Where Does the Lost Money Go?

[Frane 10]

Has someone ever studied where the lost money goes? You always read things like "95% of traders destroy their accounts", but how much of the money actually ends up in better traders' pockets? And how much is wasted on commissions and other fees?

 

I would be very interested to hear about any studies, theories, etc? For stocks, forex and commodities.

 

Thanks!

[jpennybags 11]

  Frane said:

Has someone ever studied where the lost money goes? You always read things like "95% of traders destroy their accounts", but how much of the money actually ends up in better traders' pockets? And how much is wasted on commissions and other fees?

 

I would be very interested to hear about any studies, theories, etc? For stocks, forex and commodities.

 

Thanks!

 

Of course the money lost makes it's way into another's hands. Commissions are a fixed cost for winners and for losers alike. The commissions and fees varies from broker, exchange, and asset class. It's a very broad question, that may not be helpful to delve into.

 

There have been many studies done on the effect of different trader types and market liquidity. The studies are available if you are willing to look for them.

 

This study is one of the more interesting as it pertains to day traders and skill levels:

 

http://faculty.haas.berkeley.edu/odean/papers/Day%20Traders/Day%20Trading%20Skill%20110523.pdf

 

Note that the PDF is just the abstract...

Edited May 24, 2015 by jpennybags

[MightyMouse 12]

Good traders and bad traders take your money from you and keep it or give it to someone else, depending on how good or bad a trader they are.

[pro4Xtrader 10]

The biggest chunk goes to banks, who manipulate the market, very small portion goes to traders that manage to profit.

[MightyMouse 12]

  pro4Xtrader said:

The biggest chunk goes to banks, who manipulate the market, very small portion goes to traders that manage to profit.

 

Banks make money until they lose all of it and then some, recognizing that they didn't have a handle on the risk they were taking.

 

Cycles of fear and greed over and over again. No one is immune.

[Frane 10]

Thanks jpennybags, it was an interesting paper to read even though it does not really give info about how much actually ends up in commissions since there are so many other participants than day traders. Do you know from where one can get that kind of data to analyze? Are there any publicly available datasets?

 

A perfect answer to the question would be a real world example of something like this hypothetical stock exchange (100k traders, in one year):

- 95k loosing traders have collectively trading accounts of $95M in the beginning of the year, which becomes only $50M at the end of the year.

- 5k winning traders have collectively trading accounts of $5M in the beginning of the year, which becomes $10k at the end of the year.

- This would mean that $45k has gone to broker commissions

- Somehow the holdings must have been corrected by the index or something.

 

Are there any data like this available?

[jpennybags 11]

  Frane said:

Thanks jpennybags, it was an interesting paper to read even though it does not really give info about how much actually ends up in commissions since there are so many other participants than day traders. Do you know from where one can get that kind of data to analyze? Are there any publicly available datasets?

 

A perfect answer to the question would be a real world example of something like this hypothetical stock exchange (100k traders, in one year):

- 95k loosing traders have collectively trading accounts of $95M in the beginning of the year, which becomes only $50M at the end of the year.

- 5k winning traders have collectively trading accounts of $5M in the beginning of the year, which becomes $10k at the end of the year.

- This would mean that $45k has gone to broker commissions

- Somehow the holdings must have been corrected by the index or something.

 

Are there any data like this available?

 

The market changes from year-to-year... month-to-month... week-to-week... and, day-to-day. One could argue, and be totally right in saying... second-to-second.

 

What you seem to miss is that there are winners and losers in every time frame. Everyone pays a fixed cost to trade. You may have a winning trade that facilitates another winning trade... or you may take money from someone who is losing... or, you both may be losers.

 

NONE OF THIS MAKES ANY F*KIN DIFFERENCE!!!!

 

The money you lose from your account, is lost... it makes no difference who takes it. You can observe studies, and write papers, and piss and moan about the reality of things, but it is what it is...

 

This what you must deal with.

