@quanttrader
What I mean by feedback loops is the following: what we are trying to figure is not some static natural variable. It's a price that fluctuates with supply and demand. So if the market is using models to price these things, then I would expect the prices to converge to those models. It then follows that new fish will be trying to figure out a model to a system "rigged" by previous models.

It seems to me (a student with no market experience) that its a never ending pursuit.

P.S. What does OMM mean?

Thx

Basically, the BSM has four known inputs (spot, strike, time to exp, int rate) and one unknown input, which is implied volatility. So say you assume a 0% interest rate, and are trying to price a 100 strike call option that expires in 3 months on a non-dividend paying stock that's trading at 100. If you notice the option is trading at $6 in the market, you can backsolve the BSE and find an implied vol of approximately 30%. All of a sudden, there is a big management shake up and the stock price doesn't move but the market prices in more uncertainty - the price of the option goes up to $8, and now the implied vol is 40%. Maybe some large firm thinks that the market is overestimating the volatility over the next 3 months, and so sells it back down to $6. Basically, it's still a free market, and no one knows what the TRUE volatility is/will be.

There are some new models out there but from what I've seen it's mostly just different ways of modeling the stochastic process of the price of the underlying stock. Some firms try and predict what the future vol will be, but it's (obviously) incredibly difficult.

An OMM is an options market making firm.

Let me know if you have any more questions!