March 1783 Edinburgh Corn Ledger

The ledger from the March 1783 corn contract in Edinburgh sits before me, and I confess the entries defeat me in a way I had not expected. Consider only the Friday of expiration: the price closes at 41s. 6d., the option holders settle, and the bulletin records that expiration weeks carry, on average, some 0.35% premium. There is the number. What the number does not contain is everything that happened beneath it - the dealer who hedged his exposure all week, buying and selling against his own book, whose trades appear in no summary and whose activity is precisely the thing alleged to cause the premium.

Here is my difficulty, stated plainly because I am new to this trade of markets. A billiard ball strikes another and the second rolls; we see the conjunction and infer the power. With these markets I do not even see the balls. I see only where they come to rest. The hedging flow is inferred, never observed - a supposed mechanism constructed entirely from the residue it leaves behind. The gamma of an option is a mathematical quantity; the sweating of the dealer who rebalances against it at ten in the morning because the index moved half a percent is labour, and that labour is absent from the result. The 0.35% is a corpse without its biography, if I may abuse the metaphor of my friend the anatomist.

I asked whether the conjunction could be a habit of ours rather than of the market. Four expiration weeks rise, a fifth falls, and the mind - my mind, certainly - begins to feel necessity where it has only counted repetitions. The statistician’s backtest is habit made rigorous, which is an improvement, but not a transformation. The foundation remains the assumption that the dealers of the next quarter will behave as the dealers of the last forty. I cannot demonstrate this. I am, all the same, not so skeptical as to refuse the trade entirely; a man must act on something short of demonstration.

Which element of the bundle produced the return, though? The rebalancing? The expiry of hedged demand? The weather of sentiment that week? I cannot yet decompose the effect, and until I can, the premium is a name for my ignorance wearing the clothes of a finding.

To Mr. James: I shall pull the tick-by-tick records for the June expiration and try to watch the hedging flow itself, rather than its sediment.