 

Don't know if there is any data available... someone else may. Just saying... don't worry about it...

 

You can get some sense of the failure rate from the study... not saying it's you... could be "me" tomorrow. We shall see... it's good while it lasts... make the best of it.

Edited May 27, 2015 by jpennybags

[Frane 10]

I understand that a loss is a loss and in that sense it makes no difference. I also know how the costs are formed for individual trades. I also know that there are different winners and loosers at different times, where some are more often winning and others more often loosing and money is not equally distributed (be the reason luck, skill or whatever).

 

What I do not know, and what is interesting, is how much of these loosers' money could really be available to better traders. If it turns out that something like 90% of the losers are collectively trading with a 0-profit, 0-loss strategy (like random trading) and are just loosing their money in commissions, it would seem as if long term investing would be a better idea than trading. However, if the loosers would be collectively loosing mostly due to all making bad trades (following the crowd, reading same news), it is a different story.

[jpennybags 11]

  Frane said:

I understand that a loss is a loss and in that sense it makes no difference. I also know how the costs are formed for individual trades. I also know that there are different winners and loosers at different times, where some are more often winning and others more often loosing and money is not equally distributed (be the reason luck, skill or whatever).

 

What I do not know, and what is interesting, is how much of these loosers' money could really be available to better traders. If it turns out that something like 90% of the losers are collectively trading with a 0-profit, 0-loss strategy (like random trading) and are just loosing their money in commissions, it would seem as if long term investing would be a better idea than trading. However, if the loosers would be collectively loosing mostly due to all making bad trades (following the crowd, reading same news), it is a different story.

 

I suppose it is interesting to contemplate these things. How markets work interests me too... fascinating... and in some ways an oddity that can't be fully explained. I applaud your curiosity. Regardless of how you trade, long term investments are important... because we all wear thin eventually (no matter how good you are).

 

No one looses their account to fees. The reason that people zero their accounts are myriad. Make sure it doesn't happen to you... and if it does... learn from it.

[MightyMouse 12]

  jpennybags said:

 

No one looses their account to fees. The reason that people zero their accounts are myriad. Make sure it doesn't happen to you... and if it does... learn from it.

 

I, respectfully, disagree. Too many traders overtrade and some of them are very good traders too. Overtrading leads to excessive fees. If you are trading for a tick or 2, the transaction costs are too high as a percentage of the trading profit. A trader needs to be at an unsustainably high win rate to make money. Eventually, the costs suck his account dry.

[jpennybags 11]

  MightyMouse said:

I, respectfully, disagree. Too many traders overtrade and some of them are very good traders too. Overtrading leads to excessive fees. If you are trading for a tick or 2, the transaction costs are too high as a percentage of the trading profit. A trader needs to be at an unsustainably high win rate to make money. Eventually, the costs suck his account dry.

 

Well... I suppose it can happen and probably does (the reasons are myriad), but it sounds more like operating a poor business model is what sucked the account dry... not fees.

[pro4Xtrader 10]

  MightyMouse said:

Banks make money until they lose all of it and then some, recognizing that they didn't have a handle on the risk they were taking.

 

Cycles of fear and greed over and over again. No one is immune.

 

Imagine there is bank No1 and bank No2 belonging to the same "owner"

 

Bank No1 with Bank No2 where bank 1 sell lets say million lots eurusd and bank 2 buys million lots. One of them will make huge profit another one will loose all.

The money lost belong to people (not the bank) so bank just declares bankruptcy and the "owner" opens another bank.

 

Just one of the many scenarios... banks don't loose, they play us

[MightyMouse 12]

  pro4Xtrader said:

Imagine there is bank No1 and bank No2 belonging to the same "owner"

 

Bank No1 with Bank No2 where bank 1 sell lets say million lots eurusd and bank 2 buys million lots. One of them will make huge profit another one will loose all.

The money lost belong to people (not the bank) so bank just declares bankruptcy and the "owner" opens another bank.

