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Cemil

Should we ban derivative products or hold their managers fully liable?

Ginger:

I own options on several stocks. Those are derivitive products. What is it that you want me to be liable for??

Cemil:

Derivative products are designed on the assumption that they will have marginal effect on the underlying integral products, which turns out not to be the case when derivatives are "collectively manipulated". In any 'collective manipulation', the risks related to unlawful practice are two fold. One is against the antitrust laws. When a 'collective' move in the market takes place this amounts to 'forming a consensual trust', utmost damaging to the very foundation of the free markets. Two, they are against the manipulation codes in fact but since they are derivatives and often embedded in sophisticated structures they are not scrutinized as closely and thus definitely fall out of the realm of regulation by SEC code creating a misrepresentation for the actual owner and manager of these derivatives. All derivatives are harmful when they turn in a collective act, against the very system they flourish upon, rely on. This is no different than a suicide no derivative owner or manager can see

Cemil:

As such ginger, all owners or managers should be held liable for the harm they can inflict upon the system when they all act in unison, together, collectively, maybe without knowing it and maybe guided by other manipulators. This is a real risk and it turned out to be true.

Ginger:

Most of what you say also holds true for stocks. It is just a matter of how much money is required up front. The effect of collective action in the stock market is a natural result of the business of the funds and large financial institutions. Rather consciously or unconsciously, the market is continually being manipulated.

Cemil:

Yes but there is a huge leverage and a high degree of disguise in the derivatives.

Ginger:

That leverage is part of the advantage. Derivatives provide means of hedging against risk as part of the normal flow of business. Oil options, for example. I believe, also, that derivatives also add to the overall liquidity of the markets. Without liquidity capital investment would dry up. If you reduce the liquidity, you reduce capital investment.

Derivatives have their valid uses. Should we get rid of them because some people misuse them? Let's not throw out the baby with the bath water.

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