Zero Sum Or Not? Does It Matter?

[scose-no-doubt]

What about rate differentials... is that not a form of yield for FX?

 

[ChocolateDigestive]

 

[scose-no-doubt]

Yeah who cares about interest rates in the FX world eh.

 

[ChocolateDigestive]

 

[Rhody Trader]

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?

I agree that there are any number of other gains and losses to be made from trading, and we could easily go round and round on the subject of opportunity cost. From a strict financial perspective, though, it's clear-cut.

 

[Rhody Trader]

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.

The problem here when it comes to zero sum is that you don't have a winner on the other side of the position. If you buy a stock from me and it goes up, I don't pay you your gain. Likewise, if the stock price falls, I don't benefit from your loss (at least not financially ).

Zero sum means no net gain or loss for the collective (not counting expenses), but that the two parties to the trade or the whole of the market. In the stock market the collective gain or lose as prices rise or fall.

 

[Rhody Trader]

What about rate differentials... is that not a form of yield for FX?

Someone's paying the interest to you or receiving the interest you receive - again with the broker in the middle taking a spread.

 

[scose-no-doubt]

Dunno just throwing it out there. I'm just wondering whether FX can be zero sum if you can three point arb and whether the causes of those inefficiencies, whatever they are, (probably rates related I was thinking) could be used to draw conclusions.

 

[robster970]

Using Game Theory To Model Market Uncertainty | Stocks | Minyanville's Wall Street

 

[The Leopard]

I agree that there are any number of other gains and losses to be made from trading, and we could easily go round and round on the subject of opportunity cost. From a strict financial perspective, though, it's clear-cut.

So does the fact that gains in one account are matched exactly by losses in another account (making this zero sum, or negative sum when transaction costs are considered) actually matter to a trader?

 

[ChocolateDigestive]

So does the fact that gains in one account are matched exactly by losses in another account (making this zero sum, or negative sum when transaction costs are considered) actually matter to a trader?

nope and that's where the lulz lies. you will get people who throw in technical arguments to prove a point when they miss the bigger picture..

 

[barjon]

So does the fact that gains in one account are matched exactly by losses in another account (making this zero sum, or negative sum when transaction costs are considered) actually matter to a trader?

not really, because it's not a direct competition. The person "taking the other side of your trade" may just be closing a profitable trade for example.

 

[Rhody Trader]

Dunno just throwing it out there. I'm just wondering whether FX can be zero sum if you can three point arb and whether the causes of those inefficiencies, whatever they are, (probably rates related I was thinking) could be used to draw conclusions.

If you can successfully do a 3 point arb then you're taking money away from someone. I'm talking specifically about retail forex here, where the trading is in liabilities, not inter-bank spot where money actually changes hands. At that level it is more akin to stocks.

 

[Rhody Trader]

So does the fact that gains in one account are matched exactly by losses in another account (making this zero sum, or negative sum when transaction costs are considered) actually matter to a trader?

It does if you're consistently on the other side of better (or worse) traders than you.

 

[Rhody Trader]

not really, because it's not a direct competition. The person "taking the other side of your trade" may just be closing a profitable trade for example.

You're conflating the party with whom you trade and the party on the other side of your position. For example, if you are long the ES and "sell" that position to me then while you and I are parties to the transaction, the bloke who was short on the other side of your long is now on the other side of my long. He and I are now effectively in direct competition in that one of us is going to take money out of the pocket of the other.

 

[Martinghoul]

The whole system is instantaneously zero-sum. Because of varying holding periods, it doesn't have to be zero sum over a longer horizon. Moreover, it doesn't have to be zero-sum, if you presume that there's someone hedging non-mkt considerations in the market.

 

[scose-no-doubt]

If you can successfully do a 3 point arb then you're taking money away from someone

Why? say you need to get long to close out and realise your profit and you counter-party has been long from a lower level? By getting long/short are you not introducing introducing/extracting capital in that market on a one-sided basis thus negating the zero-sum premise?

I'm talking specifically about retail forex here, where the trading is in liabilities, not inter-bank spot where money actually changes hands. At that level it is more akin to stocks.

Care to clarify the distinction and why it's necessary?

edit: re my first point, I think I just understood your point about retail trading and liabilities vs cash. Makes sense now.

 

[barjon]

You're conflating the party with whom you trade and the party on the other side of your position. For example, if you are long the ES and "sell" that position to me then while you and I are parties to the transaction, the bloke who was short on the other side of your long is now on the other side of my long. He and I are now effectively in direct competition in that one of us is going to take money out of the pocket of the other.

Er , How far do you go back with that? The "bloke who was short on the other side of your long" may, too, just have been unloading a position mayn't he?

 

[rsh01]

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.

if you are talking in general here ie for every winner theres a looser outside of retail also then this is a big sigh. if you're talking about just retail, then see below.

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.

the main reason futures arose was to exchange an asset, but at a future date and a price today which represents the markets expectation of the future price.

whether price rose or not the farmer doesnt care, he hedged his risk. you can have 2 winners on both sides, cos one side often leads to another side (which may or may not be represented by a derivative/fin instrument or whatever)....and therefore its not zero sum. with respect to just retail traders - well you cannot separate them from the rest of the market - they may be trading with other retail or not. in one instance it may be zsg, but not all instances.

theres so many examples of win/win situations with derivatives, these are the basics, and should be known by everyone who trades.

 

[Shakone]

The whole system is instantaneously zero-sum. Because of varying holding periods, it doesn't have to be zero sum over a longer horizon. Moreover, it doesn't have to be zero-sum, if you presume that there's someone hedging non-mkt considerations in the market.

If it is instantaneously zero-sum, then shouldn't it be the same over longer periods too? How can it be anything else? Where would the first non-zero-sum trade come from, and who would be on the opposite side?

For me it is zero-sum (well negative with costs, but we're putting that aside). It doesn't really matter that someone has some other target, hedging etc, besides winning on the trade, ultimately the money has to come from somewhere and so someone is losing or overpaying and someone is winning or underpaying.

Besides that, as pointed out, sometimes the idea is more important than whether it applies to every single instrument. Wyckoff might talk of a composite operator, we might say 'the market' wants to go there etc, or we may talk about strong hands, weak hands. These may all be helpful for understanding, and it doesn't really matter that the market isn't of one mind, or that some weak hands have joined in the same direction with the strong hands and all that.