How big is the derivatives market?

This article in Slate offers a readable answer to the question. International Financial Services London, an industry group, offers a useful digest of this data. Some sources of cited data are the Bank for International Settlements and the International Swaps and Derivatives Association (ISDA).

The BIS estimates had the "notional value" exceeding $600 trillion in 2008, undoubtedly an eye-catching number. The important thing to remember is that the "notional value" of derivative securities is not all that useful for judging the obligation or value to the counterparties under the contracts, though it may be useful for comparing the size of the market across years in relative terms. As such, notional value is not particularly useful for assessing the market's contribution to systemic risk.

The market value of the securities would surely be a useful number. But this measure has at least two problems attached. First, for derivatives traded bilaterally in the dark, it may be difficult to establish objective market values. This argument is similar, in some ways, to one posited by Accountants and executives who resisted attempts to bring about more transparent accounting for stock options in the 1990s. As in that case, however, the fact that it is hard to do doesn't mean that we shouldn't try to do it. On the other hand, there may be some danger that assignments of market value to dark market contracts will be manipulated to effect sinister purposes. In any case, where money has changed hands, a historical book value can surely be established, and this would be useful.

Second, the market value of derivatives securities can change incredibly fast. This property is basic to the nature of the securities, of course; you can understand this phenomenon by thinking about the market value of a fire insurance policy on the morning after your house has burned down. Similarly, the value of CDS contracts insuring various actors against default by Lehman changed significantly after September, 2008.

Slate's Explainer tells us:

"Gross market value of all outstanding derivatives was $14.5 trillion at the end of 2007, less than one-fortieth of the $596 trillion estimate. (That number shrinks to about $3.3 trillion once you take into account contracts that directly offset one another.)"