 

Just one of the many scenarios... banks don't loose, they play us

 

What would be the point? Eventually, The banks will lose everything to the cost of doing business since he is not making money and is making only what he lost minus the transaction costs.

 

Think it through. Even if they act as market maker, there are costs associated with operating a trading operation that have to be absorbed.

[SIUYA 11]

  Frane said:

.....but how much of the money actually ends up in better traders' pockets? And how much is wasted on commissions and other fees?

 

 

forget about small traders....they make up such a small percentage of the market its ridiculous.

Then you get into the world of of smart beta, factor investing and outperformance, active v passive investing and you will see the worry about 95% of the retail money that is lost in the markets is 0.000001% and irrelevant....and the money disappears into the closed shop that is the world economy and if it wasnt for growing populations and inflation and growth of tech etc; we would simply be transferring it from person to person....but its bigger than that.

 

if you look at it from a different angle (and this has been rehashed time and time again) its a numbers game of only a few survive and thrive in any industry, and that may be to luck, timing, skill or shear who knows what.

 

All the money ends up in the hands of those who either know how to extract just enough via arbitrage, or they know when to get out, or they extract enough for their size they are exploiting their advantages of being small and nimble and not having to trade. Even the great traders usually know that when makrets get tough they should get out for fear that when the tide goes out they dont want to be exposed if you hang around long enough.

 

Haha....cynical I know.

[spareappeal 10]

i think that money circulates between the traders thats all from one to another and there is no big deal in that !!!

[ProFXManager 10]

one loses, another get the money, which goes like always again: win, loses or inverstigation

[zupcon 10]

  jpennybags said:

Well... I suppose it can happen and probably does (the reasons are myriad), but it sounds more like operating a poor business model is what sucked the account dry... not fees.

 

I think a lot of people underestimate the effects of fees, the brokers really do have a MASSIVE edge.

 

Even if you look at those ridiculous quarterly NFA statistics on the percentage of winning traders, despite the various shinnanagins in play you'll see a weak correlation between win rates and the size of spread being charged.

 

As you point out there are a myriad of reasons why people are getting hosed by these costs, personally I think it's a fairly fundemental part of the game figuring this stuff out

 

If you really want to bleed a account dry you could always follow the advice given by trade to wins content manager Mr Tim Wilcox who suggested simultaneously opening long and short trades in the same instrument ! :helloooo:

 

I know they have a living to make, but recommending traders to pay double the spread just to get an IB kickback is beyond criminal. What a bunch of *****

[jpennybags 11]

  zupcon said:

I think a lot of people underestimate the effects of fees, the brokers really do have a MASSIVE edge.

 

As you point out there are a myriad of reasons why people are getting hosed by these costs, personally I think it's a fairly fundemental part of the game figuring this stuff out

 

If you really want to bleed a account dry you could always follow the advice given by trade to wins content manager Mr Tim Wilcox who suggested simultaneously opening long and short trades in the same instrument ! :helloooo:

 

Zupcon... There may be traders that overlook the effect of trading costs (fees). I'm sure it happens... there's one in every crowd (so it seems).

 

It would be akin a grocer selling produce who had no idea of what he paid for the produce. Toss in floor space, stocking, refrigeration, marketing... and if more is ordered than he can sell... spoilage and disposal. For that grocer, this is the cost of doing business. If the guy who orders my produce orders too much, and does it repeatedly... he's going to get the "come to Jesus" talk, or he's going to get fired (probably both in the end... as I've hired an idiot).

 

My point is, that traders don't zero their accounts because of fees... It happens because they order too much produce. They are operating an unsustainable business model.

 

I tried the method of entering both long and short for a brief time. I could never make it work... I was ordering too much produce (so to speak), and I got fired (so to speak). It made me laugh at your mention of it... surest way to lose twice, and your broker will thank you at the end of the day. That's not to say it doesn't work... it just didn't work for me.

