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Lost & losing hope

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  #181 (permalink)
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Cloudy View Post
Good summary of institutional and hedging volume in futures. I've come to believe the markets especially futures trading isn't a zero-sum game among retailers either. Retail volume while rising in recent years again, is reportedly only up to 3.5% of total CME volume. (https://www.chicagobusiness.com/finance-banking/cme-sees-future-small-fry). So I'd think it's far less likely the opposite side of your profitable trade is only some other losing retailer. It could be an institution, bank or firm on a higher time frame. Or an HFT or algo trade on a lower time frame fractal of price action making trades on pullbacks. All of this trying to "iron out" the inefficiencies as the market searches for price. With all the hft front-running going on since this decade, it could very well be competing algos from different firms taking the opposite side of your contracts anyways. So overall, I'd agree it's moreso value-neutral and we retailers pay a price in hefty fees and taxes. May the FTT never come to pass (along) to retailers..

This is a good post, but I'm afraid I didn't get my point across too well. Probably because I'm so long-winded and try to get too detailed instead of just addressing a point.

So let me say it in a briefer way:

At the end of the day (or when I close a trade, whichever comes first), my account receives money if I have a profit, and it loses money if I have a loss. These are real funds. I could actually take out the profit, so long as I left enough for the margin requirement. This happens to everyone else, hedger, institution, HFT, retail, no difference.

The money I get is real funds and is taken out of accounts that have a loss for the day. Or, if I have the loss, the money that is taken from me goes into accounts that have a profit. All the debits equal all the credits, exchange-wide. The money is just being moved around the table.

This is zero-sum.

It's not like some other markets, such as the stock market, where value can increase or decrease with the value of the company.

Sure, the total amount that is on the table can and will change as more is brought in from the outside, or more is taken out, and this will fluctuate. But once funds are on the table, they are just moved around.

Remember, we are not actually trading real oil, nor stock indexes, we are trading contracts on oil and stock indexes. The zero-sum nature of our trading, in aggregate, is a mechanical or, you could say, an accounting matter. It's automatic, applies to all accounts equally, and is just in the nature of the way that futures exchanges are set up.

It's not a matter of good or bad, it's not something to have a preference about, it's not theoretical, it doesn't mean retailers have to lose -- it's just a factual matter of how all futures accounts function. And certainly, some traders can win consistently.

Bob.

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  #182 (permalink)
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bobwest View Post
This is a good post, but I'm afraid I didn't get my point across too well. Probably because I'm so long-winded and try to get too detailed instead of just addressing a point.

So let me say it in a briefer way:

At the end of the day (or when I close a trade, whichever comes first), my account receives money if I have a profit, and it loses money if I have a loss. These are real funds. I could actually take out the profit, so long as I left enough for the margin requirement. This happens to everyone else, hedger, institution, HFT, retail, no difference.

The money I get is real funds and is taken out of accounts that have a loss for the day. Or, if I have the loss, the money that is taken from me goes into accounts that have a profit. All the debits equal all the credits, exchange-wide. The money is just being moved around the table.

This is zero-sum.

It's not like some other markets, such as the stock market, where value can increase or decrease with the value of the company.

Sure, the total amount that is on the table can and will change as more is brought in from the outside, or more is taken out, and this will fluctuate. But once funds are on the table, they are just moved around.

Remember, we are not actually trading real oil, nor stock indexes, we are trading contracts on oil and stock indexes. The zero-sum nature of our trading, in aggregate, is a mechanical or, you could say, an accounting matter. It's automatic, applies to all accounts equally, and is just in the nature of the way that futures exchanges are set up.

It's not a matter of good or bad, it's not something to have a preference about, it's not theoretical, it doesn't mean retailers have to lose -- it's just a factual matter of how all futures accounts function. And certainly, some traders can win consistently.

Bob.

I am not sure why the concept of zero sum in the futures market is a struggle for some people to comprehend. You have summarised it here well enough @bobwest, but I know this topic doesn’t really seem to get quashed.

Just like the futures market cannot be oversold or overbought, you still get traders that think it is a real “thing”. The futures markets are specifically designed to ensure that doesn’t happen, this same market efficiency also ensures that it is a zero sum proposition.

Zero sum meaning just that. When all accounts have been settled, there isn’t an odd amount of cash left over in the pot. There is zero left, because all they have done is transfer money from one account to the other. It is as simple as that. It’s just like one big ledger, and at the end of the day its bottom line will always read zero. No exceptions.

