Is trading a zero sum game?

This topic seems to polarize traders at times so lets hear it!

no, because i beat you to it... in the rookie section my thread is the final say (because i say so).

oh well, if i can beat the horse then so can you.

trading = zero-sum and not zero-sum. it depends on the perspective and variables being considered.

edit : your post is too ambiguous. as is everyone's. this is the whole problem with all the arguments and therefore the question you ask is the same as "how long is a piece of string". refer above.

Zzzzz....

Thanks for the thread.

My answer to your question: trading is a zero-sum game. Whereas investing is a non-zero-sum game.

Interest rates are an example of a non-zero-sum game at play in the markets. With it, "I create money."

Account balances are an example of a zero-sum game at play in the markets. With it, "I give or take money."

Thus trading is limited to a zero-sum game that's defined by the non-zero-sum game of investing b/c the ability to create money is causal to the ability to give or take it in the first place.

Cheers to you, too

um, i believe the answer is "what is swap?".

And money is "created" out of?

i don't understand how ppl can end up with the conclusion that the markets aren't zero sum. Then again, I don't understand creationists either, but that's another story for another day.


With regard to interest, it's an illusion that you are "creating" money. The market is simply paying you for your lost opportunity cost of putting your money somewhere else to generate interest. You created money from the interest the same way you destroyed your own money by withdrawing it from the bank. It's zero sum.

It is not a zero sum game. Trading currency does not involve only speculations. Banks often change currency for their clients' needs. If I buy 100.000 euros I may buy them from a French guy who wants to visit USA and needs dollars. I therefore might make a profit while the other one enjoys its holiday. Central banks often use their reserves for defending their own currency from sharp depreciation/ appreciation. You may see these examples as win/loss (the French could have waited for a better price, CB loses money while intervening into the market because that movement is against major trend and, as a result, it will be absorbed) but in the end it only matters the aim for which you are trading currencies. It's not a must to have another speculator as counterparty.

having a different motive than making money does not make it less of a zero sum game.

The whole system can be concised to it's purest form as money in, money out. Regardless of intentions, if the above premise holds true, it's zero sum.

Someone buys one of my two flats with 200.000 . I don't care why, it's his will to do that. I use the money in order to open a business and make profit. Who lost here? Was the guy who obtained what he wanted or was it me who also reached my goal?

Remember that market is not NYSE, betting companies and so on. It's not a fixed place. The market exits where there are two men and one object to trade.

No, zero-sum game is where one loses while the other wins.

Blah.....? WGAFS ? Have a guess

sigh. That's the problem with these complex subjects. People isolate a few variables and ignore the rest.



Ok you made a profit in your business. That means someone made a "loss", where loss here is defined as the surplus(your profit)he paid you over him getting the goods directly himself(very simplified explanation!)

Also, bear in mind that zero sum does not mean anybody has to make a loss. If you play a zero sum game and continually change $100 notes for $100 notes, u will not make a loss.

you realise that your wiki quote is affirming my post right?

No, that quote contradicts you. How can someone have a loss if I make profit? I make profit because they are willing to buy, let's say, candies from me. I win, they win. We both have what we wanted. Zero sum is where you gain, while the other losses.

omg.

that's like saying if i open trades and purposely screw myself into bankruptcy then i haven't lost as long as it was what i wanted. well then yeah, but like i said at the start people need to stop trying to measure a piece of string and actually get a handle on which piece of string they are measuring.

ambiguous questions lead to ambiguous answers.

FUUUUUUUUUUUUUUUUUUUUUUU

Lets make the things clearer.
Yes, the stock exchange can be considered a zero-sum game (if we get over transaction costs).

But if I exchange rice for beams, is this a zero-sum game? No. Money are goods (like rice). If one exchanges euros for paying his holiday and I sell dollars for his euros it's not a zero-sum game.
It's not the case. If I make profit from this transaction, what does his lose? Nothing.

This is the case. He "won" a trip to USA and I won 1000$. It's a net gain.

you should be a politician, or magician.

one country gives another bananas. banana count of country A is exactly less that amount given, and the amount in country B is exactly more the amount received.

then they do the same exercise with apples.

were there any extra bananas or apples materialize or disappear? no. for this aspect then zero-sum is the answer.

i won't be replying to this thread further at least for a bit. i don't want my 300th post to be in a pointless zero-sum argument, so enjoy y'all.

