Debunking Myths - Is trading really a Zero Sum game

[dont]

Quote from womblevader:

Stock trading FX etc are not zero sum games.

Theses activities are quite similar to gamlbing [incidentally this is where I got my initial captal from to strat investing...].

Consider a game of poker house takes 1% of the pot [commission, spreads etc]. You would thik this would be a zero sum game less the 1%. If all the contestants are playing with the aim of making money it would be, but consider...

To make it postiive sum you need a group of players who are don't mind losing money who are happy to keep feeding the better players. Fortunately for pro poker players [and traders] these do exist.

There will be a variety of motivations for the players.

1. Some will be doing it as entertainment to get out of the house and spend time with friends and will keep coming back for these reasons even though they consistently lose.

2. Some will keep coming despite losing becasue they believe all they have to do is find the winning stragey or hoy grail of poker.

3. Some willl be playing with the hope of learning how to be a good player and make profits in the future. They look at their losses as an investment or education cost. There is a gignatic industry bult up around teaching people how to becomes better poker players.

So many contestants are happy to pay to play even though if they were only focussed on winning they would give up [a lot of them do but there is always a steady stream of newbies].

These are called [technically] external benefits ie the contestants primary reason for trading is not to make money by trading.

Now consider some of the financial market particiapnts:
Stocks - Mutual funds - derive their primary source of income as fees from funds under management.
F/X - International trade - primary benfit is exchange of goods and services between countries.
Futures market - hedging of price and supply risk buyers and sellers

My 2c is take a leaf from the pros, keep your losses small and be happy to take small consistent profits that build up over time. If you are after the holy grail or that elusive big win you will continue to provide a decent living for someone else.

Cheers

This is the best answer to this question that I have ever read. Don't bother reading the rest of this thread this post is all anyone needs to know.

 

[u21c3f6]

Unfortunately when this topic is discussed, not everyone is using the same and/or understands the meaning of zero-sum.

Zero-sum is not the same as expectation. The lottery can be considered zero-sum minus a very healthy rake by the State making it a negative expectation for the player. However, people hit the lottery, so for them, it was a positive return.

The same can be said about options trading, it is zero-sum. For the retail trader, it too becomes a negative expectation because of transaction costs and the spread (the spread is typically raked by the market makers). This does not mean that every individual will lose money. There will be a bell curve of returns peaking at 0 minus costs and spread.

Stocks on the other hand is not zero-sum as stocks can and do create additional value. No one has to lose money for one to make money in the stock market which is not true in the options market. To make money in the options market, someone else has to lose money.

The above is just a snapshot and will probably not sway those that disagree. There's just too much to discuss to put this in context. There are many good books that one can read to get a better handle on zero-sum markets and their implications for the trader.

Joe.

 

[ammo]

money is a means of exchange,fish hooks and whale blubber,even tho there are not an infinite number of whales or fishhooks,the more eskimos in a village,thru population increase,the more whales they will need to survive,as the population increases ,so does the need for goods,these will be aquired and traded, using money as means of exchange , and the amount of goods needed for survival will continually increase. It is hard to define trading as a zero sum game when the volume in different stocks or commodities increases,or the amount of the commodity itself fluctuates. The eskimo who corners the fish hook market will eventually lose his advantage(zero sum game) when the new guy pulls ashore with a canoe full of fish hooks,the point that keeps resurfacing is that the needs and supplies for those needs are constantly changing,so the zero sum argument works briefly until supply and demand change,since they are always changing,it is hard to define zero,or a pie,or the people at a poker table,so i would say that the zero sum game is defined(zero) loosely at best

 

[Cutten]

The economic rewards from futures trading go like this:

1) Losing traders lose X dollars gross per day
2) Winning traders make X dollars gross per day
3) Brokers and other middlemen extract Y dollars per day from 1) and 2)
4) Hedgers (both consumers and producers) eliminate risk to the value of Z dollars each day.
5) Society gains prices that are more accurate

So, trading is positive sum if the benefits of hedging and superior price accuracy are greater than the total commissions and other costs paid by traders. Since hedgers would only hedge if they thought the hedge was worth the $5 per R/T commission, and price discovery is an additional benefit at no extra cost, any market with any noticeable hedger participation is likely to be positive sum.

 

[ElCubano]

to many it is a negative sum game...

 

[jamis359]

Quote from nathanos:

All I'm saying is the process of trading is zero sum, e.g. there is no value created in trading itself. The only value created is by those managing the companies the market trades and their corresponding profits, but all of that is outside the realm of the stock exchanges. The process of flipping paper back and forth between each other itself is zero sum.

I would agree with you if portfolio value does not change when not trading. If you take a day off from trading the asset values of stocks held changes whether you trade or not. That alone makes the stock market non-zero-sum.

Trading does create value. Look at the price of oil -- how much is intrinic value, how much is speculative value? Or, put in another way, what would the price of oil be if commodity traders and pension funds weren't flipping futures?