Traders used the model’s own arbitrage logic to profit in the market.

Evidence

The options traders who used Black’s sheets or other implementations of the Black-Scholes-Merton model hoped, of course, to make money. The most obvious way of doing that was to put into practice the arbitrage strategy inscribed in the model’s derivation. One could use the model to identify options that were overpriced (or underpriced) relative to their theoretical values, sell them (or buy them), and hedge the risk by taking and adjusting a position in the underlying stock. Black’s sheets included not only theoretical prices but also the “delta” values that told subscribers how big that hedging position in stock should be. — Donald MacKenzie, An Engine, Not a Camera, 731

Categorization

• XREF: This is the core performativity mechanism at work: the hedge embedded in the model’s derivation actually ran in the market — a concrete instance to carry into the book’s broader thesis. — connects to: Market makers profit from the buy-sell spread by providing liquidity. — Kean Birch, Rethinking Value in the Bio-economy:…, 121; Efficient-market theory generates the trades that consume its own counterevidence. — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 451; Traders’ arbitrage activity made the pricing model appear empirically true — Donald MacKenzie & Yuval Millo, Constructing a Market, Performing Theory, 126 (+5 more)

Broader Connections

• Traders’ arbitrage activity made the pricing model appear empirically true #expands (0.90) — Donald MacKenzie & Yuval Millo, Constructing a Market, Performing Theory, 126
• Econometric model tests can be passed because traders’ arbitrage removes model deviations. #corroborates (0.85) — Donald MacKenzie, An Engine, Not a Camera, 737
• Arbitrage is the chief channel achieving Barnesian performativity in finance #corroborates (0.85) — Donald MacKenzie, An Engine, Not a Camera, 1209
• Market conditions moved toward the model’s assumptions partly because of the model itself #expands (0.80) — Donald MacKenzie, An Engine, Not a Camera, 1155
• Option pricing converged on economic models through traders copying other users. #corroborates (0.75) — Donald MacKenzie & Yuval Millo, Constructing a Market, Performing Theory, 183