Arbitrage erodes the profitability of exploiting the index inclusion anomaly #exemplifies (0.85) — Donald MacKenzie, An Engine, Not a Camera, 462
• Market microstructure shapes price behavior independently of underlying fundamentals #expands (0.82) — Donald MacKenzie & Yuval Millo, Constructing a Market, Performing Theory, 88
• Fundamentally unrelated market phenomena can suddenly move in lock-step within a global microstructure #expands (0.75) — Donald MacKenzie, An Engine, Not a Camera, 1088
• A small trigger can unravel large systems of overlapping arbitrage positions through forced selling #qualifies (0.75) — Donald MacKenzie, An Engine, Not a Camera, 156