Regulatory and technical changes made Black-Scholes assumptions come true

Evidence

In the mid-1970s, stock could not be bought entirely on credit: the Federal Reserve’s Regulation T limited credit to 75% of the stock price. Borrowing stock was often difficult and always expensive: stock lenders retained the proceeds of short sales as security and typically refused to pass on any of the interest earned. If an options trader did not belong to a member firm of the New York Stock Exchange, stock transactions incurred significant commissions. … Gradually, though, many of the model’s assumptions gained greater verisimilitude. Regulation T was waived for bona fide hedging by options market makers, with the model used, performatively, to determine the quantity of stock purchases that constituted a bona fide hedge (Millo 2003). Stock borrowing became more respectable (short sellers had in the past often been blamed for price declines), and the balance of market power began to shift, with borrowers obtaining increasing proportions of the interest on the proceeds of short sales (Thorp interview). Fixed commissions on the New York Stock Exchange were abolished in May 1975. The data feed to Chicago was improved, and better communications and growing automation made it quicker and easier to adjust the replicating portfolio. — Donald MacKenzie & Yuval Millo, Constructing a Market, Performing Theory, 107

Categorization

• DEEPTHINKING: The claim that institutional actors systematically rewritten rules—credit limits, commission structures, data feeds—to make a model’s simplifying assumptions real is the chapter’s strongest concrete evidence of performativity.
• XREF: Regulation T waiver and institutional reshaping connect to broader literature on how deregulation enabled derivatives markets. — connects to: The market changed to fit Black-Scholes rather than the reverse — Donald MacKenzie & Yuval Millo, Constructing a Market, Performing Theory, 107; Black-Scholes price deviations fell from 2 percent to under 1 percent by 1986 — Donald MacKenzie & Yuval Millo, Constructing a Market, Performing Theory, 106

Related

• The model’s assumptions became more realistic as markets restructured around it (similarity 0.83)
• The market changed to fit Black-Scholes rather than the reverse (similarity 0.82)
• Black-Scholes price deviations fell from 2 percent to under 1 percent by 1986 (similarity 0.81)
• A financial model can be written into regulation to enact its own assumptions (similarity 0.79)