Zero Sum Or Not? Does It Matter?

[The Leopard]

Hopefully this might get an interesting discussion going.

Is trading a zero sum game?

What are the implications of this? Does it matter?

My own view on the zero sum question is yes and no, but it might be better to hear from some partisans before expanding on that.

 

[ChocolateDigestive]

my view is that it doesn't matter however it is very useful to think of trading as a zero sum game. Working out which participants make money how and why they go about it is very illuminating and you can form trading edges by thinking in this way.

ultimately winning traders take money from losing traders that is the main concept to grasp imo. arguing of the pounds/pence w/cost of trading is futile.

 

[DionysusToast]

Excellent idea....

http://www.trade2win.com/boards/general-trading-chat/85318-wall-street-casino-minus-sum-game.html
http://www.trade2win.com/boards/general-trading-chat/86726-minus-sum-game-mk-ii-derivatives.html

Where to focus first?

Forex?
Weather derivatives?

The latter tells you more about the true nature of the markets and the reason they really exist.

Oil Futures providing price stability? Or just allowing people to gamble so the house can skim off their GUARANTEED percentage?

It's minus sum - the house never loses. The trade facilitator always takes a cut. The winner wins less than the loser loses.

 

[DionysusToast]

my view is that it doesn't matter however it is very useful to think of trading as a zero sum game. Working out which participants make money how and why they go about it is very illuminating and you can form trading edges by thinking in this way.

ultimately winning traders take money from losing traders that is the main concept to grasp imo. arguing of the pounds/pence w/cost of trading is futile.

Not really because the markets exist for the house, not the winners & losers.

 

[ChocolateDigestive]

Not really because the markets exist for the house, not the winners & losers.

whether markets exist for the house or not is a different debate and it might actually be something we agree on.

I was just wondering if I buy 500 future contracts and sell them for a profit of $30,000 where does that $30,000 come from? please do tell

 

[Big Stones]

How can trading be zero sum with spreads, slippage etc, etc.
Matters lots to me trading (badly) off teh smalls.

 

[scose-no-doubt]

whether markets exist for the house or not is a different debate and it might actually be something we agree on.

I was just wondering if I buy 500 future contracts and sell them for a profit of $30,000 where does that $30,000 come from? please do tell

Say I buy a miner who strikes gold and the share price takes off and I sell my shares for a profit... who looses?

 

[Rhody Trader]

I was just wondering if I buy 500 future contracts and sell them for a profit of $30,000 where does that $30,000 come from? please do tell

Comes from the chap who's short on the other side of your long. In the futures market (and retail spot forex) it is an absolute zero sum (negative some factoring in spreads and transaction costs). No one can win without there being an equal loser. In non-"contract" markets like equities you can get into a debate, but not here.

 

[Rhody Trader]

Say I buy a miner who strikes gold and the share price takes off and I sell my shares for a profit... who loses?

This is why I would argue stocks are not zero sum. Because you're exchange an asset (fractional ownership of a company in this case) rather than matching liabilities (as in futures), one can gain without another losing.

 

[Lord Flasheart]

Say I buy a miner who strikes gold and the share price takes off and I sell my shares for a profit... who loses?

those that have sold gold on the open market

 

[the hare]

Say I buy a miner who strikes gold and the share price takes off and I sell my shares for a profit... who loses?

Lets assume you sell your shares to teh hare for $1M

The very next day, the miner calls teh hare to inform him that the seam of gold that he was previously mining has run dry.

Teh hare has just paid $1M to inherit the liabilities of an empty mine. The miner digs and digs, but alas no more gold was ever found. That trade would definitely go in the losses column, wouldn't you say I'd lost and you'd gained ?

 

[The Leopard]

Comes from the chap who's short on the other side of your long. In the futures market (and retail spot forex) it is an absolute zero sum (negative some factoring in spreads and transaction costs). No one can win without there being an equal loser. In non-"contract" markets like equities you can get into a debate, but not here.

This is why I would argue stocks are not zero sum. Because you're exchange an asset (fractional ownership of a company in this case) rather than matching liabilities (as in futures), one can gain without another losing.

