Trading vs. Gambling: The Age Old Question

At Futures Magazine we were always careful not to equate trading with gambling. The futures industry has always struggled with the reputation that it was nothing but a den of gamblers and has taken pains over the decades to distinguish futures markets from gambling.
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At Futures Magazine we were always careful not to equate trading with gambling. The futures industry has always struggled with the reputation that it was nothing but a den of gamblers and has taken pains over the decades to distinguish futures markets from gambling.

The distinction is obvious from a macro perspective because futures markets exist as a type of insurance, the opposite of gambling as it historically provided producers and consumers of commodities the ability to lock in prices and take the risk of fluctuating prices off of the table. A farmer is a gambler by nature but he can use futures markets to take risk of wildly fluctuating prices of the table.

But that is speaking to hedgers, what about the other side of the equation; speculators. From a legal point of view speculators are not gamblers because they are providing a service, making a market for people who need to hedge their risk.

There are other subtle distinctions. Leo Melamed pointed out to me in a past profile that the creation of cash settlement--a historic advancement in the development of financial futures as it would not have been possible to launch stock index or Eurodollar interest rate futures without it--was very much in doubt because previous court challenges trying to restrict futures trading based on gambling laws were defeated because futures markets contemplated delivery. Physical delivery is the only thing that kept futures from being outlawed as gambling at one point.

I never had that much of a problem with the connection of trading to gambling because both involve taking risk and in both you can improve your chances with solid research and risk management. I also worked on the floor for more than a decade and knew that many traders would refer to positions as bets and also weren't averse to making a wager on just about anything. It had more to do with a type of personality that enjoys "the action."

And Blair Hull, a famous options trader who sold his market making business to Goldman Sachs, began his career counting cards in Las Vegas.

This is all in way of introducing a fascinating look at the subject by Michael Gutmann--a trader not a gambler. Michael is one of the most knowledgeable people I know in the field of quantitative research and has put together an interesting article on the subtle distinctions between trading vs. gambling.

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