What moves the market is not always what you see.
The chart, the candle, the price on the screen — these are surface ripples, the visible echo of a deeper machinery. Beneath every tick lies a lattice of contracts, promises, and leverage. This hidden scaffolding does not merely reflect the market. It steers it.
Futures, options, ETFs, perpetual swaps — these are often described as “derivatives,” instruments that derive their value from something else. But that language deceives. They do not just follow the underlying. They feed back into it. They are shadows that move the body, gears that turn the machine, a second layer of markets whose pressure can dictate the course of the first.
In this way, derivatives are not side bets. They are the shadow engine of markets.
- Futures anchor expectation but also force rollover flows that tug on spot prices.
- Perpetuals in crypto keep their peg through funding mechanics that can cascade into forced liquidations.
- Options reshape demand mechanically, as dealers hedge exposures in ways that push the underlying higher or lower.
- ETFs funnel passive flows that ripple through entire indices, binding hundreds of securities to a single tide.
Each of these is a lever. Each changes the mechanics of price. And together, they reveal a truth that runs through every level of the market: the surface is never the whole.
In what follows, we step into this engine room. We will see how futures, perps, options, and ETFs mechanically alter liquidity, amplify movement, and sometimes break the very markets they are meant to track. To understand them is not only to see where risk hides, but to recognize why the market we trade is rarely the market we think it is.
Futures: The Original Shadow
Long before crypto perpetuals or ETFs, there were futures.
Born in the grain markets of Osaka and Chicago, they were a simple idea: a contract to buy or sell something later, at a price agreed today. Farmers locked in a price for their harvest. Merchants secured supply. Speculators stood between them, absorbing risk in exchange for reward.
But in their simplicity lay a revolution. Futures detached the trade of risk from the trade of goods. Wheat could be bought and sold thousands of times before it ever left the field. Oil could change hands on paper more than it ever would in barrels. Value became a contract, and the contract became its own market.
Mechanically, the structure is straightforward:
- Margin — instead of paying full price, traders post a fraction, amplifying both gains and losses.
- Settlement — at expiry, the contract closes, either by physical delivery or more often by cash adjustment.
- Rollover — positions don’t vanish; they migrate. Traders close expiring contracts and reopen the next month, creating predictable flows.
Yet what futures do to the underlying is anything but simple.
- They anchor expectations: the futures curve (contango or backwardation) becomes a map of anticipated supply and demand.
- They create pressure at expiry: options and futures settling simultaneously can generate volatility spikes, as hedges and rolls converge.
- They become the benchmark: in oil, gold, or indices, it is often the futures price that sets the tone, with spot merely following.
This is why futures are the “original shadow.” They do not wait for the underlying to move. They lean on it, tug at it, front-run it. They are mirrors that sometimes dictate the reflection.
A barrel of oil may be scarce or abundant. But if the futures curve says scarcity tomorrow, today’s price bends toward it. Expectation becomes mechanics. The shadow pulls the body.
Perpetuals: The Endless Bet
If futures are the original shadow, perpetual swaps are their restless offspring.
Born in crypto, they carry the same DNA — a contract tied to an underlying asset, traded on margin, with no delivery of the thing itself. But they add one crucial twist: no expiry.
A perpetual never settles. It never forces delivery. It is an endless wager, designed to track spot indefinitely. The mechanism that keeps it anchored is funding: a periodic fee exchanged between longs and shorts depending on where the perp trades relative to spot.
- If the perp trades above spot, longs pay shorts — an incentive for selling that drags the price back down.
- If it trades below, shorts pay longs — an incentive for buying that pushes it back up.
In theory, this keeps the perp tethered to reality. In practice, it creates mechanical feedback loops that define entire markets:
- Funding Imbalances: When optimism runs hot, funding turns deeply positive. Longs bleed capital to shorts, even as rising demand keeps lifting the perp. Eventually the cost forces capitulation. The unwind is sudden, and brutal.
- Liquidations: Leverage is cheap, often 20× or more. A 5% move can wipe out positions, triggering forced sales that cascade into further declines. These liquidation spirals are not accidents. They are the structure itself.
