Tis the season for expirations, the keyhole onto institutional risk-management. The shuffle started Friday Dec 11, when risk-management trading dominated. You won’t see it in price or volume, or puts or calls, but in the nature of execution.

If you wondered why your trading seemed odd that day, there’s a good chance it had to do with inscrutable black-box risk metrics run by major sellside firms helping the buyside modulate macroeconomic risk.

Oh, for the days when buyers and sellers set prices.

Volatility contracts expire tomorrow, Dec 16, and the usual index, treasury, currency, bond and other futures and options contracts cease Thursday and Friday the 17th-18th. Also, Christmas week, the S&P 500 futures, the SPL/SPX contracts, convert, and a new SPL series is added.

What do these mean to the IR job, and how do they work? SPLs and SPXs are options to buy or sell the S&P 500 index at future dates. They can be used as an asset for margin, as protection against risk, for trading volatility, for synthetically adjusting portfolios to mimic the S&P 500 without buying the actual elements – all kinds of things. How the market behaves around these expirations is like seeing the attitude of money rather than hearing the words it speaks.

Here’s the key: contrary to prevailing notions, derivatives are not an evil tool of wicked free markets. Derivatives are always an effort to deal with price and risk uncertainty. The more widely they’re deployed, the greater the risks and uncertainties. Risks and uncertainties are greatest in speculative markets and highly regulated markets. In both instances, the role of value in setting prices is obscured.

IROs and execs, these features matter. Imagine going up the down escalator. This is the nature of the capital markets at present. Too many factors are interfering with natural price-setting mechanisms. In order to explain what seems inexplicable about your share price at times, it’s necessary to understand how the value of money and the effects of risk-management work in equity markets.

We continue to say that the single largest problem now is Federal Reserve policy. Central bankers believe that the supply of money, which represents an exchange of value, can increase, even if there is no exchange of value. On corporate balance sheets, these conditions would result in a reduction to retained earnings, a dilution to equity, a writedown of asset values, or a journalizing entry affecting net worth in some way.

But that doesn’t happen in Federal Reserve policy. Inevitably, a bubble forms someplace.