Apr

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The moment a tick changes, at that moment parties that transacted on the prior tick "experience" a zero sum game. If the same parties only continue to transact with each other with every further change of tick it remains a zero sum game.

However, soon as the "pool" of competing players changes in the pit, either by someone closing out all outstanding positions for whatever reasons and stepping aside or any new players entering the pit, the game changes. It creates a very interesting web of potential ways to lay out the game in a mathematical sense. This remains true for any further longer / larger time frames. Lets focus on this part.

The gains or losses made, lets call it impact for ease of language, by existing players is shared now with the new ones. But not only MTM impact that can be measured only at the present moment, this ultra sophisticated "game" must account for Opportunity gains / Opportunity losses or the Opportunity impact also.

The zero sum game can still be visualized as zero sum where the sum of all MTM Impact + Opportunity Impact = 0.

MTM or the present moment impact is simple and lets leave it aside. The real juice is this Opportunity Impact construct. Before we enter this labyrinth let us first choose to do a post mortem of those who left the game. Lets use the term "Out" for those who are out of the game. Lets use the word "In" for those who remain in the game up to any point of time.

The Out have taken an MTM Impact and gone! Right? No Opportunity Impact taken by them? Well if I sold out a position at 100 and became an Out, and the price becomes 125 in a year have I incurred an Opportunity Impact of 25? I have, since if i came back into the game a year down the line I would be shelling out 25 dollars more. Same way if price went down to 75 in a year I have an Opportunity gain impact of 25.

This is what makes the market appear like a variable sum game.

Things get a little more interesting and more realistic when we introduce one more final variable, Those Not yet In the game whom lets call for this note, whom we can say name as the Virgins. so for any stock, any contract, any investible or tradeable entity this world produces three types of Players: Ins, Outs, Virgins.

For an easier visualization lets assume we are only evaluating the game of playing the long term drift.

So the MTM Impact of Ins = -(Opportunity Impact of Outs + Opportunity Impact of Virgins)

This equation above is an over simplification and displays only a long only deliverables only contract. If we add the derivatives layer the left side of the equation will have instead:

MTM Impact of Long Ins - MTM impact of short Ins = = - (Opportunity Impact of Outs + Opportunity Impact of Virgins)

Finally if we will allow minds to now wander along a constantly fluctuating market that has the drift or some markets that are bereft of it, different time horizons, different risk-return optimal curve seeking individuals, different tax & liquidity constraints apart from the decisively different placements within the food chain causing differences in information seeking, processing and actionability skills the market can still be described as a zero sum game in terms of the net value of all actions taken, not taken, exposures taken, not taken, different skills, abilities, compulsions to be zero.

Obviously then such a zero is a philosophically provable construct that:

a) Skill pays in markets,

b) As much as luck might pay

c) No one is in a real sense out of the markets. Those without an exposure have a notionally negative exposure to markets! They are the one's who will get lured at some point.

d) Apart from maximising the number of hands feeling that they have a bad game, the tape is likely moving in ways to minimize the number of Virgins of markets left in this world, I surmise.

d) MTM is a game of money management (LHS) which derives its value from the Inability of all those who are not managing their emotions well (RHS)

e) Whether the universal prevalence of deception as an evolutionary tool pervading the markets or the flexions or the skilled they all are part of the grand design of the market mistress who indeed plays a zero sum game on N dimensions, not on a unidimensional game of just MTM.

f) As much as this is true in life that no one wants to die a virgin, the markets have achieved a constructal to fulfill this idea in the context. This is where the deception, the flexionic matrix works most silently.

anonymous adds: 

It is not a zero sum game. True value and wealth are being created in large part due to the liquidity and capital created in the capital markets. As the the prices rise, wealth is created out of thin air, out of confidence, out of technological advances, out of new ideas, out of new people, out of new people participating in the global economy. 


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1 Comment so far

  1. Nikolas on April 14, 2018 3:38 pm

    Great article

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