[zupcon 10]

  jpennybags said:

 

My point is, that traders don't zero their accounts because of fees... It happens because they order too much produce..

 

That is perfectly true, and a very good point although I doubt the good people at trade 2 win would necessarily agree :haha:

 

In answer to where does the lost money go, a fair chunk of it definately ends up in the pockets of those altuistic people who devote their lives to "helping traders" :rofl:

[jpennybags 11]

  zupcon said:

That is perfectly true, and a very good point although I doubt the good people at trade 2 win would necessarily agree :haha:

 

In answer to where does the lost money go, a fair chunk of it definately ends up in the pockets of those altuistic people who devote their lives to "helping traders" :rofl:

 

There are altruistic notions that are ill informed... the road to hell is paved by good intentions (so to speak, and there may be some earnest notions there). There is no morality in the markets... it is what it is. The sooner a trader understands that... the sooner one can move on to something real...

 

The thing about losing money is: you have lost money... it really is that simple. There may be some discussion of where it went that is useful (in any regard... that money is "fckin" gone), but unless that discussion ends up at your own feet, I would doubt that you'll benefit from it.

 

Everyone looses money in this business. The "understanding" comes when you begin to understand that it is "all" on you...

[zupcon 10]

  jpennybags said:

There are altruistic notions that are ill informed......

 

and there's deliberate fraud too !

 

FFS, there's currently a 40 page thread over at the zoo encouraging traders to trade without stops, and the main cheerleader is none other than the sites content manager.

 

Its nothing to do with ignorance, stupidity or being ill informed, its a deliberate attempt to hose their membership (again) its not even being written 4 lulz

 

thankfully the sites as dead as a dodo, and making new lows every day so no real damage done

[jpennybags 11]

  zupcon said:

and there's deliberate fraud too !

 

FFS, there's currently a 40 page thread over at the zoo encouraging traders to trade without stops, and the main cheerleader is none other than the sites content manager.

 

Its nothing to do with ignorance, stupidity or being ill informed, its a deliberate attempt to hose their membership (again) its not even being written 4 lulz

 

thankfully the sites as dead as a dodo, and making new lows every day so no real damage done

 

Sadly (or, not so sadly)... there is a fool born every minute. New traders (retail) are like children left in the woods (to become feral children). You must name all the animals, and find what's good to eat, and what's not... and sometimes, all of it makes you sick... or you get eaten... or you are sick more than you are well... or you just freeze to death. It seems much easier to hook up with someone who claims to have the answers. Consider this: that they don't have the answers, because they are not there with you. The best answers come from within. It is survival...

 

In a world where that person doesn't have to freeze with you... well... what is to be expected if the outcome is that you freeze to death. No one gives a shit; not really...

[fxeconomist 11]

  zupcon said:

I think a lot of people underestimate the effects of fees, the brokers really do have a MASSIVE edge.

 

Even if you look at those ridiculous quarterly NFA statistics on the percentage of winning traders, despite the various shinnanagins in play you'll see a weak correlation between win rates and the size of spread being charged.

 

As you point out there are a myriad of reasons why people are getting hosed by these costs, personally I think it's a fairly fundemental part of the game figuring this stuff out

 

If you really want to bleed a account dry you could always follow the advice given by trade to wins content manager Mr Tim Wilcox who suggested simultaneously opening long and short trades in the same instrument ! :helloooo:

 

I know they have a living to make, but recommending traders to pay double the spread just to get an IB kickback is beyond criminal. What a bunch of *****

 

 

Yeah that's really crazy. Avoid such tutors easiest way to bust your account without getting a grain of experience or knowledge from it.

[zupcon 10]

  fxeconomist said:

Yeah that's really crazy. Avoid such tutors easiest way to bust your account without getting a grain of experience or knowledge from it.

 

avoiding that particular forum would definately give most people an advantage !

[Dahan 10]

I think all money and transaction will be settled in bank liquid pool and then distributed again, the funds are liquid and not stable.