As we saw in The Depths of the Market, liquidity is the bloodstream that price feeds upon. In perpetuals, that bloodstream often runs through leverage itself. Liquidations are not random shocks — they are the deliberate harvest of clustered liquidity, the same choreography playing out on a sharper, faster stage.
- Price Leadership: In crypto, perps often dictate spot rather than follow it. Because leverage concentrates here, flows in the perp market push spot exchanges in their wake. The derivative leads; the underlying obeys.
This is why crypto traders often joke: “The chart doesn’t show price. It shows liquidation levels.”
Behind every candle lies a map of who will be forced to sell if the line is crossed. The market hunts those levels, not because of malice, but because liquidity lives there.
The perpetual is not a mirror. It is a magnet.
It pulls price toward imbalance, and when the coil snaps, the release is violent.
In futures, expiry sets the rhythm.
In perpetuals, funding and leverage do.
They are the endless bet — a market with no finish line, only tides of forced entries and exits that never stop.
Options: Convexity and Gamma
If futures extend the market into tomorrow, and perpetuals stretch it without end, then options bend it.
They are contracts of possibility — the right, but not the obligation, to buy or sell at a chosen price. A call, a put. A premium paid for potential.
On the surface, they appear modest: insurance policies for risk. But in the aggregate, they twist the market’s mechanics more than any other derivative, because every option sold must be hedged. And that hedging creates convexity — nonlinear flows that accelerate as price moves.
- Delta measures how much the option’s value changes with price. Dealers who sell options must offset that risk in the underlying. If they sell calls, they hedge by buying the asset; if they sell puts, they hedge by selling.
- Gamma measures how that delta itself changes as price moves. The closer price gets to the strike, the more violently hedging requirements shift.
This is the hidden lever: the dealer’s hedge is not a choice, it is mechanical.
- A stock surges toward a popular strike price. Dealers short those calls are forced to buy more of the stock as it rises, which pushes it higher still. The squeeze feeds itself.
- Or a market falls through heavy put strikes. Dealers long delta to hedge must sell into the decline, deepening it.
Thus, options flows often dictate spot moves not by opinion but by obligation. What looks like crowd enthusiasm or panic can be nothing more than the machinery of gamma at work.
This is the same lesson we traced in The Invisible Balance: once the crowd aligns too heavily in one direction, the structure bends against them. In options, that imbalance is magnified by convexity, where hedging flows enforce the very moves that trap participants further.
Famous episodes — Tesla’s parabolic run in 2020, GameStop’s explosion in 2021 — were not merely speculative frenzies. They were gamma squeezes, where option positioning forced dealers to chase price mechanically, amplifying the surge far beyond what natural demand could sustain.
And when the music stops, the unwind is equally sharp. As positions expire, hedges reverse, and the same convexity that lifted the market now accelerates its fall.
Options are not bets on direction. They are levers of asymmetry.
- They let traders risk little for the chance of much.
- But more importantly, they force dealers into flows that reshape the underlying.
In this way, options are less about predicting tomorrow and more about pressuring today.
They bend the market’s spine, sometimes to breaking.
ETFs: The Derivative in Disguise
If futures were born from hedging crops, and options from hedging risk, then ETFs were born from a different desire altogether: access.
They promised simplicity — one trade to own the S&P 500, one ticker for an entire sector, one instrument for gold, bonds, even volatility itself.
On the surface, an ETF looks like a wrapper, a convenient basket. But like all wrappers, it changes what it contains. The mechanism behind it — creation and redemption — turns passive flows into active pressure:
- When investors buy shares of an ETF like SPY, authorized participants (APs) create new units by purchasing the underlying stocks and delivering them to the ETF.
- When investors sell, APs redeem units, releasing the underlying back into the market.
- This constant arbitrage keeps ETF price aligned with net asset value — but also ensures that ETF flows ripple directly into the spot market.
Mechanically, this means:
- Passive inflows into ETFs drive systematic demand for the underlying, regardless of fundamentals. Every paycheck that funds a retirement account pulls hundreds of securities upward in lockstep.
