It was accepted by all involved that, at least in the absence of jump protection, portfolio insurance would fail if a dreadful external event caused the market to fall discontinuously if, as Leland warned pension fund officials, "one morning, we learn that the Russians have invaded Iran and all the Mideast oil supplies are being cut off" (Leland interview). What gradually became more salient, however, was a risk "internal" to the markets. In a BlackScholes world, adjustment of the replicating portfolio does not affect the price of the underlying stock, the market for which was implicitly taken to be large, liquid, and efficient: the Black-Scholes option-pricing equation "assumes that you can't affect either stock or options prices, by placing orders," wrote Fischer Black (1990, p. 13). Would that still be the case as portfolio insurance became big business?

Donald MacKenzie, An Engine, Not a Camera, loc. 807