An intelligent question

Discussion in 'Professional Trading' started by randy33, Sep 23, 2009.

  1. randy33


    Just a catchy title. My question is: who's making all the money ?

    The background is this. Most people who try to trade fulltime lose money. The question is then who is making all the money$ ?

    Let me break it down quantitatively.

    1. Stocks

    someone sells you a stock for a price, but it lose value, you then sold it. The seller made$, you lose. If you sold it for more than it's worth, both you and the original seller made$, and the guy who bought from you sold it for less then he lose, or he may chose to hang on to it for comeback. No loss is booked. Then there isn't a loser.

    2. Stocks Short.

    You sold short a stock, it went lower and you covered with profit, you made $. The stock is put back into lender inventory. You win. If you have to cover at higher cost, you lose$, the lending broker puts it back into inventory, whether you made or lose$.

    3. Options.

    Someone wrote a call either covered or naked. They sold it to you and you sold it to someone else for profit, you win, the call writer wins because he collected the premium. Now that someone else couldn't turn a profit because of expiration or stock loses value. It expired worthless. You and the original call writer won. The guy loses.

    Let say the guy sold it at a lose before expiration to someone else. And stock made come back and closed in the money. The last guy who held it wins if the call got in-the-money greater than the premium he paid for it. He held it and the stock were assigned to him.

    Under this scenario, everyone but one loses - the one who sold it for less.
    But it is also possible everyone wins, suppose there is no middle guy who bought from you and took a lose. Suppose he was the last guy and hung on to the call and stock made comeback and he exercised the option.
    Then everyone wins in this chain. ( I made it simple that the original stock owner wrote the covered call for greater strike than the price$ he paid for the stock).

    PUT Options. Same thing, I am sure you can construct the logics.

    4. Futures.

    I am out-of-my-league here since I only trade stocks and opts. But my understanding futures you have long and short side so for every transaction there is a winner and a loser. Or perhaps drawn even if customer close EOD at same price.

    You see, there are winners in this game or am I deluding myself ? So before newbies are turned away, please answer the question I posted.

    Your input and discussion is most welcome.
  2. randy33


    Seasoned traders, seeking your opinions here.

    Who makes money in trading, really ?
  3. sosueme


    "An intelligent question"

    I think you are on the wrong forum, this one is focused on entertainment

  4. The question is then who is making all the money$ ?

    Gordon Gekko on yahoo, at least he says he does.
  5. Liquidity providers... It's not a risk-free business, obviously, but it's potentially better risk/reward.
  6. jr07


    the brokers
  7. maler


    Stocks have a built in long term expected return of about 6 to 8% per year (including dividends) with a volatility of around 20% a year, which simply comes from the fact that the economy is growing and your stocks represent ownership into the growing pie. This is the "hot potato" return that you normaly get from a passive index investment (my personal belief is that even this return is exagerated because it ignores survivorship bias, imagine that your passive investment was in the German market index in 1932 or in the Russian market in 1917).

    If you want more return than this in stocks, than you normally take it from someone else (your percentage ownership in the pie needs to grow), that is you need an edge over the uninformed investor/trader. There are various kind of edges. One example of edge is the built in advantage that intermediaries like broker dealers have: they can charge commisions and capture the bid ask spread for their intermediation services and get the gravy of usefull information from the order flow for their propietary activities. Investment bankers charge a fee for linking hungry entrepeneurs/companies with fat cats with capital. Another kind of edge goes to smart and well connected fund managers that can get the information faster than anyone else or (a more perishable edge) processing public information smarter than anyone else. If you do not know what your edge is than probably you do not have one and you will find yourself on the loosing end of the trade. Kind of like in poker where if you can not see the fish at the table then it is probably you.

    So my view is that in stocks, the bulk of profits go to intermediaries (mainly Wall Street firms) and well connected hedge fund managers.

    Derivatives like options, futures, swaps etc. are a so called "zero sum game". In reality they are a negative sum game for whoever pays commision/bid ask spread and a positive sum game for whoever collects the commision/ bid ask spread. So a broker dealer (market maker) with the skills to risk manage a book of options should in the long run make money (it is by no means easy and do not underestimate this endeavor). If you are a consumer of the product (like a speculator) then you need an informational edge, which is again very hard to gain from publicly available information.

    So my view is that in derivatives, the bulk of profits also goes to intermediaries (mainly Wall Street/ Chicago firms) and well connected hedge fund managers.
  8. randy33


    Thanks for your input. I am hoping for an academic exploration of this subject. If we can answer who makes the $ and not everyone loses (or most of us) then we can see how to be like them.

    I outlined distinct cases of winners and losers in common trading scenarios. Seasoned and profitable traders, will you share your knoweledge ?

    Thanks, Randy
  9. I did a study on a simulator. We had 25 guys trade and everyone could see each others trades.

    As the market went up so did everyone's account. Although the losers lost less. During a down market it seemed as though the bottom half of the losers supplanted the top half. If you added up the total account values they came out very close to the totals we started. For a while these numbers shifted among different players. As time went on, the bottom half lost more and the gains of the top half lessed. eventually a few came way out on top but this in no way accounted for the entire starting amount as a closed loop.

    Not very scientific and there was more to it than I care to remember now but the whole project was eye opening in some respects. I think the lesson here though was money management than pure trading.

    You could see though, some people traded the same stocks over and over and consecutively got it wrong.
  10. randy33


    Very interesting. Maybe the market value of the accounts shrink thats why you dont get the same sum again ?
    #10     Sep 24, 2009