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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. Remember, they’re trading against each other; if someone wins, someone else must lose.
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.
This game has summed to a negative number: -$5,000.
It doesn’t take an accounting genius to figure out 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:
When trading, you’ll make more money (or lose less!) if you treat it like a business.
If you’ve got the skills to beat the market, cutting your broker’s fees is the easiest way to improve your business’s bottom line.
Treat your brokers like 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, offer attractive fees.