Zero Sum Theory.

[pchan]

As I understand the term zero sum it is that there is a finite numbers of players with no tangible asset. Therefore a thunder dome type of environment. At the end of the day the players leave the thunder dome battered and bruised some better some worse than when they entered. Now if the instrument being traded has "inventory" I would view that as not a zero sum game. Is it possible that something other than 50% of the players win or lose? If yes then I don't understand how it could be a zero sum instrument. Company ABC issues stock. 100 people buy the stock. Stock goes up. Paper gains to date and no losers. Everyone is green...happy days. Now when that group sells the count must start over because it's a new set of players. Same scenario can more than 50% of the new players win or lose? Lets say the market maker absorbed 20% of the 100 peoples stock and now they are all flat happy and on a cruise. The stock continues to rise with 200 new people owning all the floating stock. It doubles again. Once again my question is who lost? I disagree with whoever will say the market maker. He did his job, he is provided the spread and for that he offers liquidity and an orderly market. He also started the position with an inventory. Now those who say the company lost money because they sold the stock. I disagree. There is one and only one reason for a company to enter the capital markets. Access to capital. So company ABC sells stock in hopes of furtherence of it's revenue model. Thats it's sole purpose in life. Make the stockholders money.

Now lets say the Es minis. That is what I believe to be a zero sum instrument. There was no initial inventory by anyone. For me to buy one there must be a player willing to sell me one. Now please remember I'm talking about the mini not the pit. No locals. So I ask is there anyway that more than 50% of the players (assuming equal contract trades for this thread) win?
Ok there ya go, fire away. Some mean folks on here, gonna go put a helmet on.

 

[Algo_Design_Kid]

Im not sure this is debatable really, but when they settle up accounts if mine was debited $100 there was either 1 or multiple participants whos accounts were credited a total sum of $100 as well.

 

[volente_00]

Wealth is not created in the stock market only transferred.

If you buy a stock for $5, and sell it for $10. You did not create $5 of wealth from it, you just had it transferred to you from the next party. In order for you to get $10, some participant had to be willing to transfer it to you in exchange for your share of stock. Even if the stock pays a dividend and you hold it long term, the money still transferred from the company to you to increase your wealth. It was not just created from nothing. For every dollar of dividends you receive, the company now has that much less.

 

[u21c3f6]

Quote from Algo_Design_Kid:

Im not sure this is debatable really, but when they settle up accounts if mine was debited $100 there was either 1 or multiple participants whos accounts were credited a total sum of $100 as well.

+1

A zero-sum instrument is like porn, I know it when I see it. Unfortunately it appears from this thread that it is very difficult to describe so that everyone is on the same page.

Stocks are not zero-sum, options/futures are zero-sum. This thread has a lot of semantics with definitions being applied incorrectly.

If we look at one option contract from inception to expiration there may be many trades of that one contract but upon expiration, the total dollar amount made on this option will exactly equal the total dollar amount lost on this option (including commission and spread). Zero-sum.

This is not true with stocks. It may seem true when one is doing short-term trading but stocks are not zero-sum. I also think that the last few years as well as trading has had a hand in blurring this line. Ignoring commissions and spreads let's say one "investor" buys one SPY for 115. Another "investor buys one SPY 115 call for 3. Now let's say upon expiration of the call SPY is 116. What are the results?

For the stock, someone was paid 115 which they still have and that didn't change. The investor that bought SPY now has an instrument worth 116 for a gain of 1. The significance here is that the value of the holdings of the seller of SPY has not changed with the change in fortune for the buyer.

Now the option. The buyer of the option upon expiration now has an instrument worth 1. However, because he paid 3, he has a loss of 2. The seller of the option now has to make good on the 1 value of the option he sold but because he originally sold it for 3, he has a gain of 2. A loss of 2 and a gain of 2. Zero-sum because the total of all gains must total all losses regardless of how many share in it.

Joe.

 

[volente_00]

Quote from Don Bright:

Comment on this:

Who is the biggest "short" of IBm or GE? Answer: IBM and GE.

If you think about it, when a company issues stock, it is basically shorting the stock to you...pieces of paper....so you actually do start off, and end up, with equal number of shares long and short. They just use the words "issued and outstanding"

Don

Yes, but isn't the liability to the company for par value ?