First a little background. I believe the seminal answer is to say "out of an idea, perspective or necessity" but in a word: Interest. It's the basis of the non-zero-sum game. To be sure the Fed or Central Banks also "create" money, which is actually based on a zero-sum game balance sheet that allows them to expand or contract the country's money supply according to policy.

Per the non-zero-sum act of creating money can be exemplified by our current monetary system that's built on the modus operandi of "fractional reserve banking," which defines "money creation" in payments of interest or interest payments. (It's how the commercial banks make and/or "create" money and Ben Bernanke gets paid, not from printing money per se.)

Thereby money is created or "derived" out-of-thin-air from the interest imposed by an investor/bank lending the asset, say $1,000 aka "principle" to a borrower/dealer at a percentage rate, say 10% for a time, say per month. So that's $100 interest, to borrow $1,000, per month. That's how the investor creates money in a non-zero-sum game or in this case, $100. The borrower can only save, spend or return the principle amount of $1,000 - nothing more. In other words they can only give or take it back, which is a zero-sum game.

So lets say the borrower repays the lender in a month. Here's what the account balance of the borrower will be: $0. Here's what the lender's will be: $1,100. In other words, the investor just made a 10% return on their investment and created money with nothing but the interest affixed to the loan: non-zero-sum. The borrower didn't create any money but took it then gave it back: zero-sum. Quite literally.

So lets start putting the two games together in a trading scenario. When a trade's executed, the broker/dealer either gives or takes i.e. pays or charges the interest on the underlying asset/contract and applies it to the trader's account balance, which in turn creates more money for the investor or interbank market. The trader merely won or lost principle capital on the trade but the investor profited from the interest on the asset, not the trade. In currency assets, the government's Treasury or the like is the one who ultimately profits from the transaction - not Central Banks. Of course this is a simplistic example of money creation.

In actuality, the trader's account is collecting interest or "creating money from nothing" but at a far lower rate than the investor's leveraging that same account in order to create money by lending a significant portion of it to others but at a much higher rate. So again, the investor or interbank market leverages our trading accounts to generate profit but in a non-zero-sum dynamic, which translates to creating money from the interest on the underlying (currency) asset, then rolled into derivatives of that asset such as real estate, business ownership and commodities. Hence the power of compound interest at work and why so-called derivatives are the weapon of choice of the uber-rich investor.

Traders just trade derivatives in a "zero-sum" fashion but the investor owns them and "creates money" from their underlying value in the form of interest. That's how a corporation, other than the Fed, can legally print or create money in a "non-zero-sum" fashion.

What brought down Greece were investors exploiting interest rates by purchasing government bonds, depositing them in the ECB, rolling them over into the Euro currency interest rates, collecting the combined interest on the bond and Euro rates in order to buy more government bonds, deposit them in the ECB, rollover, repeat process... The country simply bought itself into a debt that it couldn't work itself out of by hard labor. All by trying to play a zero-sum (borrowing) game in non-zero-sum (lending) world. "Interest" literally overtook it and made a few very rich but at the expense of many poor.

So as traders, we're playing a zero-sum game, which is a game bought and sold by investors whom play a non-zero-sum game - with interest. Thus a trader does not an investor make. Does that answer your question?

Why don't we simplify this into categories so that we aren't all talking about different things:

First off, you have to define the game -- when i think of zero-sum games I'm talking about the things we discuss on ForexFactory -- Trading in securities market...

Most transactions on an exchange fall into the zero sum category:

 

1. Futures trades between two parties are zero-sum
2. Currency Trades between two traders/speculators
3. Stock trades between a long & a short-seller

Grey areas:

 

1. Barter transactions
2. Someone selling a stock to gain diversification in their portfolio
3. Selling a security to buy a non-security (in this case, the seller is leaving the market so he's no longer "playing the game") -- example: Liquidating your portfolio to buy a house
4. Long Term investing where you're directly providing capital to a company/venture -- This is similar to a barter transaction -- the company needs your cash (which you don't really need) and you need a rate of return, both parties get what they want.

Most transactions we discuss here are zero-sum, but a select few might not be. Those transactions, like the grey areas i mentioned above, don't really interest me.

Just my 2c...