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> Isn't that example nearly zero-sum (ignoring the spread)? But ignoring the spread is incorrect, and nearly zero sum is not the same as zero-sum. The spread i

> Isn't that example nearly zero-sum (ignoring the spread)? But ignoring the spread is incorrect, and nearly zero sum is not the same as zero-sum. The spread is the fee that market makers earn for a service they provide. You're also not considering other participants. The price changes you're talking about could be driven entirely by end users, or they could be driven by speculators, arbitrageurs, and others who are providing separate services (price discovery, liquidity, balance sheet, arbitrage, etc.) and are also capturing some of the value. > futures trading is unprofitable[0], except for the market makers If you are explicitly excluding participants who profit by providing financial services to markets, then you are begging the question. > Obviously, it doesn't capture non-cash considerations. Starbucks and the farmer both might be thrilled with reduced risk. Transferring risk can definitely provide economic value (insurance policies exist for this reason), but it should be noted that there are other advantages as well. These futures transactions can help Starbucks manage inventory without needing to maintain large stockpiles of perishable or reduce the volatility of prices charged to consumers.

mattkrause 7y ago
Are you saying that the "misconception" is that it's actually slightly negative-sum, rather than exactly-zero sum? If so, great, I agree. It doesn't change my point at all; if anything it makes it stronger. I am not excluding anyone; I'm trying to explain why I think the result here is not particularly enlightening.
- nickles 7y ago
  My understanding of your comments is influenced strongly by this statement: > Thus, any analysis that averages across market participants' P&L will conclude that futures trading is unprofitable[0], except for the market makers. This is true regardless of the savvy of market participants. By virtue of offering various services to market participants, savvy market operators can consistently generate profit. In the context of this article, I took your statement to mean that any given participant cannot consistently do so. At the same time, the end users entering into these transactions understand they will be paying these fees, just as a firm expects to pay a fee to borrow money from a bank. If we describe this process as a zero-sum game, it gives the impression that trading is a speculative casino, reallocating money to participants at random (the misconception). If we describe it instead as negative-sum, where participants are paying/paid for services, it better reflects the economic value of the transactions. > ignoring/averaging across trades with non-daytraders I didn't see this bit for some reason when originally responding to your comment. Had I, my comment would have been stated differently.
  - mattkrause 7y ago
    That's not what zero-sum means. The definition of a zero sum "game" is simply one where the participants' payoffs (here, profits) sum to zero. Nothing in the definition prevents some participants from being better players than others. As you noted above, some entities might also prefer to "buy" stability for their main operation instead of trying to minimize their spending on some of its inputs. Nevertheless, for every dollar made on futures, someone has lost (at least) that much. Except for the market-maker, the entire thing is a closed system. Thus, you'd expect the average return, across everyone trading the contract, to be zero, which is exactly what this paper shows. The paper does show 47 people who turned a profit. Their analysis can't distinguish between rubes who haven't (yet) reverted to the mean and savvy traders with some kind of effective edge. It would be interesting to see what the loss distribution looks like.

mattkrause 7y ago

Are you saying that the "misconception" is that it's actually slightly negative-sum, rather than exactly-zero sum? If so, great, I agree. It doesn't change my point at all; if anything it makes it stronger. I am not excluding anyone; I'm trying to explain why I think the result here is not particularly enlightening.

nickles 7y ago
My understanding of your comments is influenced strongly by this statement: > Thus, any analysis that averages across market participants' P&L will conclude that futures trading is unprofitable[0], except for the market makers. This is true regardless of the savvy of market participants. By virtue of offering various services to market participants, savvy market operators can consistently generate profit. In the context of this article, I took your statement to mean that any given participant cannot consistently do so. At the same time, the end users entering into these transactions understand they will be paying these fees, just as a firm expects to pay a fee to borrow money from a bank. If we describe this process as a zero-sum game, it gives the impression that trading is a speculative casino, reallocating money to participants at random (the misconception). If we describe it instead as negative-sum, where participants are paying/paid for services, it better reflects the economic value of the transactions. > ignoring/averaging across trades with non-daytraders I didn't see this bit for some reason when originally responding to your comment. Had I, my comment would have been stated differently.
- mattkrause 7y ago
  That's not what zero-sum means. The definition of a zero sum "game" is simply one where the participants' payoffs (here, profits) sum to zero. Nothing in the definition prevents some participants from being better players than others. As you noted above, some entities might also prefer to "buy" stability for their main operation instead of trying to minimize their spending on some of its inputs. Nevertheless, for every dollar made on futures, someone has lost (at least) that much. Except for the market-maker, the entire thing is a closed system. Thus, you'd expect the average return, across everyone trading the contract, to be zero, which is exactly what this paper shows. The paper does show 47 people who turned a profit. Their analysis can't distinguish between rubes who haven't (yet) reverted to the mean and savvy traders with some kind of effective edge. It would be interesting to see what the loss distribution looks like.