# Is trading a zero-sum game?



## joe8489 (27 February 2009)

i am trying to get my head aroudn whether trading in say aussie equities is a zero sum game? My assessment is that isnt given slippage and brokerage, thereby making it a minus some game, but can anyone provide clarity on this?

A scenario I am trying to get clarity on is if 3 parties represent a pool of shareholder for a particular stock that is being heavily traded, (one might represent banks, another an equity holder and another a trader moving in a out of positions) and the stock is constantly going up, then are they all winners in that case? Say they are all holding $50 worth pf stock which they all bought on average of $40, so they all have a paper profit of $10) each , so an aggergate paper gain of $30

Say there is s/holder A, B, and C. 
--
If s/h A decides to sell all their holding and gets a total of $45 (taking into acount slippage and brokerage, so a profit of $5), 

-- s/h B does the same becuase he sees the stock drop quickly, he then liquididates his holdings and takes only $35 out of market ($5 loss after slippage and brokearge)

-- s/h C  s**ts himself and takes his reduced holding out of market which is only now worth $26 (loss of $14 after borkerage and slippage)

A $5 gain
B $5 loss
C $14 loss

plus Brokerage = $6 (3 x $2 per sell trade)

so it equates to that total of $30 that all three had as paper profits initially

thereby making it a minus sum game because of brokerage, is the above example accurate? Or can there be a situation where all benefit, or must there always be others who have to lose their holding in order for someone else to gain a high price for their holding?

i'd appreciate it if someone can point me in the right direction on this

its been a bit of  brain tease for me , thanks


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## theasxgorilla (27 February 2009)

IMO, not only is it not zero sum, with some gouging of your hard-earned due to slippage and brokerage, it's negative sum for many because they borrow, lose, and end up owing more than their original stake.


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## jurn (27 February 2009)

There's shareholder D, on the other side of the trades of A,B,C who made $14, so apart from brokerage, I think its zero sum.

Shares also come from a company issuing shares to raise cash... its still zero sum to me though as I consider the company on the other side of the trade.

I think dividends can make it positive if you're looking from a shareholders perspective only.


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## tech/a (27 February 2009)

> I think its zero sum.




Your making the presumption ALL shares issued are being traded at the onetime.
Theyre not and as such its NOT a zero sum game.
Think about it.


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## GumbyLearner (27 February 2009)

theasxgorilla said:


> IMO, not only is it not zero sum, with some gouging of your hard-earned due to slippage and brokerage, it's negative sum for many because they borrow, lose, and end up owing more than their original stake.




I agree.

I think leverage is the key.

There are plenty of Aussie stock worth investing in. Probably worth investigating their gearing levels b4 though especially in this ****ty dishonest climate!


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## skc (27 February 2009)

It is not a Zero Sum game for equities.

Basically the total wealth created equals current share price minus the initial price. Brokerage is one of the leaks in the system, but that depends on how much the share is traded. Slippage is not a leakage, as whatever loss on slippage to one side is the gain to the counter party. It stays in the system.

For futures and OTC contracts, however, I believe it is a zero sum game (less brokerage makes it negative sum game).


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## aleckara (27 February 2009)

It is a zero sum game in my opinion. Other people have told me that it isn't before. I believe it is and this is why:

Money in shares is not your money - it's the amount that someone is willing to give to you for your shares. The money is not in the market for long, just during the timeframe to complete each transaction (maybe a second at most). Therefore money in = money out = zero sum. It's that simple. The price level (i.e the amount someone is willing to put into the game) changes constantly depending on the amount of shares are in the game compared to the money entering the game but in the end the market is a proxy for buyers and sellers. Money leaves the buyers and goes to the sellers, and for the sellers to make a profit someone must inject more money than they paid for it. Simple - kind of like a ponzi scheme expect no fixed return is expected.

The markets do generate wealth - through company profits. This is the actual return component as the asset is generating this income, not the buyers and sellers. If the company buys back shares or issues dividends the net effect is the same - extra money is being injected into the game for the players via their own investments. This is where the wealth is actually generated.


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## rossw (27 February 2009)

I'm not 100% it's zero sum. i don't know if I can explain it properly, but I'll try

Let's say you buy a share at $20 and it goes up to $100.
your gain of 80 (to make it zero sum) would need to be offset by a loss of 80 somewhere else.
the loss for the guy selling to you at 20 is more of an opportunity cost than a real hit to his bank a/c

same deal in reverse, as has been seen in recent times. market has fallen, but short selling has often been banned. the guys that were long take a hit. the guys who sold to them forego the opportunity loss of the share price falling. they don't really make money from the fall to offset the stock holder's loss


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## brty (27 February 2009)

Hi,

The failure of many to understand that the stockmarket is an ongoing ponzi scheme, staggers me.

Price or value of an individual company is set at the margin (ie by a small number of sales). The money coming out of the market can only equal what goes in, less brokerage. For every seller of shares, there must be a buyer who puts up the money.

