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Derivative trading is usually zero sum. There is a loser for every winner. I don’t understand in what world buying and selling oil on an open market could be co

Derivative trading is usually zero sum. There is a loser for every winner. I don’t understand in what world buying and selling oil on an open market could be considered theft. Everyone knows the rules of the game.

Ecco 6y ago
Well, let’s consider a simplistic example: an obscure currency, let’s call it FAKE, that can be traded for USD. That currency is only used by people in a small island, and that island only exports clamshells and imports Big Macs. In this scenario, and unless I’m mistaken, the FAKE/USD rate will vary depending on: - how much clamshell those people can export and how much US people value them - how much BigMacs those guys import and how much those guys value them Enters a day trader - someone who will never buy a Big Mac nor any clamshell. The guy speculates and there are two possible outcomes : - He fails. Technically he basically gave “value” to either USD holders or FAKE have holders. Too bad for him, but he kinda made this happen. - He succeeds. Now what? Isn’t that kind of a parasitic behavior? Couldn’t that be considered theft to some extent? I guess the question may boil down to “why would they even let the day trader be part of this?”.
- baconandeggs 6y ago
  A speculator does one thing only: takes assets not in (peak)demand today and bets they are gonna be in demand in the future. He takes a calculated risk and a lot of times it doesn't pay off. Everybody involved is getting paid and all the transactions are voluntary. If you think that is theft then I don't know what to tell you.
  - Ecco 6y ago
    Well, a theft can be voluntary: that’s what con-artists do all the time!
    - gruez 6y ago
      Con artists are getting your consent via deception. Is this the case what derivative traders are doing?
      - Ecco 6y ago
        Well, one could argue that they are just smarter than other people and manage to find market opportunities. Good for them I guess. But technically since it’s mostly a zero-sum game would it be wrong to consider that they use their smarts to deprive other people of value?
        gruez 6y ago
        Do you really need me to explain why fraud is wrong? Fraud is wrong because you're betraying someone's trust. It's bad for society because it adds friction to business dealings. When you can't trust your counterparty, you have to expend tons of money doing due diligence. This is true regardless if you're smart or not. Being the smartest person in the world isn't going to help you if you're being deceived (assuming you're not omnipresent).
        gph 6y ago
        *Omniscient Though I guess it might be hard to deceive an entity that is literally everywhere.
        arcticbull 6y ago
        This is also the case I make against bitcoin re: the value of trust.
    - baconandeggs 6y ago
      Now that you've reached the point of calling everything theft, there is nowhere to go. Congratulations.
      - selimthegrim 6y ago
- chii 6y ago
  > Too bad for him, but he kinda made this happen ... Couldn’t that be considered theft to some extent? why is it "too bad for him" when he loses (to the people he gave value to), but "theft" when he takes value from the people? That's just a double standard. And you also mis-understand derivatives trading's purpose - to offload risk to a third party that is willing to take it.
  - Ecco 6y ago
    The double standard question is totally legitimate and a very good one! My point of view is that the trader willingly entered the market with the sole intent of trying to make a profit, whereas the other two just wanted to actually trade goods. Which is why the situation is asymmetrical in my opinion, and why the way we judge it could be as well.
    - baconandeggs 6y ago
      > whereas the other two just wanted to actually trade goods. They wanted to trade excess goods, in other words, unrealized profits, for something usable to them to realize the profits of their labor. Everyone's intention is to profit, that is the reason you sell to the market.