Of course if the company does a buyback at market value, such as WMT, then can you not make the argument that liability increases on paper $1 for them every time the price increases $1 for the shareholders ?

 

[BostonTrader339]

Quote from u21c3f6:

+1

i have to agree with this. options, because they have time decay, are absolutely a zero-sum game.

futures, as well.

stocks, i did not necessarily introduce this topic that they were, however, when one looks at the book value of say, oh, the world's biggest bank, one would like to think that citibank would not be a zero-sum game, but unfortunately, is.

at least for the common shareholders it is, which in theory, was the founding principle of the stock market and was supposed to be when it was created.

it may not have started out this way, or maybe it was and was why 1929 occurred, but the stock market has become not much more than a shell game, switching money from one pocket to the other for the sake creating the transaction, and creating little or no long term wealth in the process, except for the few.

 

[MK90210]

Quote from volente_00:

Wealth is not created in the stock market only transferred.

If you buy a stock for $5, and sell it for $10. You did not create $5 of wealth from it, you just had it transferred to you from the next party. In order for you to get $10, some participant had to be willing to transfer it to you in exchange for your share of stock. Even if the stock pays a dividend and you hold it long term, the money still transferred from the company to you to increase your wealth. It was not just created from nothing. For every dollar of dividends you receive, the company now has that much less.

volente, how much asset value had been in the balance sheets of all the stock holders when it was priced at $5 and how much asset value is there when it is priced at $10?

Got a sum or got a zero-sum? My valued friends, you make my day.


MK

 

[Scataphagos]

Quote from u21c3f6:

"... Stocks are not zero-sum

Yes, they are. You don't see it because your view is too short-sighted.... not that it makes any real difference in trading

 

[MK90210]

Quote from pchan:

As I understand the term zero sum it is that there is a finite numbers of players with no tangible asset. Therefore a thunder dome type of environment. At the end of the day the players leave the thunder dome battered and bruised some better some worse than when they entered. Now if the instrument being traded has "inventory" I would view that as not a zero sum game. Is it possible that something other than 50% of the players win or lose? If yes then I don't understand how it could be a zero sum instrument. Company ABC issues stock. 100 people buy the stock. Stock goes up. Paper gains to date and no losers. Everyone is green...happy days. Now when that group sells the count must start over because it's a new set of players. Same scenario can more than 50% of the new players win or lose? Lets say the market maker absorbed 20% of the 100 peoples stock and now they are all flat happy and on a cruise. The stock continues to rise with 200 new people owning all the floating stock. It doubles again. Once again my question is who lost? I disagree with whoever will say the market maker. He did his job, he is provided the spread and for that he offers liquidity and an orderly market. He also started the position with an inventory. Now those who say the company lost money because they sold the stock. I disagree. There is one and only one reason for a company to enter the capital markets. Access to capital. So company ABC sells stock in hopes of furtherence of it's revenue model. Thats it's sole purpose in life. Make the stockholders money.

Now lets say the Es minis. That is what I believe to be a zero sum instrument. There was no initial inventory by anyone. For me to buy one there must be a player willing to sell me one. Now please remember I'm talking about the mini not the pit. No locals. So I ask is there anyway that more than 50% of the players (assuming equal contract trades for this thread) win?
Ok there ya go, fire away. Some mean folks on here, gonna go put a helmet on.

pchan, no reason to fire it away. Just some minor points: Whether there are locals or not, it is pit traded or not, market makers do something or do not that something does not matter. The only difference that matters --- and you can read it in my first post: Assets traded (stocks, houses, gold bars, bonds) or not (e.g. derivatives). You named it inventory but some call it asset.


MK

 

[intradaybill]

Quote from Scataphagos:

Yes, they are. You don't see it because your view is too short-sighted.... not that it makes any real difference in trading

Trading securities is a zero sum game because there is no way to post a credit to an account unless you post a debit to another or more than one accounts.

People who do not understand this do it because they confuse it with the fact that companies may create wealth. However, this benefit is external to trading. Trading securities does not create or destroy wealth. It is business/political activities/decisions that do that. Otherwise, we would only trade, do no R&D and wait for new products to come along.

One of the better treatments I have read for traders about what markets really are and why they are a zero-sum game is given in chapters 1 and 2 of this book.. A must read for all those who think the market is something more than the person on the other side of the transaction. Should be able to find a scanned copy around.