Earlier quoted context omitted.
Yeah, most people don't realize that finance is a zero-sum game. That leads to arms races which over time remove the lion's share of the profit (companies will spend money on a better solution to a problem until such time as a better solution costs more than the value of the opportunity). I expect this to replicate itself on the low-end as well.
I don't really see how finance is a zero-sum game. I mean, trading in paper without any insight into the capital allocation the paper is abstracting, and observed over a very short time horizon, it's more or less zero-sum. Many synthetic products just distribute risk differently. Etc. But finance more generally is helpful for efficiently allocating capital towards wealth generating industry - and by industry I mean i…
You probably know this already, but I'll provide some more context for the interested:
In reality, two parties can walk away from a trade believing (in the moment) that they got the better deal. Otherwise, they wouldn't be trading in the first place. This results because people have different utility functions. A farmer might be willing to buy insurance that gives him negative expected value, because his utility function incorporates a larger risk term than the insurer. A fur trapper sells furs to a buyer because 1 pelt is not scarce to him. With derivative contracts this analogy gets a bit abstract, but the justifications hold.
Liquidity providers add liquidity to the market precisely because they think that the rebates are "worth more" than the liquidity they are providing. A liquidity taker might still fill their trade because they have a different utility function. The net gain for society would be the net gain in total utility, if we were somehow able to convert them into normalized units.
However, if the liquidity taker is a nearly identical firm with a nearly identical utility function, then that implies that the liquidity provider and taker disagree over who is on the losing side of the trade. One party has better information or luck than the other and the future eventually reveals which was the better choice.
To put it another way, I believe it is a zero sum game if players with identical utility functions (i.e. two small prop shops with $200K book) trade with each other. Both probably have identical utility functions, and future events will reveal whether buying or selling was the correct choice in terms of utility. There are quite a number of such players swimming in the market, so there is a zero-sum game of "who knows more" that goes on underneath the actual net utility provided by liquid markets.