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Excellent, cogent, and well written article. Thanks for posting. Leverage is very dangerous, but it is easily quantified, and assessed. Derivatives are far more dangerous because for the most part it's a completely unregulated marketplace. As the author correctly notes, it takes a failure by just one party to topple the entire house of cards.

One simple example easily illustrates the insanity. By some estimates, the total value of all derivatives that devolve from APPLE as the underlying stock is more than 100x the amount of Apple's capitalization. IOW, the tail here is clearly wagging the dog.

Wall Street never learns. My first experience with a major market correction was the late 80's. All during the run-up to the correction, we were told that "portfolio insurance" would protect everyone, that risk had all but been eliminated. And everyone believed it. Until everyone wanted to sell at the same time, the computers generated nothing but sell orders, and there were NO buyers until prices had taken a huge haircut.

Everyone forgets the one universal truth about financial markets. They are a zero sum game. For every buyer, there is a seller, for every winner, a loser. Wealth is not being created here, just rearranged.

Trading is not a zero sum game due to timing.

A buys at 1000 shares at 30 in 2008
B buys at 100 shares at 40, A sells the 100 in 2009
C buys at 100 shares at 50, A sells the 100 in 2010
price drops...
C sells 100 shares at 40, A buys the 100 in 2011
price goes back up...
B sells 100 shares at 45, A buys the 100 in 2012

Results:
A - 2,000 profit
B - 500 profit
C - 1,000 loss

When one person profits it does not mean that another has to necessarily lose any money at all, and vice versa.

It is quite possible in a rising market that most traders profit.

The problem with the stock market is the basic idea of trading stocks with imperfect information and allowing the price to float, instead of trading at book value. The higher the market price of a stock gets above the company's underlying book value, the more room it has to fall. Also, the SEC and its rules are a mirage that the SEC is actually protecting anyone or anything, when the SECs rules are what makes the information imperfect.

If I offer to sell a small local convenience store that I own for $245,000 any buyer with any brains at all would require that I show them the books so they knew the past few years sales and costs. If something didn't smell right, they'd ask for a lot of information to make sure there were no hidden problems.

When we buy and sell stock ticker symbols, their management releases quarterly statements and supposedly anything significant in between on special disclosures. But we really have no idea what is going on inside that company. So we go to "analysts" (the establishment's firms) and ask them to divine information for us. Now, they supposedly do not have "inside" information, but they are so smart they studied the details of the public information, and they have some wizardly "industry knowledge" - that they start prognosticating for us what the price of the STOCK will do. Not only how the company will do financially, but how the market will view that and reflect their views in buying and selling patterns of the stock !

Now carefully note (like watching 3 card monte)... the SEC rules actually say that prognosticator, the firm we trade through, and the SEC... - NONE of them guarantee that we will not lose our original investment. So we are completely on our own, taking on 100% of the risk.

What really is happening on wall street is globalists control many of the big finance firms, be they banks, investment banks, private equity, etc. When we invest in their little world, they get to use our money as leverage. JPMorgan, for example - it has more than 2 trillion in assets. Now, those assets do not belong to the international banksters, but JPM. And JPM is publicly held, so it's technically owned by millions of shareholders (it has almost 4 billion shares outstanding). But the board of directors and senior management are making the decisions. And it's 73% institutional-owned, so the composition of that board is pretty tightly controlled. But it's key influence is this: JPM is essential for U.S. government borrowing. Ergo, we have the board and executives at JPM and a few other major firms speaking to our dear leaders as creditors that they need in order for government to function, and having deep connections financially and idealogically to our elite universities and major news media outlets and entertainment industry, which means they can make or break politicians in elections.