Zero Sum Or Not? Does It Matter?

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

In the retail forex market there is never any exchange of asset. All you have is perpetual contracts for exchange, which are mutual liabilities. In the inter-bank market currency (an asset) actually changes hands.
 
Er :confused:, 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?

At the beginning of the futures market Zog the barbarian wanted to go long ES at 100. Gleb, the other barbarian, was happy to take the other side of that and go short ES at 100. ES rallied to 150. Zog, happy with his gains, decided he wanted out, but Gleb was sure the market would come back, so he wanted to hold firm. Zog talked found another barbarian named Malk who though ES was going even higher. Zog went short vs. Malk's long. That meant Zog was flat, and Malk was long on the other side of Gleb's short. Zog was up 50 points, but Gleb is down 50 points. Net result for the market - zero.

Say the market goes back to 100. Gleb's back to even, but now Malk is down 50. Net result for the market - zero.

You can wind it forward for as long as you want with as many traders as you want. It always ends up being zero.
 
....You can wind it forward for as long as you want with as many traders as you want. It always ends up being zero.....

Oh yes, I wasn't disputing that - zero always the overall position. The question was whether that mattered for the trader and I thought not much because you are not necessarily in an arm wrestling contest with your counterparty.
 
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.
Well, it doesn't have to be zero-sum over a longer period necessarily, as long the losses are not actually crystallized. If that's the case, you can, in theory, keep pushing them out into the future ad infinitum. So, say, I buy a bunch of AAPL stock and it goes down (I know it can never happen, but bear w/me). The other side of my trade covers their short and realizes a gain. I, on the other hand, bequeath my stock to my children, who, in turn, pass it on to their children etc, until such time when AAPL is comfortably up from where I bought it.

I understand your point, but the securities market is not a closed system. The entire economy is, but not the market.
 
whether price rose or not the farmer doesnt care, he hedged his risk.

First, let's differentiate between physical delivery futures and cash delivery ones. In the latter case it is very clear that money is changing hands through the mark-to-market settlement process and the zero sum feature is specific. One or both sides may be operating on a hedging basis, but where the futures contract is concerned there is a clear winner and loser and they are exactly in opposition. This is the definition of zero sum.

For the deliverable futures things are a bit more complicated, but still zero sum. Firstly, until delivery there is mark-to-market gains and losses being made. Doesn't matter who you are. If you're on the losing side of the contract you are sending money to the winner's account. At delivery the question of zero sum is addressed in terms of value. If the farmer was short a corn contract to lock in price and a food manufacturer was long to do the same, then if corn prices rise the food manufacturer is better off (lower cost than if he's waited) by exactly the same amount the farmer is worse off (lower price than he could have sold at). This is the definition of 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.

In the case of retail forex you can. This isn't to say there aren't non-retail participants in that market. Of course there are. What I'm saying is that the structure of retail forex with there never being any kind of delivery makes it an insular market where money in aggregate can never be made or loss on net (except by the brokers and market makers).
 
Oh yes, I wasn't disputing that - zero always the overall position. The question was whether that mattered for the trader and I thought not much because you are not necessarily in an arm wrestling contest with your counterparty.

But you are in an arm wrestling contest with your counterparty, meaning the guy who's responsible for fulfilling the other side of the contract. It's just that he may or may not be the one with whom you did the trade.
 
But you are in an arm wrestling contest with your counterparty, meaning the guy who's responsible for fulfilling the other side of the contract. It's just that he may or may not be the one with whom you did the trade.

I'm not really with you, John.

If I go long and you take the other side we are clearly arm wrestling and one of us will win and the other lose, always assuming we close at the same time and haven't passed the buck on to anyone in the meantime.

If, however, you were merely closing a position you've retreated from the battle ground. You say that this just means that I'm arm wrestling with he from whom you got your position in the first place, but that may be several people if you built your position or were multiple lots and many of those may just have been closing off and so on.

So, although I might still be arm wrestling, it's with shadowy foes who I know not and thus I would not say that I was in any direct competition as would be the case if just you and I traded blows.
 
So, although I might still be arm wrestling, it's with shadowy foes who I know not and thus I would not say that I was in any direct competition as would be the case if just you and I traded blows.

We're a long way away from you knowing who's on the other side of our positions. It's all wrestling with shadowy foes at this point. You'd have to trade OTC for a bank to know your foe these days. :)
 
We're a long way away from you knowing who's on the other side of our positions.

For home traders, the other side is usually the immediate broker, or their close associates who operate a separate business entity but share the business intelligence, since they have a sure bet that 90% (my estimate 99%) home trader joes are loosers.
 
For home traders, the other side is usually the immediate broker, or their close associates who operate a separate business entity but share the business intelligence, since they have a sure bet that 90% (my estimate 99%) home trader joes are loosers.

In retail forex the broker is quite often the counter-party. That's not generally the case in securities or futures markets, though.

As for trading against the retail, there's validity to that in the grand scheme, but caution is required in a more micro level as the figures I've seen suggest they actually win more times than not on their trades.
 
reading through this thread last night I believe some people are viewing zero sum game in a different way.

All of the literature I have read on the matter refers to zero sum game as the sum of the accounting losses within a given instrument equaling the sum of the accounting wins. This is certainly true for derivatives and spot FX, stocks and spot commodities are more complicated but the basic concepts of ZSG are still in play.

Now of course some market participants will take a loss on instrument A and offset this against a win on instrument B however this is not what ZSG refers to.

GTTY
 
reading through this thread last night I believe some people are viewing zero sum game in a different way.

All of the literature I have read on the matter refers to zero sum game as the sum of the accounting losses within a given instrument equaling the sum of the accounting wins. This is certainly true for derivatives and spot FX, stocks and spot commodities are more complicated but the basic concepts of ZSG are still in play.

Now of course some market participants will take a loss on instrument A and offset this against a win on instrument B however this is not what ZSG refers to.

GTTY

So as I said, you're in spot FX and you make a triangulation arbitrage trade. You've made a one sided entry in three markets and the conceptual "other side" of your trade in each cross has closed out for a profit. If their trades are zero sum for the initial "other side" losers to their profits, where are you getting your profits from.
 
So as I said, you're in spot FX and you make a triangulation arbitrage trade. You've made a one sided entry in three markets and the conceptual "other side" of your trade in each cross has closed out for a profit. If their trades are zero sum for the initial "other side" losers to their profits, where are you getting your profits from.

you are zero summing across the trades not the instrument. you are making it very hard for yourself.
 
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Overall trades inc. inter-market, yes, definitely... I think. Net transactions by instrument, I'm not sure.
 
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