Two things exploded in 2023.  Trading in options contracts and illegal US immigration.

No, I’m not suggesting they’re correlated!  I note it bemusedly. But I do have a point. We need clarity.

In options, the Futures Industry Association said equity-linked instruments saw volume double globally from 2022 levels to 100 billion contracts, concentrated in index and Exchange Traded Fund (ETF) options.

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Illustration 67819586 © Bakhtiar Zein |

We infer from patterns in the data we track – discrete behavioral volume in US markets – that institutional money is using ETFs, options and futures in place of stocks.

That’s tough for companies because it reduces the value of the public market for capital-raising. Money would rather own rights to things than the things themselves. 

For the same reason Hollywood owns rights.  Remember that song “How Bizarre” by OMC?  If you want to know the rest, hey buy the rights? Their lyrics, not mine.

Rights are cheaper than the underlying asset.  And confer a capacity to capture big moves without risking much capital.

And for index funds and ETFs regulated under the Investment Company Act of 1940 (as amended), substituting up to ten percent of assets in things other than underlying stocks provides a fluid way to match a benchmark.  Tracking errors? Buy the rights. 

You follow? If stock XYZB lurches on an earnings report, thanks to arbitragers making leveraged bets with derivatives, an index fund can boot it from its tracking basket and buy index futures instead, magically restoring harmony versus the benchmark.

Welcome to the new age.  Wait, wrong song. How bizarre, right?

Meanwhile on the US southern border, millions pouring in has an effect like options.  Derivatives aren’t volume in your stock. But derivatives can propel massive volumes. Machines may arbitrage price second-by-second versus an ETF.  It alters outcomes.

And millions of people in the country getting money from the government to spend alter economic outcomes.  As do millions getting jobs and spending money on food, fuel, housing.

The US Bureau of Labor Statistics says there are about 267 million people in the US civilian workforce – adults who could work. Among them, a hundred million don’t work. They’re in school, retired, staying at home, disabled, etc.

The number of people employed is about 161 million.  That leaves the unemployed – people who want a job but don’t have one. Six million, give or take.

So if 8-15 million people enter the country illegally and in some way or another contribute to the economy or consume its resources, it’s a very big deal.

Like derivatives in the stock market.

The stock market’s purpose is supposed to be matching investors with enterprising companies needing money. That’s how it began in the USA on a mid-May day in 1792 under a buttonwood tree.

The Buttonwood Agreement laid the foundation for the NYSE.  Twenty-four brokers agreed to give each other preference buying and selling stocks and to charge a minimum commission so as not to undercut each other on price.

Thus began the greatest investment marketplace in history.

It worked for about 200 years. Then the SEC took it over and declared it a national market system, connecting the exchanges together and forcing them to share customers, prices and data to “improve competition.”

Then the SEC stuffed it full of derivatives. Regulators and Congress determine what trades in the “stock market,” which is not a place anymore unless you count where all the exchange and dark-pool servers are, in which case it’s in New Jersey.

It’s an electronic arbitrage scheme where you can trade more things that aren’t stocks than things that are. Just 50 stocks, 10% of the total, are more than half the S&P 500’s market cap. ETFs outnumber Russell 3000 stocks.

That’s not the result of the absence of rules but their presence.

And at least 174 immigration laws have been enacted by Congress in the United States (Wikipedia says, but it could be more). The Constitution delegates, depending on how you count them, about 22 powers to Congress in Article I Section 8. Among them is this one:  To establish a uniform Rule of Naturalization.

Immediately in 1790, the first Congress passed the first law for doing that, called the Naturalization Act of 1790. Sure, it was racist. That’s not the point. It was a single standard.

Now, scores of subsequent Acts of Congress later and after a multitude of executive orders to boot (the power resides expressly with Congress, and the executive branch is to faithfully execute the laws), we have a byzantine web of rules and no uniform standard.

Reminds me of the stock market.  Look, I like trading leveraged ETFs. If you know the Demand/Supply imbalances, it’s a high-probability, low-risk trade. Unlike owning stocks through earnings cycles.

No wonder Citadel, which makes markets in everything, everywhere, for a tenth of a penny in a tenth of a second, makes billions.

But you see the problem.  Once the purpose of the market becomes clouded, its pursuits change and its outcomes are no longer the same. (And you have to adapt, companies! Stop doing things that hurt your shareholders when you report results.)

And if the country exists for its citizens, we need clarity of purpose at the border too. 

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