There is significant debate within the community about this topic, with no consensus or clear distinction—it largely depends on one's perspective and position. I am not an economics expert, so I can't provide a definitive answer. However, I will share my views based on my experience and perspective for your reference. I agree that prices move randomly and that much of the profit traders earn comes from other participants. However, I also believe that the financial market as a whole is not entirely a zero-sum game, and the source of trading profits does not solely come from the losses of other participants. There are additional sources of profit, and these will always exist. Furthermore, there will always be a group of traders capable of earning consistent profits. In a zero-sum game, the total profits of all participants always equal zero. This means that if one person wins, another must lose the same amount. Examples include poker or betting, where winnings and losses cancel each other out, creating no overall growth in value. In financial trading, particularly in the stock and bond markets, the overall profit of the market is positive and can grow.
In the stock market, when a listed company performs well, generates profits, and grows steadily, its value increases. The company’s shares become more valuable, benefiting shareholders (those who own the stock). This benefit does not come from the loss of another investor but rather from the value created by the company itself. Some companies also pay dividends to shareholders from the actual profits they generate. This means shareholders can earn income from owning shares without necessarily selling them on the market to profit from another person. Even when an investor sells shares to lock in profits, the new buyer can continue to benefit from the future growth of those shares. This illustrates that both the buyer and the seller can achieve benefits. Profit for one investor does not always come at the expense of another. This shows that the stock market has the potential to create wealth for many participants, rather than merely transferring profits from one person to another as in a zero-sum game.
The bond market operates in a similar way. Bonds are a type of debt security, and when investors purchase bonds, they are essentially lending money to the issuer (government or corporations) for a fixed period. In return, the investor receives the principal amount on the bond’s maturity date along with an agreed-upon interest payment. When a government or corporation issues bonds, they raise capital from investors. Bondholders earn a fixed or variable interest payment (coupon rate) from the issuer until maturity. This process demonstrates value creation because the funds raised by the issuer are typically used for purposes such as investing in new projects, business expansion, or financing public activities. After issuance, bonds can be traded on the secondary market among investors. The price of bonds on the secondary market fluctuates depending on factors such as interest rates, the creditworthiness of the issuer, and overall financial market conditions. Investors can profit by buying and selling bonds, but these profits do not always result from the loss of another party.
For instance, bond prices tend to rise when market interest rates fall. When an investor sells a bond at a higher price for profit, it does not mean the buyer is incurring a loss. In fact, the buyer may willingly purchase the bond at a higher price because its interest rate (e.g., 10%) is more attractive compared to the current market rate (e.g., 5%). The buyer expects to earn a fixed income from the bond that is higher than the prevailing market rates until maturity. This creates a scenario where both parties can "win": the seller profits from the bond sale, and the buyer secures a higher-than-average return. The bond issuer (government or corporation) continues to pay the fixed interest rate agreed upon at issuance and is unaffected by price fluctuations in the secondary market. Transactions in the secondary bond market merely represent a transfer of ownership and do not impact the issuer’s financial obligations. This illustrates that bond trading is not necessarily a zero-sum game.
In reality, I rarely trade in these two markets (stocks and bonds) and primarily focus on futures, derivatives, and forex markets. When examining trading activity in these markets in isolation, they are indeed zero-sum games, and in the short term, they can even be less than zero. Any profit a trader makes comes directly from a corresponding loss incurred by another participant. Moreover, traders must pay fees to brokers in the form of spreads or commissions, which further reduce the total pool of profits. These costs result in a net negative sum, making the overall value of profits in these markets less than zero.
However, from my perspective, when considering the role and interconnected nature of derivatives, forex, and futures markets within the broader financial system over the long term, these markets are no longer zero-sum games. Transactions in these markets play a crucial role in supporting the growth of the stock and bond markets.
One of the primary purposes of derivatives and futures is risk management (hedging). For example, businesses often use futures contracts or options to protect themselves from price or exchange rate fluctuations. A manufacturing company that relies heavily on raw materials may purchase futures contracts to lock in material prices, shielding itself from potential price increases. If prices decrease, the company may incur losses on its futures contracts but can benefit from purchasing raw materials at a lower market price. This helps stabilize their operations. In business, maintaining such stability is critical, as it allows companies to operate more efficiently and create more surplus value.
Similarly, businesses, especially those involved in import/export, are often heavily impacted by exchange rate fluctuations. For example, a company importing raw materials from abroad may face higher costs if its domestic currency depreciates. By using derivative instruments such as forward contracts or options, the company can lock in an exchange rate and protect its costs from adverse market fluctuations.