      - viklove 6y ago
        Everyone's intention is to profit, even the con artist, but the buyer and the seller are providing and receiving goods, meaning they actually have a reason to be involved in this specific trade. One party produces oil, a second party consumes oil, and the third party is just there to take his cut because he thinks he's smarter than everyone else. It shouldn't be surprising when one of these parties isn't trusted by the other two... It's essentially scalping. Do you trust the people who buy concert tickets in advance and sell them to you at a 100% markup? They're serving the exact same role in society as these market players. No one likes them for a very good reason.
        baconandeggs 6y ago
- jmvoodoo 6y ago
  When he is successful he is providing liquidity to the market, which is value, not theft.
- lmm 6y ago
  It's not theft, it's honest trading. Traders buy things from willing sellers and sell to willing buyers, in financial products as in any other market. There are two ways to make money as a pure market player: connecting buyers and sellers who wouldn't trade directly (and taking your cut) aka arbitrage, or getting paid to take on risk. Maybe the trader notices that people on the far side of the island are hungry but can't get a big mac without a long walk, so he buys as many as he can carry, walks over to the other side of the island, and sells them for a bit more than they'd cost on the dockside - that's the first kind of trading. Maybe a clamshell farmer wants to make sure they can afford enough big macs over the next year. They might agree to sell their next year's clamshell harvest at a fixed price (that's lower than the average), or buy their big macs for the next year at a fixed price (that's higher than the average), or both; the farmer loses value on average, but they offloaded their risk, while the trader makes money on average but has to carefully manage their risk. The third thing is to actually take an active position in the market, if you can predict what's coming. E.g. if you realise the clamshell harvest will be big this year, maybe you sell a bunch of clamshells short. That should send a useful signal to all the farmers, and it means you make money if you predicted right.
  - Ecco 6y ago
    Awesome explanation. Thanks!!
deleted 6y ago
[deleted]
neximo64 6y ago
You can always 'create' more oil by pumping it out of the ground once the prices hit a certain amount. So it's not really 'zero-sum'. If the supply isn't locked or restricted it's hard to say that. Same thing with Tesla shares, or whatever it is. If you can create more Tesla shares its not zero sum (which is done often). Currencies too are printed when needed. About the only thing really zero sum are some cryptocurrencies. You could argue in some way that it is zero-sum, but if the price goes down and oil companies don't pump oil out, they don't really lose anything - especially with derivatives as it is on a future outcome.
- FabHK 6y ago
  There is positive supply of oil, or Tesla shares. However, the net supply of derivatives (such as options, forwards, futures) is zero.
  - vmception 6y ago
    > the net supply of derivatives (such as options, forwards, futures) is zero. so we believe, but yes. also CDOs have entered the chat
    - refurb 6y ago
      But CDOs have to have someone on each side the deal, hence net zero.
      - defen 6y ago
        Liquidity risk has entered the chat
      - vmception 6y ago
        you mean the same person on all three sides of the deal, unbeknownst to them
- baconandeggs 6y ago
  It is zero sum in the sense that all the money has to be equal to all the stocks. Not in the sense of perceived value.
randomcarbloke 6y ago
it is possible for two of the three parties to realise a profit at the strike, and the third to ultimately profit from holding the security. it does follow that a and then b could have made more profit by not lending or selling, but it is far from zero-sum.

