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Trading – The Zero Sum Game Not!
I’ve lost count of the number of times I’ve heard trading described as a zero sum game. Believe me, it isn’t.
Definition of Zero Sum Game: In a zero sum game, if you add up the gains and losses made by all of the players, you get zero. Alternatively, everything you gain from a zero sum game has to be matched by other players’ losses.
Let’s imagine a commodity in which there are only 5 active traders, each trading $10,000 and watch what happens.
We’ll assume they pay $10 to their internet broker per trade. Yes, I know you can get cheaper brokerage, but $10 is a nice round number.
Our traders are fairly active and each makes 100 trades a year.
Let’s Follow the Money Trail
The total money in the game at the beginning is $50,000.
After one year:
| Trader | Raw Percentage Gain | Gross Profit | Brokerage Fees | Net Profit |
| Trader 1 | 20 % | $2,000 | $1,000 | $1,000 |
| Trader 2 | 10 % | $1,000 | $1,000 | $0 |
| Trader 3 | 0 % | $0 | $1,000 | -$1,000 |
| Trader 4 | -10% | -$1,000 | $1,000 | -$2,000 |
| Trader 5 | -20% | -$2,000 | $1,000 | -$3,000 |
Winners and Losers
The total money in the game at the end of the year is $45,000 ($11K + $10K + $9K + $8K + $7K.)
This game has summed to a negative number: -$5,000.
It doesn’t take an accounting genius to know where the $5,000 has gone; yes, it’s the broker, who – with very little effort compared to the players – has made more money from the game than anyone else.
This is hardly news. Read Fred Schwed’s 1995 book Where Are the Customers’ Yachts – if you need convincing that it’s easier making money as a broker than a trader.
What does need repeating (in the light of continued ill-thought-out references to zero sum games) is that even if your trading skills are good enough to beat the market, you might still only break even. (Like Trader 2 in our example above.)
Summary:
You’ll make much more money from trading if you treat it like a business.
If you’ve got the skills to beat the market, cutting your brokers fees are the easiest ways for you to improve your business’s bottom line.
Treat the broker any other seller, negotiate. Tell them you want cheaper trades. If the fees are still too high, move on. If you trade frequently, Interactive Brokers for example, has an attractive fees.
