Pure rational self-interest cannot explain founding a derivatives exchange

Evidence

Of course, avowals of altruism sometimes mask self-interest, but for a rational egoist to embark on a project like the creation of the International Monetary Market or the Chicago Board Options Exchange, in a context in which all others are rational egoists, is implausible. A risk-neutral egoist would need to be confident that the expected personal benefits of the creation of the new markets exceeded the total costs of establishing them (others must be expected to free-ride, so the founder must expect to bear all these costs); for a risk-averse egoist, the excess might have to be considerable. Given the considerable ex ante uncertainty whether the new markets would prosper many members of the Board of Trade opposed the options exchange as a likely waste of money these conditions are unlikely, and my interviews give no suggestion that they were met. — Donald MacKenzie, An Engine, Not a Camera, 678 (#corroborates, via linked claim)

“Respect” and “obligation,” in their turn, are resources for moral suasion. On the CBOE’s first morning, its failure seemed an alarming possibility. “There were two traders on the floor,” recalls Eisen. “Eddie [O’Connor] and I were running all over the floor making markets.” They returned to the floor of the CBT: “We went around and we convinced everybody to come in at least when grains got a little slow, around 11.15, 11.30 … and then they’d go back and trade the close in grains” (Eisen, in CBOE/OCC 1998b). The success of IMM, similarly, initially seemed precarious: “Once the novelty wore off, the market liquidity completely dried up… . For most of the day … we just sat around playing chess and backgammon” (Randy McKay, quoted in Schwager 1992, p. 82). Like Eisen and O’Connor, though, Melamed was able to exercise moral influence: “I became an obsessed one-man enforcer—coercing, cajoling, admonishing, pleading with our … members to trade the currency markets. We needed liquidity, I begged. Everyone had to lend a hand… . And for the most part, the floor responded to my pleas. These were, after all, my guys” (Melamed and Tamarkin 1996, p. 198). — Donald MacKenzie & Yuval Millo, Constructing a Market, Performing Theory, 84 (#expands, via linked claim)

When the Mere launched the S&P 500 index futures discussed below, Melamed was similarly active in pressuring and persuading its members to trade the new product. Other traders would show him their time-stamped trading tickets to demonstrate that they had done the 15 minutes of trading per day on the nascent market that Melamed demanded. They would be “ashamed not to” do this minimum for the collective good, says Melamed (interview). — Donald MacKenzie, An Engine, Not a Camera, 691 (#expands, via linked claim)

Categorization

• XREF: connects to: Economic theory, not trader demand, forged the proposal for the stock-options exchange — Donald MacKenzie & Yuval Millo, Constructing a Market, Performing Theory, 63; Cold rational egoism cannot explain the founding of modern derivatives exchanges — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 678; Narrow self-interest does not automatically produce efficient exchange (+8 more)

Related

• Cold rational egoism cannot explain the founding of modern derivatives exchanges (similarity 0.89)
• New derivatives markets initially lacked liquidity and depended on founders’ moral suasion to survive (similarity 0.88)
• Rational-egoist theory cannot explain why anyone founded the CBOE (similarity 0.87)
• Building financial derivatives exchanges demanded large unpaid, personally costly commitments from organizers (similarity 0.85)
• Building a new market required mobilizing existing exchange members through moral suasion. (similarity 0.83)
• Options-exchange founders worked unpaid out of felt obligation to the exchange community (similarity 0.82)
• Markets themselves can only be created by people who act against narrow self-interest (similarity 0.81)
• New financial markets require coercive persuasion of members to create initial liquidity (similarity 0.81)
• LOR’s own founders feared their trading would move markets (similarity 0.81)
• Creating the CBOE required costly unpaid collective effort by exchange members (similarity 0.80)
• Launching a new market contract requires coercive mobilization of its own members. (similarity 0.79)

Broader Connections

• Cold rational egoism cannot explain the founding of modern derivatives exchanges #corroborates (0.98) — Donald MacKenzie, An Engine, Not a Camera, 678
• New derivatives markets initially lacked liquidity and depended on founders’ moral suasion to survive #expands (0.82) — Donald MacKenzie & Yuval Millo, Constructing a Market, Performing Theory, 84
• New financial markets require coercive persuasion of members to create initial liquidity #expands (0.80) — Donald MacKenzie, An Engine, Not a Camera, 691
• Markets themselves can only be created by people who act against narrow self-interest #corroborates (0.78) — Donald MacKenzie, An Engine, Not a Camera, 673
• Narrow self-interest does not automatically produce efficient exchange #expands (0.75)
• Narrow self-interest does not necessarily yield efficient exchange. #expands (0.75) — Diego Gambetta, Trust - Making and Breaking Cooperative…, 2626
• Rational self-interest calculation presupposes a defined identity #qualifies (0.70)