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Winners and Losers of the Zero-Sum Game: The Origins of Trading Profits, Price Efficiency and Market Liquidity

Winners and Losers of the Zero-Sum Game: The Origins of Trading Profits, Price Efficiency and Market Liquidity

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Published by Cervino Institute
Harris, Lawrence. “The Winners and Losers of the Zero-Sum Game: The Origins of Trading Profits, Price Efficiency and Market Liquidity” School of Business Administration, University of Southern California, Draft 0.911, May 7, 1993.

Trading is a zero-sum game when measured relative to underlying fundamental values. No trader can profit without another trader losing. People trade because they obtain external benefits from trading. These benefits include expected returns from holding securities, risk reduction from holding correlated assets and gambling entertainment. Three groups of stylized characteristic traders are examined. Winning traders trade for profit. Utilitarian traders trade because their external benefits of trading are greater than their losses. Futile traders expect to profit but for a variety of reasons their expectation are not realized. Winning traders make prices efficient and provide most liquidity. Utilitarian and futile traders effectively underwrite the winning traders’ efforts.

This preliminary draft was prepared for presentation at the Institute for Quantitative Research in Finance Spring 1993 Seminar in Wesley Chapel, Florida.
Harris, Lawrence. “The Winners and Losers of the Zero-Sum Game: The Origins of Trading Profits, Price Efficiency and Market Liquidity” School of Business Administration, University of Southern California, Draft 0.911, May 7, 1993.

Trading is a zero-sum game when measured relative to underlying fundamental values. No trader can profit without another trader losing. People trade because they obtain external benefits from trading. These benefits include expected returns from holding securities, risk reduction from holding correlated assets and gambling entertainment. Three groups of stylized characteristic traders are examined. Winning traders trade for profit. Utilitarian traders trade because their external benefits of trading are greater than their losses. Futile traders expect to profit but for a variety of reasons their expectation are not realized. Winning traders make prices efficient and provide most liquidity. Utilitarian and futile traders effectively underwrite the winning traders’ efforts.

This preliminary draft was prepared for presentation at the Institute for Quantitative Research in Finance Spring 1993 Seminar in Wesley Chapel, Florida.

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Categories:Types, Business/Law
Published by: Cervino Institute on Apr 26, 2012
Copyright:Attribution Non-commercial

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