For businesses with revenue or expenses in foreign currencies, exchange rate volatility can significantly affect actual profitability. Hedging allows them to stabilize their operations and safeguard profits. In these transactions, both buyers and sellers of futures or derivative contracts can benefit—achieving a win-win outcome. This demonstrates that the derivatives and futures markets contribute to stability and value creation rather than simply redistributing wealth as in a zero-sum game.
Derivatives, futures, and forex also help increase the liquidity of financial markets by allowing investors to engage in transactions without actually having to buy or sell the underlying assets. Increased liquidity makes transactions in the stock and bond markets smoother and less costly. This improves the efficiency of these markets, reduces price instability, and enhances stability, fostering greater investor confidence.
For example, investors can use derivatives to adjust their positions without directly buying or selling the underlying stocks, which helps stabilize prices in the stock market. These instruments also allow investors to use leverage to amplify their market participation without needing a large amount of capital.
Investors can use derivatives to increase their exposure to asset classes without having to buy the full asset. Exposure here refers to the degree to which price fluctuations impact an investor's profits or losses. For instance, an investor who wants to increase their exposure to the entire U.S. stock market via the S&P 500 index can use S&P 500 futures contracts. Instead of spending a large sum of money to buy every stock in the index—a costly and complicated process with significant transaction and management fees—they can control a much larger value of the index with a small margin deposit.
This mechanism facilitates the flow of capital into the stock market, increasing its overall size. It also improves capital efficiency, as investors can allocate their funds more effectively. By using only a portion of their capital to control futures contracts, they can free up the remaining funds for other investment opportunities, enabling them to diversify their portfolio, reduce risks, and enhance profitability in the long term.
Thus, while individual derivatives or futures transactions may appear zero-sum in isolation, their contribution to the broader financial system transcends that limitation. These instruments genuinely add value to the economy through risk management, increased liquidity, and support for diversification. They enhance the efficiency of stock and bond markets, support economic growth, and create benefits for multiple participants.
The gain of one participant does not necessarily come at the expense of another, demonstrating that the collective outcome of all financial transactions is not a zero-sum game. The profits we earn from trading, regardless of the market, do not entirely stem from the losses of others but also arise from the value created in the economy through these very transactions.
In contrast to traditional zero-sum games, where continuous withdrawal by winners eventually depletes the available pool of funds, the financial markets operate differently. Winners reinvest their profits, ensuring a continuous cycle of growth. Due to the tightly interconnected nature of financial markets, the total value of the entire market system continues to grow, reflecting the ongoing creation of wealth.
Even if we consider trading in derivatives, forex, and futures markets as a zero-sum game, there can still be groups of participants who consistently emerge as winners.
Since the advent of the futures market, skilled traders have been able to extract profits by capitalizing on the mistakes of commodity hedgers. As mentioned earlier, businesses often engage in hedging to protect themselves from price volatility in raw materials, aiming to shield their operations from unexpected shocks that could negatively impact their business.
These companies are not focused on profiting from trading futures contracts; instead, their primary goal is to ensure stability in their operations. They willingly forgo potential trading profits in exchange for mitigating the risks associated with price fluctuations, prioritizing the stability of their core business activities over speculative gains.
A significant portion of CTAs (Commodity Trading Advisors) earns profits based on this very dynamic. They can consistently generate returns by taking the opposite side of hedging trades that do not align with market movements.
In other words, businesses are willing to incur costs or forgo potential profits from trading futures contracts to ensure the stability of their operations. This creates opportunities for traders to benefit from these transactions, as the businesses prioritize operational continuity over financial gains from the market.
The same dynamic occurs in the forex market. Multinational corporations and banks hedge against exchange rate risks to ensure the smooth operation of their economies or core business activities. Like in the futures market, they are not focused on executing trades for profit.
In the stock market, large institutions such as pension funds and insurance companies also hedge their portfolios to meet short-term cash flow obligations during periods of volatility. These entities are often willing to pay high premiums for "insurance" and accept continuous losses to avoid liquidity crises.
These hedging activities create excellent profit opportunities for flexible speculators who can take the opposite position when market conditions are favorable. By doing so, speculators capitalize on the inefficiencies and risk aversion of these large entities, leveraging their own agility to profit from the trades.
A portion of the profits that traders earn also comes from inexperienced new investors. These newcomers often come from other sectors of the economy and tend to make highly emotional decisions when they enter the market. These actions not only cause them to lose money but also create opportunities for seasoned traders to profit.
There will always be a steady influx of new investors because not everyone starts their career in financial trading. People from various fields often seek to explore and test their skills in investing, making them a sustainable source of profits for professional traders.
Thus, there is no need to worry about the profit pool in trading disappearing—it will always exist. The real question is whether we can position ourselves among the winners who capitalize on these opportunities.
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