Concepts like the value of the stockmarket being 'worth' $1.4 trillion are meaningless. As I have stated before, if every share of every company was for urgent sale today for whatever price, and there was one single buyer who offered $1 for the lot, he would get the lot!! Money coming out of the market can only ever equal what goes in less brokerage.

brty


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## freddy2 (27 February 2009)

Dividends paid from earnings make it NOT a zero sum game and NOT a Ponzi scheme.


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## aleckara (27 February 2009)

freddy2 said:


> Dividends paid from earnings make it NOT a zero sum game and NOT a Ponzi scheme.




The capital gain part of it is though and that's where most people expect growth. The thing is that it is true - if the security generates money then people are willing to pay higher prices due to the compensation of actual wealth coming from the asset. Just remember that most shares never get to pay dividends - with most the game ends in bankruptcy eventually.


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## MS+Tradesim (27 February 2009)

.....meanwhile, others just get on with the business of extracting money from it.


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## basilio (27 February 2009)

Of course shares are being created all the time by companies and these shares  can suddenly have a huge value.

For example when an IPO is made the company will issue say 20m shares at 50c ea. Total value $10m . However it is certain that the directors  and others will have issued themselves another 10-20-30 mill shares at no price. This is their equity. But the moment the first shares hit the market their shares are suddenly worth whatever the last sale price brings.  Very creative really.

And if you can persuade lots of people that your little company is going to be a goer you can turn your paper dollars into real dollars. Of course this may or may not have anything to do with actually producing something useful - but you have made yourself money which is the prime objective of the exercise.


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## Jikx (27 February 2009)

I do believe, historically, that pretty much all long term gains are the result of dividends. Capital "gains" essentially evapourate when taking the good times with the bad.


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## aleckara (27 February 2009)

basilio said:


> Of course shares are being created all the time by companies and these shares  can suddenly have a huge value.
> 
> For example when an IPO is made the company will issue say 20m shares at 50c ea. Total value $10m . However it is certain that the directors  and others will have issued themselves another 10-20-30 mill shares at no price. This is their equity. But the moment the first shares hit the market their shares are suddenly worth whatever the last sale price brings.  Very creative really.
> 
> And if you can persuade lots of people that your little company is going to be a goer you can turn your paper dollars into real dollars. Of course this may or may not have anything to do with actually producing something useful - but you have made yourself money which is the prime objective of the exercise.




Of course value is different than cashflow. Even a ponzi scheme has value to the individual (just not to the collective). i.e if I get out at the top of the ponzi scheme I still make a good deal of money. That value reflects the individual benefit. Just like all real world big problems they don't work once you try to scale the solution to everyone. I argue that if everyone were to do this the real value would be liquidation value (which is really just retained dividends/profits hence my argument before). Profits are the only thing that is put back in the game, and sometimes it never is since while it is retained earnings it can leak out before it hits the market (bad investments, etc).


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## Temjin (27 February 2009)

MS+Tradesim said:


> .....meanwhile, others just get on with the business of extracting money from it.




*Big nods in agreement*

There are countless of evidences that suggest otherwise, so why argue?  

And for forex/futures/commodities, it's not a zero sum game either.


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## johenmo (28 February 2009)

aleckara said:


> The markets do generate wealth - through company profits.




Markets don't generate wealth - companies do.  The market is a giant playground where people "gamble" on the outcome (will it rise or fall depending on if I am long or short).  Private companies that don't have shares generate wealth (profits) which don't hit the market.

The posts about extracting money along the way is spot on.  If I buy 10K of shares and get 5K back, someone else got my 5K (less brokerage) out of the pot for that share.  Got nothing to do with the companyimho.


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## Trembling Hand (28 February 2009)

Temjin said:


> And for forex/futures/commodities, it's not a zero sum game either.




Besides Brokerage why?


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## pilbara (28 February 2009)

brty said:


> The failure of many to understand that the stockmarket is an ongoing ponzi scheme, staggers me.
> 
> Price or value of an individual company is set at the margin (ie by a small number of sales). The money coming out of the market can only equal what goes in, less brokerage. For every seller of shares, there must be a buyer who puts up the money.



do you think the property market is also a ponzi scheme??

forex/futs etc are zero sum games because every trade involves a matched pair of contracts, one short, the other long.  The subsequent price movements will benefit one party at the expense of the other.

stocks/property etc are not zero sum games because you are exchanging cash for a real asset. The subsequent price movement of that asset only affect one of the parties in the trade.


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## tech/a (28 February 2009)

I think your all missing the crux of the question.

Whats an example of a Zero Sum Game.

*CHESS.*

It is impossible for both players to win.

*Trading anything*.

Houses/Stock/Futures/Goods.
There can and are multiple winners and multiple losers.
At times un equal and never is the balance 100% winners or 100% losers.

There fore it cannot possible be veiwed as a zero sum game.


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## motorway (28 February 2009)

Trembling Hand said:


> Besides Brokerage why?






