Spanning multiple options markets forced firms to adopt pricing models

Evidence

As the CBOE prospered, individual market makers and small firms were gradually displaced by larger firms, such as O’Connor and Associates, set up in 1977 when Michael Greenbaum (whose poorly attended classes on options theory were described above) persuaded Edmund O’Connor to support him in establishing a firm to trade in all the U.S. options markets. In the 1970s, options on a given stock were traded on only one exchange, so if one wished, for example, to take a position on an entire industrial sector it had to be implemented across exchanges. Seat-of-the-pants trading or simple heuristics could not suffice when implementing a position across several markets and carrying dozens or hundreds of such positions. Pricing models were necessary for risk management and, crucially, offered a way of communicating and coordinating activities, of talking about options. — Donald MacKenzie & Yuval Millo, Constructing a Market, Performing Theory, 121

Categorization

• XREF: The point that models serve as a communication/coordination device connects to MacKenzie’s performativity thesis and STS work on inscriptions as boundary objects. — connects to: Option pricing theory did not describe markets but remade them in its own image — Donald MacKenzie & Yuval Millo, Constructing a Market, Performing Theory, 182; The growth and risk of options trading made pricing models indispensable — Donald MacKenzie & Yuval Millo, Constructing a Market, Performing Theory, 125; A market shock forced Chicago options traders to adopt theory-based identity and hedging — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 745 (+1 more)

Related

• The growth and risk of options trading made pricing models indispensable (similarity 0.84)
• Organized options trading alone could explain post-model price convergence to Black-Scholes (similarity 0.83)
• Market prices converged toward Black-Scholes values within a few years of the CBOE’s founding (similarity 0.82)
• Option pricing theory did not describe markets but remade them in its own image (similarity 0.82)
• The Black-Scholes model gained market traction slowly, not through instant self-fulfilling prophecy. (similarity 0.82)
• Fairer option pricing let 1970s exchanges prosper where predecessors failed (similarity 0.81)
• Option market prices initially diverged from the Black-Scholes model but converged (similarity 0.80)
• Academic theory directly motivated the creation of the organized options exchange (similarity 0.80)
• A market shock forced Chicago options traders to adopt theory-based identity and hedging (similarity 0.80)
• Traders using the pricing model actively made market prices conform to the model (similarity 0.80)
• Option pricing converged on economic models through traders copying other users. (similarity 0.79)
• Option theory infrastructure allows derivatives markets to exist at current scale (similarity 0.79)
• Options pricing theory grew despite options being a minor financial instrument (similarity 0.79)
• All later option-price models are consistent refinements of Black-Scholes-Merton (similarity 0.79)
• Markets carry explicit traces of the specific pricing models they use (similarity 0.78)

Broader Connections

• The growth and risk of options trading made pricing models indispensable #corroborates (0.85) — Donald MacKenzie & Yuval Millo, Constructing a Market, Performing Theory, 125
• Option pricing theory did not describe markets but remade them in its own image #expands (0.80) — Donald MacKenzie & Yuval Millo, Constructing a Market, Performing Theory, 182