Do you think the participant's point of view comes into this debate at all? Does perception matter?

And do you think that a cash gain from other participants is the only gain available by participating in the futures or forex markets? Is it possible to gain by losing? Are there any participants who are in fact hoping to lose?

 

[scose-no-doubt]

Are there any participants who are in fact hoping to lose?

Maybe external real money managers who use a relative pittance want to push down price before bidding the sh1t out of something?

Insiders who sell/buy a little in the hope of adding to/offloading their holdings ata better price?

People who look to push price in one instrument to benefit from overall net exposure?

 

[The Leopard]

Maybe external real money managers who use a relative pittance want to push down price before bidding the sh1t out of something?

Insiders who sell/buy a little in the hope of adding to/offloading their holdings ata better price?

People who look to push price in one instrument to benefit from overall net exposure?

Maybe. Are all participants (or end users) speculating in the market, or are they using it for other purposes?

 

[barjon]

Comes from the chap who's short on the other side of your long. In the futures market (and retail spot forex) it is an absolute zero sum (negative some factoring in spreads and transaction costs). No one can win without there being an equal loser. In non-"contract" markets like equities you can get into a debate, but not here.

In the equity market it depends on money flow so it's not really zero-sum, albeit that it's an overall positive sum game whilst the money is flowing in and an overall negative sum game when it's flowing out - only at a final accounting would it become zero sum. It's a bit like passing the parcel, some poor soul catches it when the music stops, but everyone is smiling whilst it's playing.

 

[ChocolateDigestive]

Maybe. Are all participants (or end users) speculating in the market, or are they using it for other purposes?

oh god no. There are umpteen reasons why people are in the market but I expect you knew this already :cheesy: any good book on market structure will reveal all.

 

[NVP]

Hopefully this might get an interesting discussion going.

Is trading a zero sum game?

What are the implications of this? Does it matter?

My own view on the zero sum question is yes and no, but it might be better to hear from some partisans before expanding on that.

To me I try to step back and watch the Money/Value Flowing through the global markets (bonds / equities / commodities / Forex).....since people can always convert Instruments to Cash or vice versa (in whatever currency) I feel in terms of relative price / Value movements it is rarely a Zero sum game .......with Market differences / anomalies / Vacuums / slack..... being due to the movement in and out of Cash....

So I dont care.......:smart:

perhaps naive ...but thats just me

N

 

[Trader333]

In my view some instruments are zero sum and others are not initially but ultimately have to be and that includes stocks. My reasoning is as follows:

Any instrument where the money is effectively pooled such as forex, futures etc means that if someone has made a gain then someone has to have lost. If not then how would the person who gained have made so without others losing ?

From a purely buying and selling perspective and not including dividends then stocks rely on an ever increasing valuation of the stock for it to not be zero sum. So it is possible for generations of people to make a profit by selling them to the next generation. However, at some point the stock will not increase in value and at that point someone will lose money when selling if for no other reason that commission costs.

Of course it is possible to hold stocks long enough for dividends to have paid enough to offset any loss in value that may occur.

 

[BeginnerJoe]

It's always negative sum because the house takes 2 cuts on every deal. One on entry and one on exit. In between, they'd manipulate the deal to make it worthless, if they happen to be the other side of the deal.

By the way, the house is not just a single entity. It's the broker plus their broker plus their broker plus their broker, ad-infinitum. Anyone of them could be the other side of your trade.

 

[NVP]

In my view some instruments are zero sum and others are not initially but ultimately have to be and that includes stocks. My reasoning is as follows:

Any instrument where the money is effectively pooled such as forex, futures etc means that if someone has made a gain then someone has to have lost. If not then how would the person who gained have made so without others losing ?

From a purely buying and selling perspective and not including dividends then stocks rely on an ever increasing valuation of the stock for it to not be zero sum. So it is possible for generations of people to make a profit by selling them to the next generation. However, at some point the stock will not increase in value and at that point someone will lose money when selling if for no other reason that commission costs.

Of course it is possible to hold stocks long enough for dividends to have paid enough to offset any loss in value that may occur.

good point on Equities.......but then I am a short termist