> Is Forex a Zero Sum Game?
> 
> 
> It is between a buyer and a seller
> ...





Of course we are seeing wealth vaporised by leverage too

but others do not have to make what others loose
or have to loose what others make

inventory can be just marked up or down

Techs point maybe ?



motorway


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## a5e0i (28 February 2009)

It's not a zero sum game if you learn to play it well enough.


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## sails (28 February 2009)

pilbara said:


> ...forex/futs etc are zero sum games because every trade involves a matched pair of contracts, one short, the other long.  The subsequent price movements will benefit one party at the expense of the other....




Not if they are combined with options...


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## a5e0i (28 February 2009)

True, sails and then it's knowing the right options to buy. Not all of them work well, or perhaps I should say...some options work better than others.


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## sails (28 February 2009)

a5e0i said:


> True, sails and then it's knowing the right options to buy. Not all of them work well, or perhaps I should say...some options work better than others.




I am suggesting option synthetics where options and the underlying are combined together.  For example, combining long stock/futures with short &/or long options can completely change the nature of the trade.


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## a5e0i (28 February 2009)

too in depth for me, that one. I understand it all, but don't have enough knowledge to think I can make it work at this point in time.


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## Trembling Hand (28 February 2009)

tech/a said:


> I think your all missing the crux of the question.
> 
> Whats an example of a Zero Sum Game.
> 
> ...






What are you guys talking about!! Derivatives are zero sum (excluding brokerage) 

How are they not in balance 100% tech??


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## theasxgorilla (28 February 2009)

tech/a said:


> I think your all missing the crux of the question.




I think I get it perfectly 

Take shares, the original question, when does that game stop?  Close of trading for the day, week, month, year?  A buy out?  Maybe it never stops.

In an uptrend with a stock that has just made a new all-time-high there are no losers...bar the buyer of the last share traded who is down his brokerage, and those that maybe shorted...and that is a whole other aspect to consider.  How does adding capital stock to the market via shorting affect the balance???

So if we mark to market like so many believe is the only righteous way to track a portfolio of liquid assets, there are situations where there are no losers, on paper.  And unlike futures there is no requirement to close out positions, make a delivery etc.

For what it's worth, I don't think the financial alchemists of the world want zero-sum.  With so many basket-case companies out there who in their right mind would invest in the multitude based on "value".  Nope, smoke and mirrors and making something from nothing is what it's about.


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## Temjin (1 March 2009)

Now I want to ask the question, what is the definition of a "zero sum game"? In the context of the financial markets that is, and not CHESS. 

In fact, I am quite confused because it seems different people have different interpretation of it.

My economic friends tell me trading is a zero sum game and conclude that no one can ever make money out of it over the long term. It's a sure loss thing in their own definition.


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## motorway (1 March 2009)

It is between a buyer and a seller acting on the same scale

( You might say timeframe )

BUT


The length of the coast line (potential profit opportunity) depends on how you measure it  ( how long is the coastline )

A trader that reacts at a smaller scale  has higher potential for profit than one who reacts on a larger scale ( You might say day trader / End of month trader )
Even with perfect foresight, ( that is their trading has perfect timing ) 

one may be buying when the other is selling

Not only different scales

But different information drivers



> Classical Economics
> 
> 
> Adam Smith’s theory was politically motivated
> ...




+ leverage 

+ trading always happens only at the margin

Shares do not have to trade to change in value

No one makes what the other loses

In fact trading is a win win

because traders operating on different scales
and on different information

provide liquidity to each other

when trading activity ceases or becomes homogeneous
then the markets are lose lose

( Importance of the technical position  RDW)

A intra day trader might buy or sell
to a pension fund
both can be winners

or EOD trader to a EO-Month

They can all have correct profitable
signals

All providing liquidity

motorway


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## aleckara (1 March 2009)

motorway said:


> It is between a buyer and a seller acting on the same scale
> 
> ( You might say timeframe )
> 
> ...




The biggest risk in markets is not necessarily the loss but that for some reason there is no market to make a transaction IMO. If there are no buyers the commodity you hold is effectively worthless on the market. 

This is why liquidity is important. In my opinion it is important as it is a direct measure of how effective the music is playing. The money is there in the market until the music stops.

The fact that you need liquidity to me in the asset supports that the market is a ponzi like market although with no guaranteed return which makes it sustainable as people ride off their losses instead of them accumulating until a crash occurs.

The different scales just mean that the losses are deplayed into the future for the buyers that bought off the traders that had the profitable signals. You forget that the value of your shares is guessed by the last price - in other words if there wasn't a market the last price is meaningless. It's there to say in current market conditions this is what you probably will get. There is no value until you actually sell them - they aren't cash gains, just paper ones.


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## pilbara (1 March 2009)

sails said:


> I am suggesting option synthetics where options and the underlying are combined together.



each of the derivative markets might be zero-sum when you consider each entire market in isolation, but an individual trader can synthentically create combinations of trades between these markets.


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