Where do financial markets come from? Historical sociology of financial derivatives markets

Abstract

The thesis describes and analyses key events in the history of the pioneering markets for financial derivatives, paying particular attention to the influence of the Black-Scholes mathematical options pricing model on the formation of the markets. The historical narrative, focusing chiefly on the Chicago Board Options Exchange (CBOE), describes the transformation that markets for agricultural commodities underwent as organised trading in financial options was designed and practiced. Drawing on theoretical frameworks from economic sociology and from the sociology of science and technology, the thesis aims at expanding the explanatory scope of sociological accounts on markets. The work presents a new perspective for the understanding of today's financial markets: a multifaceted analytical description that combines the social, regulatory and organisational aspects of these institutions.

After an introductory chapter, a literature review and a discussion of methodology, the empirical material of the thesis is presented in four chapters. Chapter 4 describes the regulatory approval of CBOE. The chapter examines the initial stages in the development of derivatives markets and analyses the effect that the Securities and Exchange Commission (SEC), the American financial regulator, had on the socio-cultural process through which financial markets evolve. The analysis shows that the entrepreneurial setting in which derivatives contracts were situated allowed regulators to use them as a source for political power. Chapter 5 reveals the influence that the culture of the Chicago agricultural commodities markets had on the formation of the financial options market. The case describes the cultural roots of the competitive market maker concept, and the part that this concept played in the introduction of the Black-Scholes options pricing model to the organisational structure of derivatives' exchanges. Chapter 6 is devoted to a detailed description of the practices through which the Black-Scholes model was incorporated into the organisational infrastructure of the options market. This process, as the chapter shows, played a significant part in the construction of the model's validity and credibility. Chapter 7 focuses on the inter-agency regulatory struggle through which index-based derivatives were conceptualised and approved. Building on the cases analysed in the four chapters, the discussion part of the work presents and illustrates the concept of techno-social market networks - the interrelated socio-technical institutions within which price-constructing mechanisms are maintained and operated.