The Derivatives Market: An Unseen Threat to the Productive Economy


As technology has continued to improve, investment firms have created algorithms capable of efficiently analyzing stock prices for buying and selling much more efficiently than human traders.

What should have been obvious and probably was, is that the wealthier the financial institution, the more money they would be able to pay for the best programmers to develop more powerful algorithms on faster computers like in a financial arms race.

It should have been obvious that this “financial arms race" would not be won by the most ethical institutions, as algorithms began to cheat. They would place enormous bids on stocks to significantly influence the market, but then withdraw those bids before fulfillment, causing a crash in the stock price. After the crash, they would quickly purchase large quantities of the stock at exceptionally low prices, knowing full well that they had caused the crash and that the stock would eventually rebound in value. At the same time, the algorithms had bet that the crash would happen, knowing for sure that it would.

For this to work, speed is important, as the most powerful algorithms on the world’s fastest computers can, and do, intercept bids from less powerful algorithms on slower computers. They buy up their targeted stock a few nanoseconds before the other algorithms can get to it, and then immediately sell them back for a few pennies more than the price they would have paid, had they got to the seller first. The few pennies don’t make much difference to each sale, but the combined reward for such activity globally is in the hundreds of billions.

Geographical location is also important. The world’s wealthiest financial institutions can afford huge supercomputers right next door to the computers of the world’s biggest stock markets. This wins them a few more crucial nanoseconds.

This understanding will help you see capitalism in a new light. Capitalism is a game, a giant computer game played by the world’s most powerful algorithms on the world’s fastest computers, owned by the world’s wealthiest investment houses. Where the derivatives market is ten times the size of the real, productive market, and so extracts all its value from it ultimately, from the people actually doing productive work.

It doesn’t make economic sense anymore to work in the productive economy anymore, only to bet on it. Money makes you money; doing useful things gets you exploited.