- Outflows do the opposite: indiscriminate selling, forcing liquidity events even in strong names.
- Sector ETFs transmit flows into correlated clusters, tightening relationships between companies that may share little beyond an index label.
The effect is structural: ETFs turn individual securities into participants of a collective tide. Stocks move less by their own earnings than by their membership in a basket. Correlation rises. Dispersion falls. The market becomes less a marketplace of companies and more a marketplace of flows.
And in this way, ETFs are derivatives in disguise. They appear to simplify, but they overlay a second layer of mechanics on top of the first. They are mirrors that concentrate the gaze — not on the firm, but on the fund.
An investor thinks they bought “the market.” What they really bought was a machine that mechanically translates flows into price, compressing individuality into index momentum.
ETFs do not just track markets. They reshape them.
In The Long Shadow of Markets, we saw how secondary effects ripple outward across years. ETFs are a modern expression of that truth: flows that begin as passive allocations in retirement accounts can, through mechanical arbitrage, reshape the entire surface of price.
The Shadow Engine in Motion
Each derivative on its own distorts. Futures pull price forward into expectation. Perpetuals tether it to funding and leverage. Options bend it with convex flows. ETFs compress it into baskets.
But together, they form a single machine. A shadow engine that often dictates where the visible market must go.
Consider how these gears interlock:
- Options into Futures: Dealers short options hedge with futures. A wall of calls at a strike drags futures higher, and those futures pull the index with them.
- Futures into Spot: As expiry nears, rollover flows and arbitrage tie spot prices to futures settlement levels.
- Perps into Spot: In crypto, funding imbalances drive liquidation cascades in perpetuals, which spill into spot order books.
- ETFs into Everything: Passive inflows into ETFs translate into futures hedging and spot buying, binding hundreds of assets to the same tide.
The result is a feedback loop: derivative positioning alters flows, flows alter spot, spot shifts derivatives further, and round it goes. What looks like “price discovery” is often price choreography, a dance scripted by contracts and hedges before it ever reaches the chart.
This is why markets sometimes move with uncanny violence at seemingly arbitrary levels. Why rallies accelerate beyond reason. Why collapses overshoot fundamentals. The reason is not sentiment alone, but structure — positions built in the shadow engine, unwinding in public view.
In this light, the visible market — the stock, the coin, the index — is not the primary arena. It is the surface expression of a deeper negotiation taking place in futures pits, options books, ETF creations, and perpetual swaps.
The engine runs beneath the floorboards.
Price is just the sound of its gears turning.
Why This Matters
To most, derivatives appear distant — exotic tools for professionals, abstractions layered on top of “real” markets. But the truth is reversed. It is the derivative flows that often drive the cash market itself.
This matters because:
- Price is not pure. What you see on the chart is frequently the echo of hedging, funding, or passive flows — mechanics, not sentiment.
- Risk is amplified. Leverage embedded in futures, perps, and options ensures that small moves can trigger liquidations, squeezes, or cascades far beyond the original spark.
- Markets are coupled. ETFs and index futures bind hundreds of securities together, raising correlation and fragility. When one stumbles, all sway.
- Liquidity is distorted. The surface may look calm, but beneath, orders are pulled, rolled, or unwound in ways that can empty the book in an instant.
To ignore derivatives is to mistake the shadow for the body — to believe the surface tells the whole story, when in fact it is moved by deeper currents.
Conclusion: Reading the Shadows
Derivatives are not side games. They are the hidden gears of the machine.
Futures pull expectation into the present. Perpetuals bind price to leverage and liquidation. Options bend flows with convexity. ETFs transmit tides across entire markets.
Together, they form the shadow engine: an unseen lattice of contracts that powers the movement we call price.
To read markets, then, is not to study candles alone. It is to listen for the hum of the engine beneath them. To see where funding bleeds, where hedges must be rolled, where gamma walls bend the tape, where passive flows disguise themselves as conviction.
Price is theatre. Liquidity is choreography. Derivatives are the machinery that moves the stage.
To understand the play, you must read not only the actors — but the engine beneath them.