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  #183 (permalink)
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I do not think it changes the difficulty of trading. However, the whole zero argument is provably false, i.e. that is not necessarily true. Of course, it could be true in most cases but it is not true as a matter-of-fact. In fact, I shown this already. Below is the simple proof:

I buy 1 ES contract at market. An HFT hedges that contract instantly against an ETF/basket of stocks for a profit. Now, I am speculating on the outcome and the HFT has locked in a guarantee profit. They are short 1 ES but long the equivalent at a profit. At the end of the day, the S&P 500 index rises to place my trade in profit. I close it at a profit. Now, on the futures side, all transactions will net to zero. The HFT will appear to have a loss but actually has made a profit off of there futures trading.

If you make the counter argument that zero sum only means all futures trades net to zero then it implies then it is still meaningless to make the zero sum claim because a trader can turn an actual realized profit on a losing futures trade.

You can compare it to a secondary market even like NADEX. Let us imagine there are 3 traders. A bullish trader. A bearish trader. And a market maker. I speculate the market will rally and buy a binary at market and at the same time a bearish trader shorts the same binary. In this case, the market maker/liquidity provider takes both sides of our trade and profits from the spread on each. The market maker is perfectly hedged. I have the diametrical opposite to the other trader. However, there is no competition or "cross-trade" between myself and the other speculator. A similar dynamic is found in futures markets. More over, in this dynamic, the outcome of our profits or loss is completely non determined by any participant. It is wholly determined by where the market closes. This again raises serious question that trading is competitive because none of the participants in this case have any determination of the outcome. Of course, you might be able to make an argument that the only real +EV trade was the market maker/liquidity provider-- however, if you believe that then you shouldn't trade at all, in any case.

Again, please carry on. I do not think it changes the sentiments.

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  #184 (permalink)
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tpredictor View Post
I do not think it changes the difficulty of trading. ...

I buy 1 ES contract at market. An HFT hedges that contract instantly against an ETF/basket of stocks for a profit. Now, I am speculating on the outcome and the HFT has locked in a guarantee profit. They are short 1 ES but long the equivalent at a profit. At the end of the day, the S&P 500 index rises to place my trade in profit. I close it at a profit. Now, on the futures side, all transactions will net to zero. The HFT will appear to have a loss but actually has made a profit off of there futures trading.

I think we do not have a disagreement. My post was entirely about what the accounting is on the futures side, exclusive of whether hedging against assets outside of the futures market may allow for a net profit or loss that is not within the futures market by itself, although the futures position is a part of it overall.

I agree that actually, whether the futures market is zero sum or not, the issue in the original post is about whether a retail trader can make money in this market, which is another question, and actually whether the futures market is "zero sum" or not is irrelevant to it. I was expanding on a prior post that raised the issue, and probably should not have.

If there is more on this topic, let's take it somewhere else and let the original discussion continue.

Bob.

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  #185 (permalink)
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bobwest View Post

The money I get is real funds and is taken out of accounts that have a loss for the day. Or, if I have the loss, the money that is taken from me goes into accounts that have a profit. All the debits equal all the credits, exchange-wide. The money is just being moved around the table.

This is zero-sum.

It's not like some other markets, such as the stock market, where value can increase or decrease with the value of the company.

Oh, ok, I see what you mean when taking the futures market as a contained system for the day. In this context I would think a retail trader in profit is taking in funds from the "losses" of a hedge or higher time frame trade of a fund, rather than an outright other retailer. I would think there are also plenty of contracts that are held on a longer time frame overnight so they may not necessarily be losses and could just be offsets or actually making profits from an earlier position days earlier if they were indeed speculative trades and not used as hedges for an external position involving other types of markets.


tpredictor View Post
If you make the counter argument that zero sum only means all futures trades net to zero then it implies then it is still meaningless to make the zero sum claim because a trader can turn an actual realized profit on a losing futures trade.

You can compare it to a secondary market even like NADEX. Let us imagine there are 3 traders. A bullish trader. A bearish trader. And a market maker. I speculate the market will rally and buy a binary at market and at the same time a bearish trader shorts the same binary. In this case, the market maker/liquidity provider takes both sides of our trade and profits from the spread on each. The market maker is perfectly hedged. I have the diametrical opposite to the other trader. However, there is no competition or "cross-trade" between myself and the other speculator. A similar dynamic is found in futures markets. More over, in this dynamic, the outcome of our profits or loss is completely non determined by any participant. It is wholly determined by where the market closes. This again raises serious question that trading is competitive because none of the participants in this case have any determination of the outcome. Of course, you might be able to make an argument that the only real +EV trade was the market maker/liquidity provider-- however, if you believe that then you shouldn't trade at all, in any case.

Again, please carry on. I do not think it changes the sentiments.