Ecco 6y ago

Well, let’s consider a simplistic example: an obscure currency, let’s call it FAKE, that can be traded for USD. That currency is only used by people in a small island, and that island only exports clamshells and imports Big Macs. In this scenario, and unless I’m mistaken, the FAKE/USD rate will vary depending on: - how much clamshell those people can export and how much US people value them - how much BigMacs those guys import and how much those guys value them Enters a day trader - someone who will never buy a Big Mac nor any clamshell. The guy speculates and there are two possible outcomes : - He fails. Technically he basically gave “value” to either USD holders or FAKE have holders. Too bad for him, but he kinda made this happen. - He succeeds. Now what? Isn’t that kind of a parasitic behavior? Couldn’t that be considered theft to some extent? I guess the question may boil down to “why would they even let the day trader be part of this?”.

baconandeggs 6y ago
A speculator does one thing only: takes assets not in (peak)demand today and bets they are gonna be in demand in the future. He takes a calculated risk and a lot of times it doesn't pay off. Everybody involved is getting paid and all the transactions are voluntary. If you think that is theft then I don't know what to tell you.
- Ecco 6y ago
  Well, a theft can be voluntary: that’s what con-artists do all the time!
  - gruez 6y ago
    Con artists are getting your consent via deception. Is this the case what derivative traders are doing?
    - Ecco 6y ago
      Well, one could argue that they are just smarter than other people and manage to find market opportunities. Good for them I guess. But technically since it’s mostly a zero-sum game would it be wrong to consider that they use their smarts to deprive other people of value?
      - gruez 6y ago
        Do you really need me to explain why fraud is wrong? Fraud is wrong because you're betraying someone's trust. It's bad for society because it adds friction to business dealings. When you can't trust your counterparty, you have to expend tons of money doing due diligence. This is true regardless if you're smart or not. Being the smartest person in the world isn't going to help you if you're being deceived (assuming you're not omnipresent).
        gph 6y ago
        *Omniscient Though I guess it might be hard to deceive an entity that is literally everywhere.
        arcticbull 6y ago
        This is also the case I make against bitcoin re: the value of trust.
  - baconandeggs 6y ago
    Now that you've reached the point of calling everything theft, there is nowhere to go. Congratulations.
    - selimthegrim 6y ago
chii 6y ago
> Too bad for him, but he kinda made this happen ... Couldn’t that be considered theft to some extent? why is it "too bad for him" when he loses (to the people he gave value to), but "theft" when he takes value from the people? That's just a double standard. And you also mis-understand derivatives trading's purpose - to offload risk to a third party that is willing to take it.
- Ecco 6y ago
  The double standard question is totally legitimate and a very good one! My point of view is that the trader willingly entered the market with the sole intent of trying to make a profit, whereas the other two just wanted to actually trade goods. Which is why the situation is asymmetrical in my opinion, and why the way we judge it could be as well.
  - baconandeggs 6y ago
    > whereas the other two just wanted to actually trade goods. They wanted to trade excess goods, in other words, unrealized profits, for something usable to them to realize the profits of their labor. Everyone's intention is to profit, that is the reason you sell to the market.
    - viklove 6y ago
      Everyone's intention is to profit, even the con artist, but the buyer and the seller are providing and receiving goods, meaning they actually have a reason to be involved in this specific trade. One party produces oil, a second party consumes oil, and the third party is just there to take his cut because he thinks he's smarter than everyone else. It shouldn't be surprising when one of these parties isn't trusted by the other two... It's essentially scalping. Do you trust the people who buy concert tickets in advance and sell them to you at a 100% markup? They're serving the exact same role in society as these market players. No one likes them for a very good reason.
      - baconandeggs 6y ago
jmvoodoo 6y ago
When he is successful he is providing liquidity to the market, which is value, not theft.
lmm 6y ago
It's not theft, it's honest trading. Traders buy things from willing sellers and sell to willing buyers, in financial products as in any other market. There are two ways to make money as a pure market player: connecting buyers and sellers who wouldn't trade directly (and taking your cut) aka arbitrage, or getting paid to take on risk. Maybe the trader notices that people on the far side of the island are hungry but can't get a big mac without a long walk, so he buys as many as he can carry, walks over to the other side of the island, and sells them for a bit more than they'd cost on the dockside - that's the first kind of trading. Maybe a clamshell farmer wants to make sure they can afford enough big macs over the next year. They might agree to sell their next year's clamshell harvest at a fixed price (that's lower than the average), or buy their big macs for the next year at a fixed price (that's higher than the average), or both; the farmer loses value on average, but they offloaded their risk, while the trader makes money on average but has to carefully manage their risk. The third thing is to actually take an active position in the market, if you can predict what's coming. E.g. if you realise the clamshell harvest will be big this year, maybe you sell a bunch of clamshells short. That should send a useful signal to all the farmers, and it means you make money if you predicted right.
- Ecco 6y ago
  Awesome explanation. Thanks!!

deleted 6y ago

[deleted]

neximo64 6y ago

You can always 'create' more oil by pumping it out of the ground once the prices hit a certain amount. So it's not really 'zero-sum'. If the supply isn't locked or restricted it's hard to say that. Same thing with Tesla shares, or whatever it is. If you can create more Tesla shares its not zero sum (which is done often). Currencies too are printed when needed. About the only thing really zero sum are some cryptocurrencies. You could argue in some way that it is zero-sum, but if the price goes down and oil companies don't pump oil out, they don't really lose anything - especially with derivatives as it is on a future outcome.

FabHK 6y ago
There is positive supply of oil, or Tesla shares. However, the net supply of derivatives (such as options, forwards, futures) is zero.
- vmception 6y ago
  > the net supply of derivatives (such as options, forwards, futures) is zero. so we believe, but yes. also CDOs have entered the chat
  - refurb 6y ago
    But CDOs have to have someone on each side the deal, hence net zero.
    - defen 6y ago
      Liquidity risk has entered the chat
    - vmception 6y ago
      you mean the same person on all three sides of the deal, unbeknownst to them
baconandeggs 6y ago
It is zero sum in the sense that all the money has to be equal to all the stocks. Not in the sense of perceived value.

randomcarbloke 6y ago

it is possible for two of the three parties to realise a profit at the strike, and the third to ultimately profit from holding the security. it does follow that a and then b could have made more profit by not lending or selling, but it is far from zero-sum.