Global derivatives market

Top Derivatives Expert Estimates Size of the Global Derivatives Market at $1, 200 Trillion Dollars … 20 Times Larger than the Global Economy

How Large Is the Derivatives Market?

Everyone paying attention knows that the size of the derivatives market dwarfs the global economy. But how big is it really?

For years, there have been rumors that there is over a quadrillion – one thousand trillion – dollars in notional value of outstanding derivatives. But no one really knew.

Even though the Bank of International Settlements regularly publishes tables showing the amounts of different types of derivatives, some of the categories are ambiguous, and so it has been hard to get a good handle on what’s really out there.

For example, one blogger wrote last year:

Estimates of the notional value of the worldwide derivatives market go from $600 trillion all the way up to $1.5 quadrillion.

Smart guys like bond trader Jeffrey Gundlach said last year that we’ve got a quadrillion dollar derivative overhang, the government hasn’t done anything to fix the basic problems in our economy, and so we’ll have another crash.

But I’ve now found an estimate from a top derivatives expert who confirms the claim.

Specifically, Paul Wilmott – who has written numerous books on the subject – estimated the number last year at $1.2 quadrillion:

The… derivatives market … is 20 times the size of the world economy.

According to one of the world’s leading derivatives experts, Paul Wilmott, who holds a doctorate in applied mathematics from Oxford University (and whose speaking voice sounds eerily like John Lennon’s), $1.2 quadrillion is the so-called notional value of the worldwide derivatives market. To put that in perspective, the world’s annual gross domestic product is between $50 trillion and $60 trillion.

A Clear and Present Danger to the World Economy

The size of the derivatives market is a huge threat to the world economy:

One of the biggest risks to the world’s financial health is the $1.2 quadrillion derivatives market. It’s complex, it’s unregulated, and it ought to be of concern to world leaders ….


How big is the risk to the world economy from these derivatives? According to Wilmott, it’s impossible to know unless you understand the details of the derivatives contracts. But since they’re unregulated and likely to remain so, it is hard to gauge the risk.

But Wilmott gives an example of an over-the-counter “customized” derivative that could be very risky indeed, and could also put its practitioners in a position of what he called “moral hazard.”

Another kind of market conduct that makes markets volatile is what Wilmott calls positive and negative feedback loops. These relatively bland-sounding terms mask some really scary behavior for investors who are not clued into it. Wilmott argues that a positive feedback loop contributed to the 22.6% crash in the Dow back in October 1987.

As we noted last year:

Bloomberg reported in May:

Mark Mobius, executive chairman of Templeton Asset Management’s emerging markets group, said another financial crisis is inevitable because the causes of the previous one haven’t been resolved.

FINANCIAL IMPLOSION: Global Derivatives Market at $1,200 Trillion Dollars … 20 Times the World Economy

CCMR Releases Letter Recommending Steps To Avoid Disrupting E.U.-U.S. ..  — PR Newswire
There is no need for an extremely costly disruption of the global derivatives market," says Scott. One issue that has received substantial attention is differences between E.U. and U.S. rules for initial margin for futures.

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