I tend to still lean toward this being an overall-overlapping context of different market types or strategies and market reactions that end up valuing overall price, rather than an absolute speculative zero-sum endeavor. Maybe it's true that those of us who've learned to profit in the futures markets have come across too much of an advantage able to leverage up so much and make decent profits without having to cover the notional values. Maybe as retaliers , we "help" the big money make their hedges, contributing to the liquidity and price valuation in the smallest ways, where some would still say "overpaid" to do so. (And sorry to see this poster was just banned(?))

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  #186 (permalink)
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Zero sum as presented here doesn't seem to consider fees applied to the transactions. My $100 loss is actually a loss of $100 plus fees and commissions. Your $100 gain is actually a gain of $100 minus fees and commissions. If our brokerages have different commission structures the zero sum argument if further complicated. My $104.80 loss is your $95.75 gain. Between traders it is not a zero sum gain. And with this transaction, both brokers realize a net positive gain.

For most traders it would be more helpful if the concept of "zero sum" were more accurately understood as "sum to zero" in regard to the future balance on their account.

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  #187 (permalink)
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glennts View Post
Zero sum as presented here doesn't seem to consider fees applied to the transactions. My $100 loss is actually a loss of $100 plus fees and commissions. Your $100 gain is actually a gain of $100 minus fees and commissions. If our brokerages have different commission structures the zero sum argument if further complicated. My $104.80 loss is your $95.75 gain. Between traders it is not a zero sum gain. And with this transaction, both brokers realize a net positive gain.

For most traders it would be more helpful if the concept of "zero sum" were more accurately understood as "sum to zero" in regard to the future balance on their account.

Contract to Contract...Futures are a zero sum game. Commissions are just a cost to do business. Brokers charge commissions to give us low margins on borrowed leverage. Without this, most of us jokers would not be able to trade. Consider us lucky! LOL.

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  #188 (permalink)
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If by contract to contract you mean one sold / one bought then yes in that sense it is a zero some gain as all transactions that initiate a position will ultimately be closed. If referring to the cash value then it can be argued that it is not a zero sum gain. Brokers charge commissions not to enable us to trade but to generate revenue for their business. Brokers structure their rates not to do us a favor but to be compete with other brokers for our business. Every moment of the trading day tens if not hundreds of thousands of dollars are swept off the table in the form of fees and commissions never to return to the arena and because of this, from a cash value perspective, it is not a zero sum gain. If a liquid were repeatedly poured from a one gallon container into another gallon container, at the end of the day we are left with a gallon of liquid. One could say this is an example of a zero sum gain. If a small fraction of that liquid were spilled with each pour it becomes something else.

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  #189 (permalink)
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glennts View Post
If by contract to contract you mean one sold / one bought then yes in that sense it is a zero some gain as all transactions that initiate a position will ultimately be closed. If referring to the cash value then it can be argued that it is not a zero sum gain. Brokers charge commissions not to enable us to trade but to generate revenue for their business. Brokers structure their rates not to do us a favor but to be compete with other brokers for our business. Every moment of the trading day tens if not hundreds of thousands of dollars are swept off the table in the form of fees and commissions never to return to the arena and because of this, from a cash value perspective, it is not a zero sum gain. If a liquid were repeatedly poured from a one gallon container into another gallon container, at the end of the day we are left with a gallon of liquid. One could say this is an example of a zero sum gain. If a small fraction of that liquid were spilled with each pour it becomes something else.

To that prospective I see your analogy. But what about leverage, do you expect that for free?

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  #190 (permalink)
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WoodyFox View Post
To that prospective I see your analogy. But what about leverage, do you expect that for free?

It's not clear to me what it is about my comments that led you to this question... I've not complained about fees and commissions but accept them as a fact of life. Leverage, like commissions, are one of the tools that brokers use to attract our business. Brokers use margin requirements to limit their exposure to the risk associated with offering leverage. We all make assertions of income and liquidity to the NFA to qualify for this access to leverage. Compare IB's margin and maintenance requirements to AMP's and you can see how this game is played. Because we have been programmed since birth to be mindless consumers we have come to associate cost with quality. Create a successful top shelf image / brand and that it costs more is to be expected and this is often viewed as confirmation of quality. That the upper and lower range of brokers offer a quality of service that may be identical really doesn't matter. If I say I use IB then I am wrapping myself in an image of a successful trader and on some level, garnered a bit of respect. If I brag about my broker letting me trade Micro's with only a few hundreds of dollars in my account, I'm announcing that although I may not see it coming, I'm soon to be road kill.

A saying from the Gold Rush Days is that the real wealth was acquired by those who sold the picks, shovels and denim jeans (Levi Strauss) to those who were doing the digging. That's the brokerage model. They provide access to the markets and we do the digging certain that there is gold to be found.

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