For every $1 in stock markets, $11 in derivatives are betting on what that dollar does.

A conservative estimate puts global derivatives at one quadrillion dollars. These aren't just hedges—they're side bets, bets on side bets, and bets on bets on side bets. And the sheer quantity of side bets changes how the main game plays out.

Key Takeaways

• Market structure often matters more than fundamentals. Dealer positioning, liquidity dynamics, and reflexivity move prices.
• The 1987 crash wasn't caused by bad news—it was a structural failure. No one was willing to bid. Regulations changed. Now market makers are legally obliged to provide liquidity.
• Derivatives don't just reflect spot prices—they influence them. Large options positions create self-fulfilling dynamics through dealer hedging.

A Case Study

The S&P 500 futures movement in early 2022:

1. Large traders (reportedly including Carl Icahn) accumulated massive positions in 4050 puts
2. The market declined to precisely 4050 by expiration
3. These traders then established new positions in 3950 puts
4. The market dropped again

Coincidence? Maybe. But the mechanics of dealer hedging combined with market psychology can make large derivative positions self-fulfilling.

Market Structure

Market structure encompasses everything that affects how prices form: number and size of buyers/sellers, competition level, information availability, regulatory environment, and trading infrastructure.

Gamma Squeezes

During COVID, "gamma squeeze" became a CNBC buzzword. Here's what it means:

1. You buy call options (betting on upside)
2. A dealer sells you those options (taking the other side)
3. The dealer hedges by buying the underlying asset
4. More call buying → more dealer hedging → more buying pressure
5. Price rises exponentially

GameStop and AMC demonstrated this in extreme form. The derivatives drove the spot price, not the other way around.

The 1987 Lesson

Why do dealers have so much influence? Because after 1987, they're legally required to.

The 1987 crash wasn't caused by bad earnings or geopolitical events. It was a structural failure: an overcrowded trade in portfolio insurance triggered selling that triggered more selling. On that October morning, no one was willing to bid.

The market dropped 22% in a single day—not because anything fundamental changed, but because the market's structure broke. Regulators decided this was unacceptable. Now market makers must provide liquidity.

Paul Tudor Jones made a fortune being on the right side of that crash. The market then went up almost continuously until the tech bubble burst in 2000.

The backstop has failed twice since: 2008 and 2020. In both cases, conditions got so dire that even obligated market makers couldn't absorb the selling—until central banks made their intentions clear.

Notional vs. Real Value

The S&P 500 priced in USD looks like this:

Now price it against the Fed's balance sheet:

In 2007/2008, for every $1 on the Fed's balance sheet, ~$0.0016 of S&P value existed. After QE and bailouts flooded the system, that ratio dropped to $0.0004-0.0006.

The index hasn't come close to its 2007 highs in real terms. The USD notional value keeps rising. Prices are rising. Real value isn't.

How do you measure inflation? You can trust the Fed's CPI. Or you can look at your candy bars.

Shrinkflation

Product	2014 Weight	2018 Weight	Change
Snickers (4 pack)	232g	167g	-28.1%
Toblerone	200g	150g	-25.0%
Twix (4 pack)	200g	160g	-20.0%
Kit Kat Chunky	48g	40g	-16.7%

Same price. Less candy. This pattern—shrinking value at stable prices—runs through education, groceries, ride-sharing, and streaming.

What Drives Prices

Scarcity (Or Lack Of It)

The US dollar is not scarce. Neither are the derivatives tied to it.

Global derivatives markets are 11x larger than global stock markets. One quadrillion dollars in derivatives, by conservative estimates. For every $1 in stocks, $11 in derivatives bet on what that dollar does.

Most aren't hedges. They're cash-settled speculations—side bets on side bets on side bets. Each tied to that original $1.

The thesis: the quantity of side bets changes how the main bet plays out. This is Soros's reflexivity principle from The Alchemy of Finance.

Reflexivity

Physicists call it the observer effect: you can't check a tire's pressure without letting out some air. You can't see an object without light hitting it.

Financial markets are infinitely more complex. Every observer has intentions. Every observation affects the observed. Derivatives compound this effect—they're observations that actively move the thing they're observing.

Crypto Derivatives

Equity whales are traditionally risk-averse: endowments, pension funds, market makers. Crypto whales are different: early adopters playing with house money, family offices, individual traders with higher risk tolerance.

This creates sustained volatility unmatched in traditional markets (outside penny stocks and OTC plays).

Crypto derivatives are smaller and messier than equity derivatives:

• Multiple futures exchanges with different prices
• Bitcoin futures trading 10% higher on Coinbase than other exchanges
• 20% "Kimchi premium" in South Korea due to capital controls

This doesn't happen in equity markets. SPX futures trade on one exchange. The arbitrage is instant. Crypto's fragmented structure creates inefficiencies that equity markets eliminated decades ago.

The Bottom Line

Markets are shaped by their structure. Dealer positioning, liquidity dynamics, and reflexivity often matter more than fundamentals—especially in the short term.

The side bets move the main game.