Difference Between Poker and the Stock Market

[pig4bill]

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Perhaps I misunderstood your post. I believe day traders, focusing on a 'very limited number of stocks' do not gain much at all from a long term systematic bias. I just offered the alternative of buying bonds as a less expensive and more direct way to play the US economy.

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Being a market maker is more analogous to table games in the casino than to the rake in poker.

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Nope.

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The casino, or market maker, can lose on any given bet but in the long run EV becomes actual value.

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Market makers don't fade "bets" from investors offering odds that are unfavorable to investors and they don't cut pots either.

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You're correct. Market Makers do not cut pots.

Market makers (in their purest form) provide two sided markets; making their money by buying on the bid, selling on the offer, and scalping the difference. As such, market makers make the most money by finding an equilibrium (or theoretical) price where there are an equal number of buyers and sellers. They then set their bid below this theoretical price and offer above the theoretical price and attempt to attract as much order flow as possible. If there are more buyers than sellers a market maker will 'fade' his(or her) market up in search of this new equilibrium by raising both the bid and offer. If you send a large market order the the NYSE I guarantee the specialist (head market maker) will fade your bet every time and take the EV between the market equilibrium price and the price you are executed at. This difference is the Market Maker's vig. Examples are best seen in illiquid stocks, as their markets tend to be wider, but they trade smaller volume. The purest form of a market maker makes the bulk of his/her money in the same way that a casino does, by taking many small +EV bets (much like a successful poker player).

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That's the way market makers USED to make money. Spreads are usually 1 or 2 cents. These days market makers make their money by out-trading the average trader.

[pig4bill]

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They are both negative sum games. Poker has the rake and stock trading has commissions and spreads. Both are very difficult to overcome for the vast majority of people.

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Commissions are really insignificant IMO. If I buy $100,000 of stock with a $10 commission that's nothing. The rake in poker is much more difficult to overcome. Second of all even if one is doing day trading in a very limited number of stocks, they have the upward bias of the market working for them. I realize that people are not compensated for taking individual company risk and the systematic risk varys from stock to stock (GE correlates more with market movements than somehting like KKD for instance) but there is an upward bias nonetheless. Not true in poker. Sorry the market makers in stocks and the house in casino poker are not the same thing at all, not even close.

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This isn't true. Commissions are only a small part of your "rake"

Day trading generates huges costs, and not just in the form of commissions. There are also spreads to overcome, which are even more significant when day trading as the spread takes up a greater proprtion of your trading channel.

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Huge costs? Spreads? Commission and spreads often total 2 or 3 cents per share. That is what you call "huge costs"?

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And then there is the slippage...... [img]/images/graemlins/frown.gif[/img]

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Slippage??! Have you been reading a futures systems article? Slippage is irrelevant with stocks.

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I've yet to see a short-term trading system that generates a greater net profit than the costs it produces.

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You haven't looked very hard. I think you have a misconception of what stock daytrading is.

[adios]

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If you send a large market order the the NYSE I guarantee the specialist (head market maker) will fade your bet every time and take the EV between the market equilibrium price and the price you are executed at. This difference is the Market Maker's vig. Examples are best seen in illiquid stocks, as their markets tend to be wider, but they trade smaller volume. The purest form of a market maker makes the bulk of his/her money in the same way that a casino does, by taking many small +EV bets (much like a successful poker player).

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What kind of order are you talking about? Anyway what you described here isn't in the least bit similar to what a casino does. Perhaps similar to casino's competing for customers business. In the scenario you describe both sides can be +EV, DUCY? Of course OP was about poker not casino gambling.

[mrbaseball]

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That's the way market makers USED to make money. Spreads are usually 1 or 2 cents. These days market makers make their money by out-trading the average trader.


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I can't really speak to stocks but this sounds pretty acurate. Back in the days of trading pits market makers would buy on the bid and sell on the offer and even then those spreads got tight. Not as tight as in today's electronic trading platforms though. The last bastion of true market makers is in illiquid stuff, options and spreads. These are the places where a true market maker can make a market and actually get paid for it. Electronic trading has changed the playing field enormously.

[Foghatlive]

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The bad thing about stocks, is it takes a much bigger bankroll to get significant returns, but at the same time is less risky.


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This depends on how you play the market. If you're heavily leveraged and buy volatile stocks, you can get cleaned out in a hurry.

[Jimbo]

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I don't see the Poker equivalent of Margin. Sure, you can get staked, but, it's not quite the same. With Margin, the brokerage firm's money is not at risk, as they'll sell the stock long before their money starts disappearing. In addition, you can't get into trouble with margin because you can only lose your money, albeit twice as fast*.

* This wasn't true in the pre-depression days when you could borrow up to 90% of the purchase price.

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The equivalent is allowing the staker to hold your WSOP bracelet until you repay him. When you go busto, he sells your bracelet and beats the Hell out of you. Poker Margin should be used sparingly.

Jimbo

[xxThe_Lebowskixx]

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Assuming markets are priced efficiently, you are always giving up edge when investing in the market to market makers. That is, the more you trade, the less you are expected to win. I like to think of commissions as rake and the edge lost to market makers as negative Sklansky dollars. In poker you still pay the rake, but profitable players instead are the recipients of Sklansky dollars.

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it costs $10 to make a trade. that is way less rake than you pay in poker.

[lgas]

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it costs $10 to make a trade. that is way less rake than you pay in poker.

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This highlights another difference: you pay the comission whether your trade wins or loses. In poker you pay the rake only when you win. Unless of course you're paying time instead of rake....

[kimchi]

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it costs $10 to make a trade. that is way less rake than you pay in poker.

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This highlights another difference: you pay the comission whether your trade wins or loses. In poker you pay the rake only when you win. Unless of course you're paying time instead of rake....

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I'm not sure this is true. If another player is losing money to the rake, then its money you can't win. Fish bust quicker due to rake.

[midas]

I think it is a joke that people still think that poker and investing are remotely similar.

Poker is finite game with limited variables to understand, quantify and evaluate.

Investing or trading is an open ended "game" with hundreds if not thousands of quantifiable and psychological variables all with the potential to impact your results. Why do you thik that investment pros rarely beat indexes? It's too difficult - too may variables? Why did the housing/mortgage market recently create such an impact in the financial markets that no one anticipated? Because certain firms panicked together and caused market disruption.

There is no comparison. Most investment pros dont play poker and only few poker players are great investors.